Underwriting is slow, volume is light, and commission prices are being squeezed by competition.

For many of Wall Street's brokerage firms, 2000 may be starting to smell a bit like 1994. That year, after a series of

Federal Reserve

rate hikes, the

S&P 500

finished down 2.3%. But the slowdown on the Street took far more out of the shares of the big brokers:

Merrill Lynch

(MER)

fell 18%,

PaineWebber

(PWJ)

dropped 24% and

Bear Stearns

(BSC)

lost 28.4%.

Wall Street firms claim they have diversified since then, and over the next quarter, investors will be watching the sector's revenue to see if new international and fee-based businesses are strong enough to offset shrinking commissions and a vaporizing IPO market. If these bread-and-butter businesses of underwriting and trading commissions remain under extreme pressure, though, it will take an awful lot of European mergers to make up the revenue shortfalls.

Some think Wall Street is ready for the challenge. "The big firms are, if anything, better able to withstand lower volume" because of their diversification, says Michael Holland, who runs

Holland Asset Management

.

So far, the market seems to believe in the diversification concept. Shares of Merrill Lynch, which generates gobs of asset-management fees, are about flat at 104 since March 10, while

Goldman Sachs

(GS) - Get Report

has lost 24% and Morgan about 20% over the same period, likely because of their dependence on technology-related investment banking business.

But the results from the retail brokerage world could still darken the picture for the

giants. Retail branch managers at Merrill Lynch and the Salomon Smith Barney unit of

Citigroup

(C) - Get Report

say they're seeing business slide, especially over the past month.

There's another aspect to the volume problem. Retail brokerage executives have been concerned with what they call commission deterioration -- the price of each trade being lower than in the past -- for the past year. In essence, they need to do volume

in volume

.

Lately, the volume knob has been on mute. The last billion-share day on the

New York Stock Exchange

was more than two weeks ago and the

Nasdaq Stock Market's

average daily volume fell to 1.87 billion shares in April from 1.90 billion in March.

"I do think it could be a tough couple of quarters, says Patricia Ouimet, the associate portfolio manager in the John Hancock

(FIDAX) - Get Report

Financial Industries, pointing to a "pretty scary" combination of low volume and a light underwriting calendar.

The lucrative IPO business that carried the stocks of Goldman Sachs and

Morgan Stanley Dean Witter

(MWD)

is in jeopardy along with the Nasdaq. Both stocks can now be seen as somewhat vulnerable despite some signs of life in IPO-land -- like the 155% pop Thursday by

New Focus

(NUFO)

in its market debut.

"The spastic action is going to reduce overall confidence in the market, and we're seeing a slower IPO market as a result," says John Garrity, the associate research director at

Investec Ernst

in New York.

In 1994, the industry's investment banking revenue fell to $1.8 billion from $2.7 billion in 1993 and took two years to bounce back to those levels. With Wall Street's compensation expenses growing to $60 billion in 1999 from $27 billion in 1994, there are an awful lot of mouths to feed and revenues from the IPO calendar have been where management has been picking up its groceries.

The underwriting business has tightened up, with withdrawals of some deals and others stuck in neutral. Richard Peterson, of

Thomson Financial Securities Data

, says there are about 400 deals still in registration with the

Securities and Exchange Commission

and waiting to go public.

Peterson expects the IPO market to pick up at the end of June, but interest-rate concerns likely will still be affecting the climate through the summer. "The big question," he says, "is how will the third quarter of 2000 look?"

Large deals such as the

AT&T Wireless

(AWE)

IPO skewed the numbers considerably, but the industry still raked in $1 billion in underwriting fees in April.

Whether those kind of numbers can stand up as bankers pitch private placements for young companies instead of initial public offerings is another major question. One expert says private placements generate about half the fees of IPOs.

So far in the second quarter there have been 55 IPOs, raising $16 billion.

Yet, while Garrity says he sees some parallels between 1994 and early 2000, he says securities firms have "completely changed their business models. Their business has become somewhat annuitized in the retail market."

Retail brokerage firms, led by Merrill Lynch, have over the past decade sought to flatten the gyrations in their revenue streams by bringing in more business that's paid for in flat fees as opposed to transactions. This has worked well during the bull market. But the real test will come in a market that is not so vibrant.

"If the assets get smaller, the fees get smaller," says one Merrill Lynch manager. "The business has been too easy for too long."