Business review; DLJ goes public

From the national educational radio network here is a Business Review ASSOCIATE PROFESSOR ROSS Wilhelm of the University of Michigan Graduate School of Business Administration presents his views in the commons of business and economic activity. One of the biggest goals to hit the New York Stock Exchange in recent years with that was the decision of DLJ that is Donaldson Lufkin and Jenrette incorporated. One of the brokerage firms which is a member of the exchange to sell stock in its company to the general public. It may seem strange that the New York Stock Exchange would be upset by one of its member brokerage firms deciding to go public since the buying and selling of shares is the principal business of the exchange. However while the exchange fully supports non member companies in selling their shares to the public it has always been against the rules of the exchange for member brokerage firms to sell their own shares on a widespread basis. When DLJ announced that they were going public they simultaneously requested the exchange to change its rules to permit this action. However DLJ also informed the exchange that if it did not change the rules and DLJ intends to resign its

membership. Theyve been good reasons why the New York Stock Exchange prevented its member firms from being publicly owned. The main reason has been to keep crooks out of the big time stock brokerage business of buying and selling stocks is a business where there are many opportunities for fraudulent operations to prevent thieves from gaining a foothold in the business. The exchange carefully investigates the owners of each of its member broker firms to be certain that their honest and spotless. In addition the exchange along with the Security and Exchange Commission carefully polices the operations of American stock brokers as a consequence of the effective controls are exercised over the brokerage business we in the United States have the world's finest or one of the world's finest and safest security markets. Obviously of the stock brokerage firms who are members of the New York Stock Exchange were permitted to sell their shares to anyone wishing to buy them. It would be much more difficult for the exchange to keep thieves and confidence men out of the business. However in recent years the stock brokerage business is undergoing undergone major changes. The most important change is that today the biggest buyers and

sellers of common stocks are financial institutions the pension fund the mutual investment companies and insurance companies. Every time an institution wishes to buy or sell a block of stock on the New York Stock Exchange it must pay commissions on the transactions to a member broker firm. If the institutions themselves were brokers of the members of the exchange they could save tremendous amounts of money in commissions. However most institutions are publicly owned and for this reason the stock exchange has prevented the institutions from becoming members. In response to their inability to become members of the New York Stock Exchange the institutions of created what is called a third market which is a kind of over-the-counter telephone market for listed stocks in which large blocks of stocks are bought and sold directly between the institutions to meet the sort of market competition the New York Stock Exchange recently reduced its minimum commissions on large blocks of stock. The dilemma for the exchange raised by the DLJ decision to go public is that if the exchange permits DLJ to do this then the exchange will find it very difficult to prevent

institutions from becoming members and the member firms will lose a great deal of commission income. On the other side however if DLJ is prevented from going public it will leave the exchange and go actively into the third market. If DOJ begins to obtain large amounts of institutional business that rate commissions in the third market this will cause other member firms to leave the exchange and fairly soon the New York Stock Exchange will find itself with a giant new competitor in the form of the third market. At the present only about 3 percent of the volume of listed stocks is traded on the third market. However efficient brokerage houses such as DLJ start to service they said commissions lower than those charged by the regular broker firms. This volume will grow rapidly. It's difficult for cast what action the stock exchange will take however the hard onal horrible reality it must face is that the exchange is not meant serving the institutional market adequately and if it wishes to survive it has to begin to compete effectively for this business. If the exchange does not do this the third market will continue to grow regardless of whether it's served by

DOJ or anyone else. That was Associate Professor Ross Wilhelm of the University of Michigan Graduate School of Business Administration. With his views and comments on business and economic activity Business Review is recorded by the University of Michigan Broadcasting Service. This program was distributed by the national educational radio network.