Hi Don, brokerage prices were very very high back in the day....
The Day Wall Street Changed
By JASON ZWEIG
Apr 30, 2015 10:35 am ET
Friday, May 1, is the 40th anniversary of what may well have been the most momentous day on Wall Street since the predecessor of the New York Stock Exchange was formed in 1792.
n May Day 1975, fixed-rate commissions were abolished by regulators. Until then, a broker who tried to charge customers less than the fixed rate to trade shares ran the risk of being expelled from the stock exchange. With some minor exceptions, for 183 years it had cost the same amount per share to trade 100 shares as it did to trade 1,000 or 100,000—and brokers regularly shaved 2% or more for themselves off the typical trade.
May Day blew that cozy world to smithereens.
One of its lessons for today’s investors is obvious; another is more subtle.
The obvious lesson is that when brokers treat their customers more fairly, the customers prosper. May Day smashed Wall Street’s monopoly, unleashing the discount-brokerage industry, fostering independent research and democratizing the world of investing.
The subtle lesson is that when brokers treat their customers more fairly, everyone prospers. May Day, which brokers at the time expected to be the most apocalyptic event in their industry’s long history, turned out to be the best thing that ever happened to them. Trading boomed, investors flocked back to the markets and brokerages minted money for decades.
To understand the changes wrought by May Day, consider what it cost to buy 100 shares trading at $25 on the New York Stock Exchange before May 1, 1975.
You would have paid a minimum commission of $49 and a bid-ask spread (the difference between the selling price and purchase price) of $13, reckons Charles M. Jones, an economist at Columbia Business School who studies brokerage costs. That totaled 2.5% of the $2,500 transaction.
Today, you could buy 100 shares of a $25 stock for a commission of $10 or less at an online broker and perhaps $1 in total bid-ask spread, a combined cost of 0.4%.
So the cost of trading has fallen by more than 80%—without adjusting for inflation.
How did May Day come about?
With fixed rates sheltering them from the discipline of competition, many brokerage firms had become inefficient. When volume surged in 1968, brokers were so unable to keep up with the paperwork that the NYSE had to shut down every Wednesday—and some 160 brokerage firms went bust between 1968 and 1970.
Meanwhile, institutional investors wanted to know why it cost the same rate to trade tens of thousands of shares as it cost to trade 100 shares.
Prompted partly by trustbusters at President Richard Nixon’s Justice Department, the Securities and Exchange Commission announced in September 1973 that it would eliminate fixed commissions a year-and-a-half later.
As May Day—or “Black Thursday”—loomed, the rhetoric on Wall Street turned red-hot. James Needham, chairman of the NYSE, predicted that negotiable commissions would bring “disaster to the majority.” Brokers sneered that the SEC was an acronym for “Soviet Economic Committee.” Summarizing the industry’s positions against deregulation, SEC commissioner John Evans recited a litany of doom; critics, he said, claimed that it would “create confusion and chaos” and “bring about the downfall of our free enterprise system.”
The opponents of deregulation “had a sense of entitlement that they somehow deserved a certain level of profits,” recalls Lee Pickard, then the head of market regulation at the SEC and now a partner at the securities-law firm of Pickard Djinis and Pisarri in Washington. “They also had a kind of arrogance that this [change] is never going to happen.”
The NYSE threatened to sue the U.S. government; brokerage executives marshaled what SEC Chairman Ray Garrett Jr. called “a parade of horrors” to arm-twist congressional committees into stalling the reform.
But May Day went ahead—and Wall Street’s world didn’t end.
“The exact opposite happened,” says Donald Weeden, former chairman of Weeden & Co., one of the earliest firms to support the end of fixed commissions. “Getting rid of those monopolistic restrictions led to the most explosive profitability ever.”
When May Day came, brokers cut commissions, often by 50% or more—and business boomed.
“Deregulation provided the window for people to begin to innovate,” says Charles Schwab, who in September 1975 opened the first brokerage office of the firm that bears his name and that now oversees $2.5 trillion in assets. “It turned the whole industry upside down and led to this great mass flourishing of services and pricing and technology.”
Fast-forward to 2015, when much of the brokerage industry vehemently opposes the idea that brokers should be required to put their clients’ interests ahead of their own.
If such a “fiduciary duty” became standard practice, would it—as many brokers argue—bring disaster by making financial advice too expensive for the masses? Or would it instead encourage more consumers than ever to seek advice, now that they could finally be assured that it would be in their best interest to do so?
Those who oppose the extension of fiduciary duty should look back at May Day and ask whether they are on the right side of history.
— Write to Jason Zweig at intelligentinvestor@wsj.com, and follow him on Twitter at @jasonzweigwsj.
http://blogs.wsj.com/moneybeat/2015/04/30/the-day-that-changed-wall-street-forever/
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May 1st Marks 30th Anniversary of Brokerage Commission Deregulation
Birth of 'Discount Brokerage'
Apr 28, 2005, 01:00 ET from Charles Schwab How much things have changed since 2005
SAN FRANCISCO, April 28 /PRNewswire-FirstCall/ -- The Securities Acts Amendments of 1975 ushered in the most comprehensive securities legislation in decades. A key change included in the amendment was ending fixed trade commissions, a practice that had been in place for over 183 years. On May 1, 1975 negotiated trade commissions became law, a day known within the brokerage industry as "May Day." 1975 was an important fork in the road for financial services firms. In the face of deregulation, many brokerages took the occasion to leave alone or even raise commissions for smaller individual clients, while reducing commissions for large institutional clients. For many individual investor clients of those firms, trade commissions stayed at their high levels for years to come. Charles Schwab & Co., Inc. and a handful of other start-ups seized the opportunity to pursue a new kind of brokerage that provided lower cost transactional services, ushering in the birth of what came to be known as "discount brokerage." "We probably didn't know it at the time, but May 1st 1975 was a watershed moment for individual investors and for the markets," said Charles R. Schwab, Founder and CEO of The Charles Schwab Corporation. "With the sudden arrival of negotiated stock trades that were less than half the cost they had been, a major barrier to investing went away for the average American." According to Schwab: "It took some time, but a radical transformation took place and a flood of new investors -- most of them independent-minded investors -- began entering the markets and changing the landscape forever. The impact can't be overstated. In 1975 there were approximately $1.75 trillion of investable assets held by individuals, with less than 45 percent of it invested in securities. Trading was fixed-price, done through highly paid intermediaries, and very expensive. Today that number has grown tenfold to $17 trillion, with 73 percent of it invested in securities and over half of the adult U.S. population now holding equities in some form." The discount brokerage category itself evolved, to the point that today many of the distinctions between them and old-line full commission brokerages have disappeared. At Schwab, for example, in addition to low priced trades, clients have access to personal service and investment help, portfolio guidance and stock recommendations, thousands of mutual funds at their disposal, as well as referrals to special expertise such as independent investment advisors, wealth managers, and trust services. Clients also get the same level of value and service in banking, mortgages, and credit card through Charles Schwab Bank. "The power that the competitive marketplace unleashed is simply remarkable, and hasn't stopped," said Mr. Schwab. "For example, on May 1st, 1975, the discounted broker assisted trade at Schwab was $70 compared to hundreds of dollars at Wall Street firms. Today a client with household assets of $50,000 or more at Schwab pays just $12.95 per online equity trade, up to 1000 shares. In 1975 only 2 percent of the nation's investable assets were held in mutual funds, today it is nearly a quarter. Back then, 55 percent of investable assets were held in bank deposits, today only 2 percent. In 1975 there were virtually no assets in IRAs, today there are over $3 trillion, with 40 percent of the adult population having an IRA. The number of registered investment advisors has skyrocketed from just a few thousand to near 14,000 in 2003." "These last thirty years have been marked by constant innovation and improvement of services for individual investors," said Mr. Schwab. "The choice today isn't either or -- either low cost or high quality investment service. Today, investors can get both. It is exciting to consider what the next 30 years will bring." About Charles Schwab The Charles Schwab Corporation (NYSE / Nasdaq: SCH), through its operating subsidiaries, provides securities brokerage and financial services to individual investors and the independent investment advisors who work with them. With over 7 million individual investor accounts and more than $1 trillion in client assets, The Charles Schwab Corporation is one of the nation's largest financial services firms. Its subsidiary Charles Schwab & Co., Inc. (member SIPC) provides a complete range of investment services and products, including an extensive selection of mutual funds; financial planning and investment advice; retirement plans; referrals to independent fee-based investment advisors; and custodial, operational and trading support for independent fee-based investment advisors. Its subsidiary Charles Schwab Bank, N.A. (member FDIC and Equal Housing Lender) provides deposit and lending services and products. The corporation's other operating subsidiaries include U.S. Trust Corporation (member FDIC) and CyberTrader(R), Inc. (member SIPC). These companies' Web sites can be reached at www.schwab.com, www.schwabbank.com, www.ustrust.com, and www.cybertrader.com. (0005-7375) |
