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- Title
COMMISSION COST STRUCTURE: SHIFTS AND SCALE ECONOMIES.
- Authors
EDMISTER, ROBERT O.
- Abstract
This study has estimated general cost functions for a broad spectrum of institutional transactions. The goodness of fit and computational simplicity of the cost functions make them suitable for inclusion in empirical tests of security pricing and portfolio formation. The estimated functions provided a reasonable replacement for stated standard rates in the decentralized brokerage industry. Clearly, commission charges declined significantly and substantially in May 1975, when negotiated rates became the pervasive pricing method. The expected cost of transactions in the $10,000 to $300,000 range declined by 17 to 34 percent, and greater percentage cost reductions were given to small rather than to large transactions. The cost structure shifted downward, and economies of scale declined. Based on the three months investigated, the cost function shifted immediately in May, and little, if any, change occurred in June. We noted, also, increasing scale economies with respect to the total trading volume of each trust department during the quarter. The larger trust departments were negotiating lower commission rates overall and receiving greater discounts in June than in April and May. A need for further research relating commission costs to security characteristics and brokerage services was indicated and would provide cost functions for specialized investment topics, such as trading strategies and industry structure.
- Subjects
COMMISSION merchants; STOCK price forecasting; INSTITUTIONAL market; COST structure; STOCKBROKERS; TRANSACTION costs; ECONOMIES of scale; PRICES of securities; INVESTMENT analysis; FINANCIAL services industry
- Publication
Journal of Finance (Wiley-Blackwell), 1978, Vol 33, Issue 2, p477
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.1978.tb04862.x