Portfolios of Investment Bankers and Brokers

Most investment bankers are also secondary-market brokers and dealers. They are traders who maintain small inventories of securities, which they plan to sell in the near future. Note that the total assets of $61 billion of security brokers are only a small fraction of the total assets of any of the thrift-type institutions. Sources of financing are principally commercial bank loans and customer credit balances. Commercial bank loans and customer credit balances. Commercial banks extend broker loans, which are very short-term (less than 30 days or on call) credits collateralized by marketable securities. Customer credit balances are amounts due to brokerage customers. Many customers prefer to leave credit balances at brokerage firms to pay for future security transactions, and brokerage firms accept the funds as a short-term source of financing.

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Commissions Brokers

Commissions Brokers are paid a commission for selling securities and arranging for the official transfer of ownership. The commission is negotiated between the broker and the investor for each transaction. Large institutional traders are able to negotiate lower commissions than individual trader, because institutional traders need proportionately less advice and personal service than do individual investors. In general institutional traders pay 40 to 50 percent less than individual investors for comparable transactions. The characteristics of the transaction are important determinants of the amount of the commission. The number and price of shares traded account for most of the difference in commissions charged for institutional transaction commissions. However, the commission charges do not increase proportionately with increases in the number of shares or price of shares traded.

The commission increases only 38 percent when the price increases by 100 percent. A very substantial discount is given for larger dollar volume transactions when the increase is due to higher prices. If we compute commission changes for increases in the number of shares traded, we find that commissions increase by 95 percent when share volume increases by 100 percent. Overall, commissions depend primarily on the number rather than the price of shares traded.

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