Trends in Institutional Commission Costs Following Deregulation: Evidence From the USA
7 Pages Posted: 23 Sep 2008 Last revised: 29 Jul 2011
Date Written: 1985
Deregulation of common stock brokerage commissions occurred in the United States on 1 May 1975, when the Securities and Exchange Commission prohibited the New York Stock Exchange from setting minimum brokerage rates for member firms. Prior to this time, brokerage charges for common stock transactions had been set for all traders by a mutual agreement. With the advent of negotiated commissions, competition led to dramatic structural shifts in commission pricing particularly for institutional traders. The purpose of this research is to examine the effect on portfolio diversification costs resulting from a changing commission rate schedule. The commission schedule is estimated with actual commission cost information for over 28,000 transactions executed by institutional investors (bank trust departments) during the two years following the advent of negotiated commissions. This large sample of transactions, for a number of traders and securities, provides clear evidence that diversification of institutional portfolios became costless with respect to commissions following deregulation.
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