DEFINITION of 'May Day'
On May 1, 1975, the stock market changed forever. Commonly referred to as May Day, this date allowed brokerages to charge varying commission rates. Prior to this change, all brokerages charged the same price for stock trades. This was the first time in 180 years that trading fees would be set by market competition, instead of a fixed price.
BREAKING DOWN 'May Day'
Prior to the May Day changes, brokers charged a fixed rate commission for all traders, with no regard to the size of the trade. Small-time investors paid a high percentage of potential profits in fees and commissions. Total commission costs were in the hundreds of dollars range prior to May Day. Brokers risked being expelled if they charged a lower costs to investors.
Prior to May Day, the New York Stock Exchange actually shut down one day a week. A boom to the stock market in 1968 led to brokers not being able to keep up with demand. This caused the New York Stock Exchange to be shut down every Wednesday for brokers to catch up. The U.S. Securities and Exchange Commission (SEC) announced in 1973 that it would eliminate fixed commissions.
The May Day passage was controversial and saw two sides to the debate. New York Stock Exchange chairman James Needham was against changing the commission structure. The NYSE even threatened to sue the SEC if it went through with the change. Brokers were also against it as it would cut down on their overall commissions. Some brokers even referred to the SEC as the Soviet Economic Committee.
May Day is believed to have led to the creation of discount stock brokers. As commission prices fell, brokers offered a new trading service that had lower rates but didn’t offer advice to individual investors. This led to the creation of discount brokers and gave rise to a new do-it-yourself investor class that could research on their own and pay lower fees for their trades.
Charles Schwab founded his namesake company in 1971. The company began offering discounted stock trades on May 1, 1975. The Charles Schwab Corporation became one of the first discount brokerages, offering lower commissions than most competitors. This included lower fees for less investment advice from stock advisors.
Other discount brokers started to pop up as a result. The May Day deregulation of commission fees also paved the way for the online discount brokerages we know today. Many investors are able to do their own research or get advice from other mediums and execute stock trades on their own through a discount broker.