During 2006, the Bank of America had been charging its customers a $19.95 commission for each stock trade. By the end of the year, they wound up at $0. The only catch was you had to have a minimum of $25,000 in deposits and a maximum of 30 trades a month.
However, at 15 million customers, the impact was potentially massive. Beyond trading activity, the Bank’s goal was to become a financial supermarket where retail investors exclusively shopped.
The Bank of America was not the first to cater to the individual investor. Long before, we had Merrill Lynch.
The First Robinhood: Merrill Lynch
Our story begins in 1914 when Charles Merrill started his own investment firm. Successful, by 1928 he became uneasy about the market’s highs, pared back, and survived the 1929 crash. Soon after, selling his brokerage operations to E.A. Pierce & Co., he wound up in the grocery business. As.the largest shareholder in the Safeway grocery chain, he influenced corporate strategy and management selection. A decade later, Charles Merrill returned to a struggling version of his old firm. Like Safeway, his goal was an economy of scale. But this time, instead of supermarkets, it would be brokers selling to middle class retail investors.
In what eventually became Merrill Lynch, Pierce, Fenner & Smith, Charles Merrill led a retail revolution. To avoid “churn and earn” his account executives (Merrill’s name for brokers) earned a salary rather than trading commissions. Targeting middle income investors, he believed in massive advertising, in-house stock research for his salespeople, and, through an eight-week course, even invited women to learn about markets. Using a $40 a month plan in which investors consistently grew their money with the firm, by 1958, investment accounts topped 100,000.
Merrill Lynch was also one of Wall Street’s first firms to go public. On Wednesday June 23, 1971, the firm had its IPO (Initial Public Offering). At $28 each, four million shares were divided between Merrill Lynch’s customers and other investors. (Their own customers got 3.2 million shares.) By the end of the first day of the Merrill Lynch IPO, the stock closed up at a $37.75 bid and $38.25 asked price.
You can see under the headline that the NY Times said Merrill Lynch’s shares were “snapped up”:
Robinhood also believes it is “democratizing” investing with its commission free trading. And, it too has had an IPO in which it sold close to 25 percent of its shares to 301,573 of its own customers. However, at the end of the first trading day, the stock closed at $34.82, lower than its $38 offering price.
A postscript: During the Great Recession (December 2007-June 2009), a financially distressed Merrill Lynch was acquired by the Bank of America where it now resides.
Our Bottom Line: Financial Intermediaries
While the Robinhood story just began, we do know for sure that it has joined a group called financial intermediaries. For millions of small retail investors that that want to buy or sell stocks, other securities products, and cryptocurrencies, the transactions are free.
As economists, we call Robinhood a financial intermediary. Similar to banks, they connect the people who want to raise money with the individuals and entities that have the money to save and invest.
My sources and more: Thanks to WSJ’s Jason Zweig for giving me the idea and some facts for today’s post. Meanwhile WSJ told Bank of America history and BIS described today’s retail investors. Then, for some Merrill Lynch facts, this book and this Insider article had the details. Finally, you might want to look at Merrill’s 1971 IPO in the NY Times and at econlife to see why Robinhood’s commission free trading is not really free.