Securities Industry Strains in Midst of Upheaval : Wall Street: Brokers and investment bankers tighten belts, alter strategies to combat the recession that has engulfed the industry since the 1987 market crash.

BOCA RATON, Fla. — Richard B. Fisher, president of Morgan Stanley & Co., one of Wall Street’s premier investment firms, stood on the trading floor one day watching a government bond trader at work in front of a bank of computers.

“You’ve got 11 screens there. That’s terrific,” Fisher told the trader.

“No, it’s not,” the trader shot back. “Our customer has 12 screens.”

Fisher tells this story to document some of the vast changes taking place throughout the brokerage and investment business.

When a Morgan Stanley customer has more information about the government bond market than the firm’s traders, why would the client pay for Morgan Stanley’s advice, Fisher asked.

And if the investment organizations with giant pools of money will no longer support a brokerage firm’s traditional bond trading operation, should the firm continue to run and even subsidize so costly an operation?

The answer, Fisher said, is “no.” Yet many firms put tradition ahead of profits and are unwilling to curtail marginal or losing operations while they hope for better times.

“I don’t think the business cycle is going to bail us out,” Fisher said.

Belt-tightening at both the institutional and retail levels was the theme of a recent meeting of the Securities Industry Assn.

Brokers and investment bankers, from firms large and small, brought tales of layoffs, reorganization plans, consolidations and new sales efforts--all intended to help them survive the recession that has engulfed the securities industry since the 1987 market crash.

But the turmoil in the industry appears to be far from over. Fisher told his colleagues that despite all the cutbacks--Wall Street employment has dropped by 33,000 jobs--he believes that the industry still has 20% to 25% too many employees.

Industry leaders attending the meetings here cited four events in the last two decades that have revolutionized the once placid business of buying and selling stocks and bonds and raising money for corporations:

* The move from fixed commissions to negotiated commissions, which created the discount broker and price-cutting trader and sent more people chasing relatively fewer dollars.

* The rise of the pension fund, which poured billions of dollars into stocks and bonds, replaced the individual as the dominant force in the market and opened the door to multimillion-dollar strategies such as program trading.

* The development of electronic systems that created global markets in which all players get the same information at the same time and often buy and sell simultaneously, tilting the markets sharply.

* The stock market crash of 1987, which accelerated the movement of individual investors away from stocks and toward fixed-income investments.

While individual investors have turned away from risk, brokerage firms have had to increase their own risk-taking to replace the evaporating commission business.

In 1985, commissions produced 61% of industry revenue. It has now dropped to 17%.

Jeffrey M. Schaefer, head of research for the SIA, observed that while commission revenue has slumped, there has been strong growth in the revenue that firms derive from trading for their own accounts, mostly bond trading.

Another major area of revenue growth has come from the fees derived from merger and acquisition activity, as well as from the private sale of corporate stocks and bonds.

But as some Wall Street firms found out, their high-risk activities can be costly when the market goes against them. Several firms have sustained major losses on municipal bond trading and mortgage-backed securities.

Whether the retail investor eventually will go the way of the dodo bird is a subject of debate in the brokerage industry.

Statistically, the individual is losing his grip on the world of stocks.

Ten years ago, stocks accounted for 36% of household financial assets. Today, the number is down to 20%.

Traditionally, American stockholders held most of the shares of U.S. corporations. In 1965, they held 84% while institutions held 16%. Today, the gap has narrowed to 57%-to-43%.

Individuals also account for a decreasing amount of the volume on the New York Stock Exchange. And yet, many brokers contend, the individual is still in the market but in a different way. Mutual funds, a minor factor 10 years ago, now hold almost $1 trillion of American savings.

And more and more investors are putting money into corporate savings plans that also buy stocks.

In conversations, brokers speak frequently of a “fear factor” that replaced the excitement of the five-year bull market.

Just when brokers thought they saw investors regaining their courage, the market plunged 190 points on Oct. 13, again derailing investor confidence.

James W. Brinkley, president of Legg Mason in Baltimore, finds it perplexing that investors remain so fearful of stocks. An investor who simply waited out the 1987 crash would have seen his stocks rebound nicely, Brinkley said.

Even so, Brinkley noted, his firm finds it difficult to attract new investors into stocks.

Two years after the market crash, investors “are concerned about whether the market is a safe place to be,” said Joseph Hardiman, the head of the National Assn. of Securities Dealers, which runs the over-the-counter market.

Rebuilding investor confidence is still an urgent necessity, Hardiman added.