005 Fee released by Dow Jones ...
15:23 08/15 --DJ signaling Industry shift, Knight Unveils Stock-Trade Fees
By Gaston F. Ceron and Lynn Cowan of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--In a move likely to resonate throughout the stock-trading business, Knight Trading Group Inc. (NITE), the biggest stock dealer in the Nasdaq stock Market, has imposed explicit fees on stock transactions.
The new policy was detailed in a July 30 letter sent to select Knight customers by Phil Rapp, a senior vice president at Knight's Knight Securities unit. The letter, a copy of which was obtained by Dow Jones Newswire, said Knight will charge clients a transaction fee of 0.5 cent for each trade execution.
(Note: Verified by phone to some brokers the .005 fee is per share and not for each transaction)
The move aims to shield the Jersey City, N.J., firms bottom line from the switch to trading stocks in one cent increments. The smaller increments, which were recently ushered in along with decimalized stock prices, have cut deeply into the earnings of market-makers: In the second quarter, Knight's net income fell 94%, partly because of the penny increments but also as a result of other factors, such as the weak stock-market conditions.
The decline in profits has led to widespread speculation in the trading community about the need to impose new pricing structures previously, many trading firms profited from the “spread" on stock trades, or the difference between the price bid to buy a stock and the price offered to sell it. Now, the smaller increments are making that much more difficult
"There's no question that there's been a stunning reversal of fortune for people who make markets or specialize in creating liquidity for customers," said ton Gorman, a Charles Schwab Corp. (SCH) vice chairman who runs the San Francisco firm's capital markets business.
Knight's new policy is certain to be closely scrutinized by the firm's competitors, who may decide to follow suit. Jeffrey Meyerson, vice president of trading at X.H. Meyerson & Co. (MHMY), said his firm hasn't yet moved to institute fees, but that he expects it will do so sooner rather than later. Gorman said fees have a "good chance of becoming standard practice" and said that Schwab is studying them, although he cautioned that no final decisions have been made.
A spokesman for Merrill Lynch & Co. (MER) said that the firm is "speaking with many of our institutional buy-side clients as to the possibility of different payment options" on market-making activities.
"Once the biggest players out there begin, we'll be able to step in and figure out what we're going to do," said Meyerson.
Charging fees "would have been unheard of as little as six months ago, when volumes were higher and spreads fatter," said Russell Keene, an analyst at Keefe, Bruyette & Woods Inc. who issued a research note' early Wednesday reporting the changes at Knight. He said that the new prices are aimed at "smaller firms that do not supply the high volumes that large online brokers attract."
Knight, meanwhile, simply said through a spokeswoman that "a select group of clients received letters dated July 30 outlining a revised fee and rebate schedule. The changes to the select group of clients are effective Aug, 13. These changes are being made to reflect the value of providing liquidity in a one-cent minimum price variation environment, which has altered the depth of book in the marketplace.
"In the letter, which was not wade available by Knight, Rapp said the fees are 'compensation’ for execution services. Knight shares were recently trading at $11.02, down 70 cents, or 6%. The stock has traded as low as $8.39 and as high as $39.75 over the past 52 weeks.
Thus with the reason for the fees as a cost recoup of costs it is allowed and does not come under the 5% max. commission guideline of the NASD.
:=) Gary Swancey
