Investment & Financial Articles
Title: NASD Brokerage Commissions
Author: William Cate
Article:
NASD Brokerage Commissions By William Cate Published June 2001
To contact the author: Visit the Beowulf Investments website:
[http://home.earthlink.net/~beowulfinvestments/]
[http://home.earthlink.net/~beowulfinvestments/globalvillageinves
tmentclubwelcome/]
Investors pay a commission and a spread whenever they buy a NASD
stock. This is true about stocks trading on the Over-the-Counter
Bulletin Board (OTCBB). It's true of Nasdaq stocks.
NASD brokerage commissions can't exceed 5%. Investors are
stampeding to the Net to save on brokerage commissions. Few
brokerage firms still charge 5%. However, Net traders pay less
than 1% brokerage commissions.
What investors don't realize is that there's a spread. This is
the commission charged by market makers. The NASD doesn't
regulate the spread. It can be 25%. What difference does it make
if an investor saves 4% on brokerage commissions and pays 25% on
the spread?
Investors believe that the Bid/Ask prices represent the highest
Bid and lowest asking price for any stock. In reality, the
Market Maker sets the Bid & Ask prices. The pricing structure
benefits the short term cash needs of the Market Maker to make
money. It's rare to have a Market Maker that trades a company's
stock for the benefit of the company or the public.
Let's assume that the highest bid is one dollar in an OTCBB
stock. The Market Maker can show the highest bid as seventy-five
cents. If the lowest ask price is seventy-five cents, the Maker
makes the trade. However, the bidder pays one dollar for the
stock. The Market Maker keeps the quarter per share as their
spread. The result is the buyer has paid over a 25% commission
on the sale of the stock.
Maker Makers can buy stock for their own account. If there's
strong Bid demand, the Market Maker isn't obligated to reflect
it in the Bid & Ask prices. This allows the Market Maker to buy
shares at lower prices for their own account. Once they own the
low-priced ask stock, they report the stronger bids. They sell
the stock, adding the stock sale profit to their spread. A
heavily traded stock makes money for anyone making a market in
it.
The goal of the NASD was to have the Market Making broker act
like a stock specialist on the American or New York Stock
Exchanges. It doesn't work because the NASD broker makes their
money buying and selling stock for their own account. The Stock
Exchange Specialist makes money by buying and selling shares to
maintain an orderly market in the company's stock.
If you are a public company, investigate how your market maker
handles trades of your stock. If they are solely interested in
their short term profit, meet with them. Restructure your
agreement so that the Market Maker makes money, but your company
benefits.
To contact the author: Visit the Beowulf Investments website:
[http://home.earthlink.net/~beowulfinvestments/] Or, visit the
Global Village Investment Club Website:
[http://home.earthlink.net/~beowulfinvestments/globalvillageinves
tmentclubwelcome/]
About the author:
He has been the Managing Director of Beowulf Investments
[http://home.earthlink.net/~beowulfinvestments/] since 1981 and
is the Executive Director of the Global Village Investment Club
[http://home.earthlink.net/~beowulfinvestments/globalvillageinves
tmentclubwelcome/]
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