Franklin Hugh Money

On the first of May, nineteen seventy-five, the price of a stock trade in the United States became negotiable for the first time in a hundred and eighty-three years.

Wall Street had been dreading the date for months. The industry called it May Day, and it was not meant affectionately.

Here is what ended that morning. Since the founding agreement that created the New York Stock Exchange in seventeen ninety-two, member firms had charged a fixed, published commission to execute a trade. Every firm charged it. Nobody undercut anybody. If you wanted to buy a hundred shares, you paid the rate, and the rate was the rate whether your broker had done research for you or had simply written down what you told him.

That is not a market. That is a cartel with a nice address, and it was entirely legal, and it lasted a hundred and eighty-three years.

The Securities Acts Amendments of nineteen seventy-five ended it. Congress instructed the exchanges to stop setting prices. Commissions would be competitive.

The industry's dominant response was to raise them.

The reasoning was not stupid, exactly. Firms believed institutional clients would negotiate hard and retail clients would not, so the way to protect revenue was to hold the line on the small investor and absorb the pressure at the top. There was also a strong shared conviction that competing on price was beneath the profession. You did not undercut a fellow member. It was not done.

A thirty-seven-year-old in San Francisco named Charles Schwab did it that day.

He had a small firm, a newsletter background, and a view of the customer that the rest of the industry did not share. His view was that a large number of people wanted to make their own decisions and simply needed someone to execute the order at a fair price. They did not want to be sold anything. They did not want the research. They did not want a call at dinner about a hot idea.

That was a genuinely strange position in nineteen seventy-five. The entire retail brokerage business was built on the opposite assumption. A broker was a salesman, paid a commission, whose income depended on the customer trading. The advice and the transaction were welded together, and the person giving you the advice was paid more the more you acted on it.

Schwab pulled them apart. His brokers were on salary. They did not get paid more when you traded more. They did not make recommendations. If you called and asked what to buy, the honest answer was that they were not going to tell you.

For that, he removed most of the cost.

The industry's assessment was that this was a discount business for unserious people and it would not last. It got its own name — the discount broker — and the name was not a compliment.

What followed is one of the more instructive sequences in American finance, because Schwab kept identifying the next thing the industry was protecting and giving it away.

Twenty-four hour order entry, so you could place a trade outside the hours that suited the broker. Branch offices, so a discount firm had somewhere for a customer to physically walk in. In nineteen eighty-four, the mutual fund marketplace, and in nineteen ninety-two, the version that mattered — a supermarket where you could buy funds from many different fund families in one account, with no transaction fee, and get one consolidated statement. That broke the fund companies' direct grip on their own customers.

Then the internet, which he moved onto early and aggressively, and which cut the price of a trade again by an order of magnitude.

And in twenty nineteen, the last step: commissions on stock trades went to zero.

Zero. The thing that had been fixed by agreement for a hundred and eighty-three years, that the industry raised the morning it was allowed to compete, that Schwab cut in nineteen seventy-five and kept cutting for forty-four years, finally arrived at nothing at all.

One biographical detail is not decoration. Schwab is dyslexic and did not know it until his son was diagnosed. He had gone through Stanford failing English twice and getting past the novels he could not finish by reading comic-book summaries of them.

He has said it made him relentless about stripping things to what a person actually needs to know. The products bear that out. The whole proposition was subtraction. Remove the sales pressure. Remove the commission conflict. Remove the fee. Remove the jargon.

Here is the assessment, and it requires holding two things at once.

Schwab did more to lower the direct cost of participating in the market for ordinary Americans than nearly anyone. The self-directed brokerage account — the thing you probably own, where you decide, and the broker executes — is substantially his invention. Before nineteen seventy-five, that account, at that price, did not exist and could not have.

And a zero-commission trade is not free. It cannot be.

This is not a fact about any one firm. It is how the entire retail brokerage industry now works — every major broker, including whichever one holds your account. A business has to earn somewhere, and when the visible price goes to zero, the revenue moves somewhere less visible. Into the interest earned on the cash sitting in your account. Into payment for order flow. Into the margin on other products. The bill did not vanish. It moved.

That is the thing to carry out of this one. Every time the industry has been forced to compete on a price the customer can see, that price has fallen, eventually to nothing. And every time, the money has reappeared somewhere the customer cannot see as easily.

Knowing where it went is most of what separates an informed account holder from a customer.