Fixed commission system

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The fixed commission system was a traditional method used by brokerage firms in financial markets to charge clients a set fee for executing trades, regardless of the trade size or value. This system was prevalent in many stock exchanges around the world until the late 20th century when deregulation and technological advancements led to its decline.[1][2]

History[edit]

The fixed commission system has its roots in the early days of stock exchanges. It was designed to standardize the cost of trading and ensure that brokers received a consistent income for their services. Under this system, brokerage firms charged a predetermined fee for each transaction, which was agreed upon by the stock exchange and its member firms.[3][4]

In the United States, the New York Stock Exchange (NYSE) operated under a fixed commission system until May 1, 1975, a date known as "May Day," when the Securities and Exchange Commission (SEC) mandated the abolition of fixed commissions. This move was aimed at increasing competition among brokers and reducing the cost of trading for investors.[5][6][7][8]

Operation[edit]

Under the fixed commission system, the fee structure was straightforward. Clients paid a fixed rate for each trade, regardless of the trade's size or complexity. This rate was typically set by the stock exchange or the commodity exchange and applied uniformly across all member firms. The system provided brokers with a predictable revenue stream and simplified the cost structure for clients.

Advantages[edit]

  • Simplicity: The fixed commission system was easy to understand for both brokers and clients. The standardized fee structure eliminated confusion over pricing and made it easier for clients to anticipate trading costs.
  • Stability: Brokers benefited from a stable and predictable income, which allowed them to plan their business operations more effectively.
  • Transparency: The uniform fee structure ensured that all clients were charged the same rate, promoting fairness and transparency in the market.

Disadvantages[edit]

  • Lack of Competition: The fixed commission system stifled competition among brokers, as they could not compete on price. This often led to higher costs for investors.
  • Inefficiency: The system did not account for the varying levels of effort and resources required to execute different trades. Small trades were often overcharged, while large trades were undercharged.
  • Barrier to Entry: The high fixed costs could be a barrier to entry for smaller investors, limiting their participation in the financial markets.

Deregulation and the End of Fixed Commissions[edit]

The move towards deregulation in the financial markets, particularly during the 1980s and 1990s, led to the gradual abolition of the fixed commission system. In the United Kingdom, the "Big Bang" reforms of October 27, 1986, deregulated the London Stock Exchange, eliminating fixed commissions and allowing brokers to set their own fees. This shift was part of a broader effort to modernize financial markets, increase competition, and reduce trading costs.

Impact of Deregulation[edit]

The abolition of fixed commissions had several significant impacts on the financial markets:

  • Increased Competition: Brokers began to compete on price, leading to lower trading costs for investors. This increased market efficiency and accessibility.
  • Innovation: The competitive environment spurred innovation in brokerage services, including the development of electronic trading platforms and discount brokerage models.
  • Market Growth: Lower trading costs and increased competition contributed to the growth of financial markets, attracting more participants and increasing trading volumes.

References[edit]