NEGOTIATED BROKERAGE COMMISSIONS AND THE INDIVIDUAL INVESTOR
Abstract
The advent of negotiated brokerage commissions on May 1, 1975, (Mayday) made it possible in principle for small investors as well as large institutions to bargain over the charges they are assessed for executing common stock trades. While the popular business press has speculated both that the actual incidence of negotiation by individuals is infrequent and that the net impact of the new regime has been to raise individuals' trading costs, empirical evidence has been sparse. The purpose of the paper is to examine these hypotheses, using a data base consisting of the actual common stock transactions records of a sample of some 8,000 accounts of a large retail brokerage firm, covering the years 1970 through 1979. The frequency and magnitude of commission-rate discounts from the posted post-Mayday schedules will be identified, the net impact on trading costs assessed, and the factors that appear to "explain" who gets a discount analyzed. Prior to Mayday, the only segment of transactions costs requiring investigation was the dealer mark-up or spread since, with the knowledge of price and volume, agency commissions were invariant. Studies on the spread were accomplished by Demsetz, Tinic, and Tinic and West to name but a few. It was only necessary to simulate transactions as an individuals' attributes had no effect on commissions. This however, is no longer the case. With the possibility of discounts from stated commissions, the data must include the pattern and frequency of transacting by individuals, the exchange or market on which the transaction occurred, and various other investor specific attributes. Thus, actual transactions across markets and over time are required. This is the first study to meet these criteria.
Degree
Ph.D.
Subject Area
Finance
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