NEW YORK STOCK EXCHANGE member firms currently charge small investors (that is, investors making transactions with an aggregate value of $300,000 or less) according to an industry-wide fixed minimum commission schedule for executing purchase and sale orders in New York Stock Exchange listed stocks.' For paying these fixed rates, investors receive other services, aside from the actual transactions; notably, these services include safe keeping of securities and, most importantly, a copious flow of investment advice. The first "free" service allows an investor, in principle, to avoid holding actual stock certificates; thus, if he takes advantage of it, it saves him the cost of a safe deposit box and the cost of mailing or bringing stock certificates to a brokerage house ofice when he decides to sell. If, however, he chooses not to use this service, he does not get "full value" from his commission outlays. The second "free" service is supposed to help the investor make better investment decisions and, not coincidentally, may encourage him to trade securities more frequently, incurring a fixed minimum charge each time. The value of the first free service is most likely very small, but positive. The value of the second free service is unknown both in direction and effect.Investors, however, pay commissions of approximately 30 percent more when dealing with a member firm than they would pay to a so-called retail third-market broker if they had such a firm execute their orders.2 These brokers do not provide any free advice, only executions. Accordingly, one immediate gross inference that can be drawn is that if member firms stopped forcing every investor to pay for research, which he may or may not find of value, charges for buying and selling might be reduced by up to 30 percent.The fact that New York Stock Exchange member firms charge for one service which they provide, offering the others at no additional cost, means that a transaction with them involves the purchase of a complex product-a product with many independent component parts. As a general principle, it would be far better, from the investor's perspective, to have each service offered and priced independently. While this is quite an important issue in the theory of consumer choice, this paper will not focus on it; rather, it concentrates on the more manageable question of whether brokerage firm investment advice is, in fact, worth anything to the investor. More specifically, it focuses on the performance of * Both of Indiana University. The authors thank John Becker for assembling the data and performing the computational work.1. A good deal of analysis has been conducted on the general issue of fixed minimum commissions and the necessity (or lack thereof) for them. See William F. Baxter 121 for a legal perspective and Richard West and Seha Tinio [ I l l for an economic analyris of the question.
See Richard Martin [8].A retail third-market broker is a firm which will buy and sell New York Stock Exchange listed stocks off the floor of the New York Stock Exchan...
