Profits of Investment Banker and Brokers

Revenues of investment bankers and brokers depend heavily on the volume of securities handled. Most firms in this business are both investment bankers and brokers. These institutions are paid for financial transactions, not financial holdings, and they are paid a percentage commission based on the size of the transaction. For example, NYSE member firms’ revenues rise with increased trading activity on the exchange. However, the expenses of operating do not change in direct proportion to the change in volume. Expenses tend to remain fixed for many of the productive factors used by investment bankers and brokers. Such expenses as electronic information and data processing systems, administrative salaries, and building costs and rents are fixed expenses. After subtracting expenses from revenues, we find earnings because revenues vary more widely than expenses with volume, earnings rise and fall. Revenues, expenses, and earnings of NYSE member firms for the years 1972 through 1976 are given in Figure 13-3. We see losses for the low – volume quarters in 1973 and 1974. Also, we see relatively large earnings for the peak-volume quarters in 1975 and 1976.