The role of a Cassandra is to deliver unpleasant prophecies that won't be believed.
Robert H. B. Baldwin, managing partner in Morgan Stanley & Co., more than three years ago assumed that role when he predicted the demise of 100 to 200 brokerage firms if commission rates were to float and the stock market stayed low while interest rates remained high.
Dismissed as scarce talk at the time, Baldwin's prediction was close to the mark, although the pace was not as rapid as the 12-month time table he anticipated, mostly due to the bull market which began in early 1975.
But since 1973, the number of New York Stock Exchange firms doing business with the public has dropped from 476 to 371 as of last September. And the consolidation wave now hitting Wall Street is, if anything, gaining strength as many of the country's largest and best known securities firms are seeking survival through mergers.
Baldwin, who next week assumes the chairmanship of the Securities Industry Association, the main trade group for brokers and investment bankers, thinks that a year from now the number of major firms will be sliced even further, impairing the Street's ability to distribute shares from new underwritings and to research a wide range of companies.
Twenty-three major firms were involved in the distribution of the recent massive American Telephone & Teleghaph stock offerings, for example. But that includes Reynolds Securities, which has agreed to merge into Dean Witter, and Hornblower, Noyes, Weeks & Trask, which is combining with Loeb Rhodes.
A year from now the number of major firms could be reduced to 15 or 18, Baldwin predicts, and the total could prove less than the sum of the combinations.
"You put a Dean Witter and a Reynolds together and you don't wind up with one and one being completely equal to two," said Baldwin. "You don't end up taking twice as big a position, or having the capability of selling twice as many securities."
And as research departments consolidate, the number of companies that are followed for investment purposes also appears to be shrinking. The costs involved in hiring an analysts to watch a company with annual sales of $100 million and a $50 million capitalization probably exceeds the total brokerage commissions generated in a year of trading for that stock, said Baldwin, even if one brokerage firm had a monopoly on all the trading that goes on.
The pressures that have led to the merger wave do not all rise from the Securities and Exchange Commission's 1975 order to end fixed brokerage commissions, he concedes. Inflation and the competition of high-yield low-risk debt securities have contributed significantly to the stock market's prolonged doldrums, and to the drying up of new underwritings in turn.
But the end of fixed rates and hard bargaining from institutions to drive transactions costs to rock bottom levels have largely made the institutional business unprofitable for most brokerage firms, Baldwin says, and that in turn has caused firms to seek diversification.
Some of the investment vehicles that have been developed to replace flagging interest in equities may not be in the best interest of investors, he adds, and that may include options, which are now being scrutinized by the SEC.
"I'm a little worried that some of the efforts to survive may not be in the interests of the investor - particularly the small investor," said Baldwin. "I do raise a question about options," he continues, 'and it's certainly one thing we need to know more about before we say go ahead.
Though some of Baldwin's characteristically blunt-spoken remarks may not sit well with his fellow brokerage chieftains, his forthright and forceful ability to make the industry's case is a large part of the reason why he was chosen to head the SIA for a year.
Long considered one of Wall Street's most influential figures, Baldwin's willingness to split his time between the SIA and his many duties at Morgan Stanley is also an indication of the important juncture now confronting the industry as it is prodded to create a national market system amid its own uncertain economics.
"I've taken the SIA position because I felt this is a crucial time in our industry," admitted Baldwin. "As I said to some of my partners, it's better to take a year or two spending 40 to 50 per cent of my time (on the industry) than spending the next three or four years digging out from rules and regulations that somebody in Washington forced upon us."
Baldwin believes that a major industry lobbying effort, led by the New York Stock Exchange, has already forced the SEC to chance its mind about eliminating rule 390 and other off-board trading rules before a national market system is in place.
"There was one group (at the SEC) which just wanted to tear the whole industry down and let us build something up," he noted. "It's like asking a man to jump out of an airplane with a ripped parachute and telling him to sew it on the way down."
But he believes the SEC has had to reassess its position.
As to the form a national market system should take, Baldwin favors the exchanges pursuing the proposal to develop an intermarket communications link-up. At the same time, he thinks there should be experimentation with some kind of computerized automatic execution device. The so-called 'black box' system for trading, involving a limited number of stocks.
"I don't know whether a fully automatic market is the best way,' Baldwin said. "It's going to take some time to get there, some time to be sure. What bothers some of us is we haven't seen that going away from the auction-exchange market to this black box is going to solve everything.We got caught as an industry trying to switch over to a computeized situation and we got our fingers burned badly."
Meanwhile, he notes, pressure from Washington has provoked "more interest now on all sides" to go ahead with a national market. NYSE floor members, especially, said Baldwin, "are willing to be more reasonable now than they might have been a year ago or two years ago - they recognize that if they don't do something they're going to have nothing."