The Securities Industry under Negotiated Brokerage Commissions: Changes in the Structure and Performance of New York Stock Exchange Member Firms

This paper examines the effects of competitive brokerage commission rates on the structure and performance of the NYSE brokerage industry. Although the demise of fixed minimum commission rates has caused economic hardship for a number of brokerage firms, the results to date do not support the negative public policy effects that were alleged to be the inexorable consequences of permitting brokerage rates to be set by competitive pressures.

Minimum Commission Rates on New York Stock Exchange Transactions

This article presents an economic analysis of the long-standing policy of charging minimum commissions on stock exchange transactions. The discussion draws heavily on the arguments put forward by the NYSE as a part of its recent ongoing defense of fixed commissions. These arguments fall into two categories: (1) those related to the structure of the continuous auction method, or market-making, employed by the Exchange, and (2) those related to the structure of the brokerage industry. According to the Exchange's logic, the elimination of minimum commissions would lead to a splintering of the auction market and to an increase in the concentration in the brokerage business. The analysis presented in this article leads to the conclusion that the Exchange's case is faulty in terms of both its theory and its empirical findings. It further concludes that the viability of the auction market would be somewhat improved by permitting commissions to be set on the basis of competition. In short, this article argues that minimum commission rates on stock exchange transactions cannot be justified on economic grounds but rather represent a form of monopolistic price-fixing.