Graphical Comparisons of Actual and Proposed Brokerage Commission Schedules

Abstract

T HE NEW YORK STOCK EXCHANGE has presented two proposals in recent months for new, generally higher brokerage commissions. Under the proposal of February, 1970, commissions would be drastically increased for small orders and substantially decreased for large orders, with a net increase of about 18 per cent in overall commission dollars for given total volume. This proposal met substantial opposition both within and without the brokerage industry. Small investors were unhappy with the prospect of commission increases ranging up to 163 per cent and brokerage firms specializing in institutional business balked at the thought of losing up to 37 per cent of their commission on large transactions. In July, 1970, a new proposal was released limiting commission increases on small orders to 50 per cent and leaving large-order commissions generally unchanged. The net overall effect of the July proposal is a substantially higher increase, about 29 per cent, in overall commission dollars for given total volume. The latest proposal has excited relatively little controversy within the brokerage industry. It received tentative SEC approval on October 22, but with certain significant qualifications. In the meantime, the industry re, quested a temporary surcharge.' This received 90-day approval by the SEC in April, 1970. The approval was renewed for an additional 90 days in July and in August, 1970, was renewed for an indefinite period. To the layman, as well as to many in the brokerage industry, these two proposals are merely tables of numbers representing commission dollars for transactions of typical size. It takes considerable effort and study of the tables to achieve an understanding of the broad impact of the various proposals vis-a-vis the existing commission schedule. The graphical format presented in this article is designed to help the many interested parties achieve that understanding. Section I of this paper describes the graphical framework used to illustrate existing and proposed commission schedules. In Section II, curves for the existing commission schedule are presented. Section III presents, for three selected share prices, commission curves for (a) the existing schedule, (b) the existing schedule plus the $15 surcharge, JOHN SCHREINER is Assistant Professor of Finatce at the University of Minnesota. He was formerly associated with James Talcott, Inc., New York. His academic degrees are: B.S. (University of Utah), M.B.A. (Harvard University), and Ph.D. (University of California, Los Angeles). 1. Footnotes appear at end of article.