April 25, 2011
The Financial Industry Regulatory Authority (FINRA) has proposed changes to its rules governing markups, commissions and fees, partly in response to a study by Harvard Law School Professor Allen Ferrell. The study, published April 7, is titled “The Law and Finance of Broker-Dealer Mark-Ups.”
On FINRA’s behalf, Ferrell conducted an analysis of more than 161,000 equity transactions in order to assess the mark-ups and mark-downs that broker dealers charge when customers buy and sell securities. Ferrell examined the distribution of these mark-ups and mark-downs, as well as their determinants.
“Professor Ferrell’s study was an important component in the formulation of FINRA’s policy and regulatory position,” FINRA commented.
The Law and Finance of Broker-Dealer Mark-Ups
By Allen Ferrell
The prices charged retail customers by broker-dealers for less-liquid, lower-priced securities have been of long-standing regulatory concern. In particular, the Financial Industry Regulatory Authority has long had regulations prohibiting broker-dealers from charging excessive “mark-ups” and “mark-downs.”
This paper, using a unique dataset generously provided by FINRA tracking some 161,635 equity transactions involving fourteen broker-dealers and retail customers in largely less liquid, lower-priced securities over the course of the 2003-2005 period, provides the first comprehensive analysis of the determinants of the mark-ups and mark-downs charged by broker-dealers.
In particular, the effect of broker-dealer solicitation, broker-dealer participation in the trade as a principal, stock price volatility, stock price level, trade volume and the bid-ask spread are examined on the size of mark-ups and mark-downs charged. This analysis is placed in the context of the law on mark-ups and mark-downs. ... Read the full study on the Social Science Research Network »