Abstract
Early in 1975, the Securities and Exchange Commission (SEC) prohibited national securities exchanges from requiring their members to charge fixed rates of commission for transactions made through these exchanges. The rule, which became effective 1 May 1975, effectively ended the practice of price fixing in the brokerage industry. One of the more important questions that should be raised in this context is whether the removal of fixed commission rates will lead to a fully competitive market. Although the dissolution of the cartel that existed on the supply side of brokerage services is presumptive, a noncompetitive pricing structure may emerge because of concentration on the demand side of the market. Such may be the case in the security industry where buyers of brokers' services consist of two distinct groups: institutional and individual investors. This question has implications for banks' trust departments, who purchase brokers' services in large quantities and at the same time also service individual investors. In this study we address ourselves to the question of whether there is evidence that large customers are able to obtain a lower commission rate for given types of services. In particular, we try to isolate the differences between commission prices paid by trust departments and by individual investors. Also considered are the impact of economies of scale and brokers' quality, as perctived by investors, on the commission rate structure. Section 2 reviews the institutional background and examines earlier research. Section 3 presents a simple model of commission rates determination. The empirical test of the model and results appear in section 4.
Published Version
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