The other day, I was sitting in a restaurant with a friend watching a basketball game.   My friend is also in the investment business.  The game must have become boring because we started talking about the business.    The change of topic caused my sub-conscious to activate.  I found myself saying, “Geoff, it has always bothered me how the entire financial sector hides whatever they charge a customer.  I can’t think of another profession where people do that.   Banks, brokerage firms, and insurance companies all do it. Then they run glib television ads extolling their virtue with songs like … ‘we’re on your side.’”

Brokerage firms have always hid commissions.   Careers were built on that reality.   I remember being in New York to meet the top salesman of my then firm.   He made so much money he was held in godlike awe by everyone.   Each day, he would buy – or sell -thousands of shares of stocks priced $10 or less.   Commissions were based on the number of shares; so he would always be dealing in low priced stocks.  But the real key to his wealth was, he only dealt in stocks the firm traded.   Market makers were governed by the National Association of Security Dealers Statement of Policy Rule.  This meant you were allowed to buy – or sell - a stock and not show a commission.   On the New York Stock Exchange you couldn’t do that.  Trades done there had to be on an agency basis with no hidden commission.   

The NASD rule limited the amount of a commission markup, or markdown if it was a sale, to a maximum of 5%.  So a stock bought or sold at $10 could be marked up - or down - $.50 to the customer.   It would be considered a “net” trade and no commission would be shown on the confirmation.  The transaction would appear to be free.  Years later, these invisible markups or markdowns were used in the fixed income market as these firms were also over-the- counter market makers ... but in bonds.   It enabled bond salesmen to become “MASTERS of the UNIVERSE.”  Since the debt market is 50% larger than the stock market, how could you not become rich by getting a piece of everyone’s debt?  Especially when no one had any idea what they were paying in commissions.   It was to continue for 35 years!

 Despite being in the investment business, I did not fully grasp the immense size of the fixed income world - and the commissions involved (it was all secret) - until I visited the Boston office of Bear Stearns.   As I got off the elevator, I was immediately struck by the gargantuan size of what I thought was the equity trading room.   As my host came out to greet me, I commented as much.  He looked where I was pointing and, with a sardonic smile, turned and said to me, “Oh those aren’t stock traders.  They’re bond salesmen!”  He then pointed to a small trading desk.   It had, maybe, 10 people. “Those are the equity traders” he said.  Everyone in that immense room was gone a year later.  The firm was done.

Recently, Goldman Sachs, and other firms, reported a 50% drop in fixed income revenue.   It was hardly mentioned that trading had moved to listed exchanges … as agency trades.  Gone are the idolatry books such as “Liars Poker” and “Bonfire of the Vanities.”  Gone are the fixed income “gurus.”  Some of them have run for political office.   I wonder if that’s because they think they’re smart since they made so much money.  Or do these new political candidates simply recognize another area of hidden commissions? 

-Francis Patrick Boland