What Is May Day?
Commonly referred to as May Day, on May 1, 1975, the stock market changed forever. 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.
- May 1, 1975, is called May Day and is when commissions switched from being fixed to negotiable.
- Prior to May Day, commissions were high for retail investors and favored large institutional clients that took advantage of their economies of scale.
- May Day led to the creation of the discount brokerage industry, supplying retail investors with low trading costs on a do-it-yourself platform.
Understanding May Day
Prior to the May Day changes, brokers charged a fixed-rate commission for all traders, with no regard for the size of the trade. Small-time investors paid a high percentage of potential profits in fees and commissions, as total costs could be hundreds of dollars. Brokers risked being expelled if they charged a lower price to investors.
The May Day passage was controversial. 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 has 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 do research on their own and pay lower fees for their trades.
Leading the way was Charles Schwab, who founded his namesake company in 1971. The Charles Schwab Corporation began offering discounted stock trades on May 1, 1975, becoming one of the first discount brokerages. This included lower fees for less investment advice from stock advisors. Other discount brokers started to pop up as a result of the May Day deregulation of commission fees, paving the way for the online discount brokerages we know today.
Discount brokers are abundant in the 21st century. A retail investor can open a trading account with a dollar, although the minimum deposits vary by broker, and trade for as little as a $1 per trade or less than $0.01 per share.
Discount brokers don't typically offer personal investment advice, yet many offer online coaching and financial advisors which are available via online chat and phone to answer investor's questions. Charting packages and fundamental research are also provided by most discount brokers, although it is the job of the investor to sift through the information and make their own trading decisions.
Examples of Commission Structures Following May Day
Some discount brokers charge a flat rate, such as $5.95 per trade, or $9.95. Typically, although not always, the lower the commission the greater chance there is for additional fees hidden somewhere else. For example, the $4.95 per-trade broker may require the client pay to see prices on each exchange, whereas the $9.95 per-trade broker may include basic price quotes on some major exchanges for free. Other hidden fees may include inactivity fees, charged if a client doesn't make any trades within a specified time frame.
Other discount brokers offer variable-rate commissions based on volume. For a hypothetical example, if less than 300,000 shares are traded in a month, then the commission per share is $0.0035 per share, or $3.50 per 1,000 shares. If they trade more than 300,000 shares, the commission drops to 0.002 per share, or $2 per 1,000 shares.
The more the customer traders, the lower the rate. These variable rates are typically subject to standard exchange, regulatory, and clearing fees in addition to the rates charged by the broker. These types of fees are often, but not always, already included in flat rate broker prices.
Most discount brokers provide a trading platform, charting functionality, fundamental research, and online help. Before utilizing any broker, request a demo account to assess the functionality and costs of trading with that broker.