NASD Brokerage Commissions

By: William Cate

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/globalvillageinvestmentclubwelcome/]

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/] OrBusiness Management Articles, visit the Global Village Investment Club Website:
[http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]

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