When and why did brokerages switch from fixed commissions to negotiated ones?

On May 1, 1975, there was no lightning, white calves or other omens to mark the moment when brokerages switched from fixed commissions to negotiated ones. In fact, most of Wall Street was convinced that the rule change would have very little effect. After all, each firm had a high opinion of the value of its advice and a feeling that a gentleman's agreement on rates, something laymen might call price fixing, could be reached. Fortunately for us, Charles Schwab wasn't a gentleman.

Schwab saw deregulation as a chance to drop rates and increase his client base, which ran against the common practice on Wall Street of firms laddering their fees in hopes of charging a premium for previously fixed-rate advice. Schwab believed that if he cut the costs on trades, a new class of investor would flock to him - the individual investor. The individual investor that Schwab pictured had never been seen on Wall Street before. He wasn't wealthy like most individual investors at the time, but a regular person who wanted to get more from his savings.

Schwab pioneered discount brokerages with his no-advice accounts. The fees that came with buying stocks dropped from hundreds of dollars to less than a hundred. The internet took over Schwab's work and discount brokerages appeared that charged an unthinkable $10. Thanks to May Day and pioneers like Schwab, the number of individual investors has exploded. Of course, the low fees have led some individual investors to overtrade, but this generally is a personal vice, and not a result of the increased accessibility to investing. Overall, most people are better off being able to invest, rather than being locked out of the market by high fees.

(For more on this topic, read Don't Let Brokerage Fees Undermine Your Returns.)

This question was answered by Andrew Beattie.

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