Haack wasn’t alone. Merrill Lynch and Salomon Brothers issued calls for reform, recognizing that they could readily compete — and profit — in a world of competitive bidding. Others, like newly created discount broker Charles Schwab, also pushed for deregulation, seeing an opportunity to grab business from firms ill-prepared to fend for themselves.
The SEC forced reform on the NYSE in several steps. The first was an order that brokers making transactions of half a million dollars or more had to submit to negotiated rates, but only on the amount above that critical threshold. This led to additional changes. In 1973, the SEC demanded that the NYSE abolish fixed rates by May 1, 1975; Congress followed suit, writing this date into an amendment of the Securities Act.
Robert Baldwin, the head of Morgan Stanley, dubbed the deadline “Mayday,” after the common code for distress. But May 1 came and went, and the world did not end. A year later, 11 underperforming brokerage houses had merged with competitors; nine more failed altogether. But this was a far cry from Baldwin’s prediction that up to 200 investment banks would go under.
The benefits of competitive pricing, though, overwhelmingly went to the biggest institutional investors, with brokerage fees declining as much as 50 percent. Wealthy investors also managed to secure cut-rate commissions. Small investors initially saw their rates go up, largely because the big brokerage houses had no interest in dickering over fees for a tiny trade.
But as fees rose for ordinary investors, this opened the door to yet another revolution: the proliferation of bare-bones discount brokers operating along the lines of Schwab. A decade after Mayday, the Wall Street Journal counted more than 600 discount operations luring away investors from conventional stock brokerages. This in turn helped fuel a democratization in stock market participation. As trading costs fell, more investors dabbled in the market, fueling yet more competition for their business.
The advent of computerized trading platforms drove the decline in fees as well, but in reality, the key steps had been taken many years earlier, when the NYSE finally unleashed capitalist forces on their own brokers. Indeed, one researcher who has researched commission costs has tracked a long steady decline that dates back to 1975.
And now we’re finally at zero: Trading is free. The revolution started by government regulators and Robert Haack has reached its inescapable conclusion.
This article was provided by Bloomberg News.