End of Fixed Brokerage Commissions (May Day 1975)

The end of fixed brokerage commissions on May 1, 1975—known as “May Day”—terminated 183 years of regulated, uniform broker fees. The Securities and Exchange Commission forced negotiations over rates, slashing trading costs for institutions and triggering a seismic shift toward discount broking, asset management, and the institutional-dominated market we see today.

The fixed-commission cartel, 1792–1975

For nearly two centuries, the New York Stock Exchange set and enforced a fixed commission schedule. Any broker buying or selling shares on the exchange had to charge the same percentage fee, regardless of order size or effort. A 100-share retail trade and a 1-million-share institutional block incurred the same percentage cost.

The rationale was fraternal: fixed rates protected smaller brokers from being undercut and ensured all firms earned a reliable profit spread. It was also anti-competitive—the NYSE’s rule book explicitly banned discounting, and members who violated the rule faced expulsion.

For institutional clients, the fixed-rate regime was punishing. A pension fund executing a large block trade paid the same percentage commission as a retail investor buying 10 shares, even though the institutional trade required minimal additional effort. Institutions absorbed these costs; the spreads were built into their net asset values.

By the 1960s, equity trading volume was surging, especially among institutions, and the fixed-rate schedule was plainly anachronistic. The Securities and Exchange Commission began pushing the NYSE to deregulate rates. The Exchange resisted, fearing that competition would erode profitability. But the SEC had jurisdiction, and pressure mounted.

The race to deregulation

In 1971, the SEC ordered the NYSE to begin phasing in negotiated rates for large institutional trades. Brokers could now haggle with institutions over fees for blocks above a certain size, while retail trades remained fixed.

This hybrid regime accelerated the movement toward institutional trading. Pension funds and mutual funds, facing lower costs, shifted execution toward the bigger institutions and off the retail brokerages. The smaller, traditional brokers—who had relied on retail commissions to cross-subsidize their institutional operations—began losing market share.

The pressure to complete deregulation grew. On May 1, 1975, the SEC’s mandate came into full force: all commission rates became negotiable. The fixed scale disappeared overnight.

Immediate market impact

The shock was real. In the weeks and months following May Day:

• Institutional commission rates fell 30–50% from their fixed levels. A large pension fund that had been paying 0.08% commission might negotiate down to 0.04%.
• Retail commission rates initially remained higher than institutional rates—brokers still charged individuals more because their orders were smaller and labor-intensive.
• Many traditional full-service brokers saw their revenue per trade plummet. The model of “make money on commissions alone” became unviable.

Trading volume did not immediately collapse; if anything, lower costs made trading more attractive, especially to institutions. Institutional trading volumes climbed sharply in the late 1970s and 1980s as pension funds and asset managers took advantage of cheaper execution.

The transformation of the brokerage industry

May Day forced brokers to reimagine their business model. Commission income alone could no longer sustain a firm. Three paths emerged:

Discount broking. Charles Schwab, already experimenting with lower commissions, became the archetype: a broker that offered execution and minimal advice at sharply reduced fees. Schwab and competitors like E*TRADE eventually made retail discounting the norm, compressing retail commissions from 0.1–0.3% to near-zero by the 2000s.

Investment advisory and asset management. Full-service brokers like Goldman Sachs, Morgan Stanley, and JPMorgan Chase shifted from commission-driven retail to proprietary trading, hedge funds, and fee-based advisory. They began managing money directly rather than just executing trades on behalf of clients.

Consolidation and specialization. Smaller brokers that could not achieve scale in either discounting or advisory work were acquired or went out of business. The industry consolidated rapidly.

Structural reshaping of the stock market

May Day’s ripple effects fundamentally altered the equity market:

Rise of institutional dominance. Lower trading costs made it profitable for institutions to trade more frequently and build larger, more fluid portfolios. By the 1990s, institutions accounted for over 60% of equity trading (vs. perhaps 30–40% in the early 1970s). Today they account for 80%+ of volume.

Growth of index funds. Index funds became economically viable for mass retail because lower trading costs made replicating an index cheaper. Passive index investing was marginally profitable before May Day; afterward, it exploded. This shift accelerated further with the rise of exchange-traded funds in the 1990s and 2000s.

Decline of retail trading. With commissions in line with institutional costs and no informational advantage, retail investors faced a steeper disadvantage. Retail participation in equities actually fell as a percentage of all trading until the 2010s-2020s rise of apps and zero-commission broking.

Proliferation of trading venues. With commissions negotiable, the NYSE’s monopoly on order flow weakened. Over-the-counter market makers like NASDAQ began competing for order flow, and eventually electronic communication networks (ECNs) chipped away at the traditional exchange model.

Lasting lessons

The May Day deregulation illustrates a recurring pattern in finance: cartels rest on regulatory protection, and when that protection is withdrawn, the entire structure can flip in weeks. The fixed-commission regime had endured not because it was economically optimal, but because the NYSE had the power to enforce it. Once the SEC withdrew that power, markets reorganized in favour of efficiency and cost reduction.

The deregulation also revealed that transaction costs matter deeply. Institutions that had been locked into expensive intermediaries immediately began shopping around. This competitive pressure spread to retail and ultimately to all participants.

May Day 1975 is rightly celebrated as a watershed in market development. It marks the moment the US equity market shifted from a cartel-controlled, intermediary-profit-driven system to a cost-conscious, competition-driven one. The shift was not painless for brokers, but the net effect was a deeper, more liquid, more efficient market—and lower costs for nearly all market participants.

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