It was known as “May Day” or “Mayday,” the latter spelling suggesting the distress with which it was regarded in some financial circles. On May 1, 1975, the era of fixed commissions for stock transactions ended. A comfortable albeit constraining arrangement gave way to heightened competition that would transform the brokerage industry — indeed, ultimately remaking it such that the very term “broker” would seem old-school.
The old era lasted just shy of 183 years. It began with the Buttonwood Agreement of May 17, 1792 in which 24 brokers, reportedly meeting under a Wall Street buttonwood tree, resolved to trade on a commission basis and not to allow any commissions below a certain level. This loosely organized group evolved into the New York Stock Exchange.
The Buttonwood Agreement may have helped America’s nascent financial markets survive. For one thing, it gave confidence that dealing in securities was a plausible way to make income. Plus, by showing that brokers could regulate themselves, it may have forestalled a political crackdown on the newfangled activity of stock trading.
But over time, fixed commissions, enshrined not only in New York but at exchanges throughout the country, also put limits on the stock market. The high costs of trading discouraged broad public participation, and the clubby arrangements among exchange members created a dubious environment for innovation in financial services.
By the 1960s, fixed commissions were generating a degree of investor discontent that was hard to ignore. Pension funds and other institutional investors had become big players in the market, creating a powerful constituency for lower trading costs. Brokerage firms competed for their lucrative business with “soft dollar” amenities such as research reports, and individual investors looked jealously at these special deals for institutions.
Moreover, a “third market” was emerging (the exchanges being the “first” market and unlisted stocks the “second”), consisting of over-the-counter trading of exchange-listed stocks. An avenue was opening for institutions to avoid paying fixed commissions.
Legal and regulatory changes were upping the pressure as well. In 1963, a court case called Silver v. New York Stock Exchange, involving a complaint by some over-the-counter dealers about NYSE policies on communications with non-members, established the principle that the Exchange was not exempt from antitrust laws. In 1968, the Justice Department asked why fixed commissions shouldn’t be outlawed as an anticompetitive practice, and pressed the Securities and Exchange Commission to look into the matter.
The NYSE began pushing back, reflecting the views of most of its members that fixed commissions were needed to keep the industry profitable or at least couldn’t be abandoned quickly without causing massive damage. For a while, the SEC sympathized with such counterarguments, though gradually the agency looked more sternly at fixed commissions, especially as the NYSE proposed increases in the rate structure.
In 1970, the controversy was plodding on, and little seemed likely to change anytime soon. A bear market was taking a deep bite out of brokerage revenues, and many on Wall Street were in no mood to experiment with sweeping commission reforms. However, a renegade NYSE president soon shook things up again.
That executive, Robert Haack, speaking before the Economic Club of New York on November 17, 1970, astounded his audience and infuriated much of Wall Street by calling for an unfixing of commissions. Such a measure, he argued, was in the long-run interests of the Exchange and its members. “I am concerned lest we bask solely in the glory of the past, and in the process become oblivious to emerging trends,” said Haack. “The New York Stock Exchange, to put it crassly, no longer has the only game in town.”
Haack’s speech made the front page of the next day’s New York Times and much negative reaction followed. “It’s a pretty sick patient to be performing major surgery on,” complained Richard Jenrette, co-founder of Donaldson, Lufkin & Jenrette. Clifford Michel, CEO of Loeb Rhoades, called Haack’s initiative “ridiculous.”
Few people, if any, were angrier than Bernard “Bunny” Lasker, chairman of the New York Stock Exchange, who pointed out to the Times that policy was set by the Exchange’s board of governors, not its president. But despite expectations that Haack would be fired, the Exchange avoided such a bad public-relations move. Instead, Haack left in 1971 and a reorganization of the NYSE eliminated the president’s job until 1980.
Yet amid the backlash, one important player was conspicuously in line with Haack’s position. This was Donald Regan, who as CEO of Merrill Lynch pressed the Exchange to get rid of fixed commissions. The future Treasury secretary and White House chief of staff said he was appalled that Wall Street’s capitalists practiced “cartelism” by keeping rates rigid. He also had Merrill Lynch’s interests in mind. The firm was more focused on the mass market than were its competitors. Regan was betting Merrill would do quite well in a new era of competitive scrambling and higher volume.
Toward May Day