#1572 1975 · Charles Schwab · Financial services / brokerage
Every broker raised prices when fixed commissions ended — Schwab cut them in half
the problem
Full-service brokers earned fixed commissions, and a regulatory change threatened that entire revenue model overnight
background
For 183 years, brokers on the New York Stock Exchange operated under a fixed, non-negotiable commission schedule dating back to the 1792 Buttonwood Agreement, guaranteeing every brokerage the same fee regardless of how efficiently it operated or how much service it actually provided. Prompted partly by Justice Department antitrust pressure, the SEC formally adopted Rule 19b-3 in January 1975, ending fixed commissions effective 1 May 1975, a date the industry came to call 'May Day.'
Most established full-service brokerages, whose entire cost structure and profit model assumed guaranteed commission income, responded to the coming deregulation by preparing to compete on service and prestige while raising or maintaining fees wherever they could. Charles Schwab, running a modest brokerage founded in 1971, made the opposite bet: he signed up for the SEC's discount-brokerage pilot program ahead of the deregulation.
what everyone would do
Respond to the end of fixed commissions by emphasizing superior advice, research and relationship service to justify maintaining higher fees, competing for the same full-service client base on quality and trust rather than trying to build an entirely different low-cost, low-touch business.
what they saw
Every broker treated deregulation as a threat to defend against by raising prices elsewhere. Schwab treated it as a new market — cut commissions further, drop the advice, sell access instead of expertise.
the move
When fixed commissions ended on 1 May 1975, Schwab cut trading commissions by roughly half compared to the old fixed schedule, and rebuilt the business model around that cut: no investment advice, no research reports, no full-service relationship manager, salaried staff rather than commissioned brokers so employees had no incentive to churn client trades, and a stripped-down offering built purely around low-cost trade execution. This directly targeted a customer segment full-service brokers had never seriously served: individual investors who wanted to make their own decisions and didn't want to pay for advice, prestige or relationship service they didn't use. Because full-service incumbents had built their entire economics and culture around advice-plus-execution bundled together, none could credibly match Schwab's stripped-price model without cannibalizing their own existing high-margin advisory relationships. Schwab's firm grew steadily through the late 1970s and 1980s into the largest discount brokerage in the United States, eventually forcing the rest of the industry to adapt around the discount model it pioneered.
why it works
Full-service brokers were structurally unable to follow Schwab into the discount segment because their entire business, commissioned brokers, research departments, advisory relationships, was built around the higher-margin bundle that discount pricing would have cannibalized; matching Schwab's price would have meant dismantling their own revenue model rather than simply cutting margin. This structural incumbency trap gave Schwab years to build the discount segment largely uncontested, while the individual investors Schwab targeted, people who wanted to trade without paying for advice they didn't want, had genuinely been unserved by an industry that had never needed to compete for them under the fixed-commission regime.
the payoff
On May 1, 1975 the SEC ended fixed commissions; Schwab cut fees roughly in half and grew into the largest US discount brokerage.
where it breaks
The strategy depends on a genuine, previously underserved segment existing behind the deregulation, not every regulatory change creates a new customer base; some just intensify price competition within the same customer pool, in which case there's no new market to build, only margin to lose. It also requires being early and structurally different enough that incumbents genuinely can't follow without self-cannibalization; a copyable discount offering with no deeper structural difference would simply get matched by better-capitalized incumbents once they noticed the threat.
what came after
Became the founding case of the discount brokerage industry, credited with democratizing stock market access for individual investors and cited as a standard example of a deregulation event creating room for an entirely new business model rather than just price competition within the old one.
references
- [1]In the Midst of Revolution: The SEC, 1973-1981 (Ending Fixed Commission Rates)SEC Historical Society, Virtual Museum and Archive of the History of Financial Regulation, 2004sechistorical.org
- [2]Schwab, CharlesEncyclopedia.com, 2004encyclopedia.com