Image credit: Courtesy of Fred Siesel, Weeden & Co., “The May Day Countdown Calendar,” 1975
By Jason Zweig | 9:00 am ET May 1, 2015
Today’s “Intelligent Investor” column marks the 40th anniversary of May Day, when the Securities and Exchange Commission abolished fixed-rate commissions on stock trading—perhaps the most transformative event on Wall Street since 1792.
After all, for 183 years commissions had been non-negotiable—and for more than 40 years, ever since its creation in 1933, the SEC had been functioning like a public-utility commission, approving the rates that customers had to pay.
Finally, in the late 1960s, regulators began suggesting that fixed rates should be abolished—and met with vehement opposition from Wall Street. “Unregulated commission rates would seriously weaken the Exchange, undermine the stability of the securities industry and greatly reduce established safeguards for the protection of investors,” thundered New York Stock Exchange president Robert Haack in 1968. (Mr. Haack later changed his mind.)
Meanwhile, investors were fleeing the stock market. The total number of individual holders of corporate stock and mutual funds fell to 25.3 million in 1975 from 30.8 million in 1970. In the 1960s, individuals made up well over half of trading volume on the NYSE; by 1975 they accounted for less than 30%. In response to the demands for lower commissions, the NYSE asked to raise them instead, and the SEC approved the increase in September 1973—but then dropped a bomb. As a precondition for approving the rate increase, the SEC ordered that fixed commissions be abolished as of May 1, 1975.
The brokerage industry was furious, lobbying Congress, threatening to sue and mocking the idea that competition could be good for investors. The very term May Day was popularized on Wall Street because it evoked the international distress signal for sinking ships and the international workers’ day celebrated by socialists and communists. The irony was exquisite: People who called themselves capitalists were complaining that regulators finally wanted to stop regulating the most fundamental aspect of their business.
“The boys in the club, they fought it like hell,” recalls Wayne Wagner, then a partner at the investment-research firm Wilshire Associates. “They pulled out everything they could think of to try to short-circuit the change.”
“In the heart of capitalism, they wanted to sustain a monopoly,” recalls Charles Schwab, founder of the discount brokerage. “If you have a monopoly, you think the worst thing that can happen is to have it overturned.”
“People spoke to what they believed was their own self-interest when they didn’t even realize they were wrong about what was in their best interest,” says John Bogle, founder of Vanguard Group. Until commissions were deregulated that day, he adds, “It was fixed-rate capitalism, not competitive capitalism.” (By coincidence, Vanguard officially says it began operations on May 1, 1975, although Mr. Bogle dates its launch to September 1974.)
Mr. Wagner says he came into work early on May 1, 1975, to sit at Wilshire’s trading desk and see what would happen. “And the phone started to ring,” he recalls, “and the question was always the same: ‘What’s your rate?’ And our answer was always the same: ‘What do you want it to be?’”
“One of the great ironies is that the moving force behind May Day was institutional clients who felt they weren’t getting economies of scale,” says trading-cost expert Ananth Madhavan, global head of research for iShares, a division of BlackRock. “But the biggest beneficiaries have been retail investors.” Analysts of transaction costs say many big institutional traders today face higher costs per share than retail investors do.
May Day, and the technological innovations that came in its wake, cut the costs of trading drastically and democratized investing as no single event before or since has done.
But Wall Street was dragged into the modern age kicking and screaming. No one—least of all the brokerage industry itself—should forget that.
Note: Fascinating historical documents pertaining to May Day are available for browsing and free download at http://www.sechistorical.org/museum/papers/1970/.
Source: WSJ.com, Total Return blog