What Is Clicks?
"Clicks" refers to a historical unit of price quotation and commission calculation prevalent in financial markets, particularly the U.S. stock market, prior to decimalization and the abolition of fixed commissions. In this context, a click represented 1/8th of a dollar, or 12.5 cents. It was a fundamental component of the antiquated fixed brokerage firms commission system, a practice deeply embedded in the market microstructure of exchanges for over a century. The term "clicks" is a vestige of a time when trading costs were explicit and standardized, affecting how brokers were compensated for order execution. Understanding clicks provides insight into the evolution of trading mechanics and the structure of fees in financial markets.
History and Origin
The concept of "clicks" is inextricably linked to the history of fixed transaction costs in the U.S. stock market. For over 180 years, until the mid-1970s, brokerage firms operating on exchanges like the New York Stock Exchange (NYSE) were required to charge a predetermined, non-negotiable fee for each trade, regardless of the transaction's size. This fixed-rate system meant that small and large investors alike paid the same commission for an equivalent trade volume. Before May 1, 1975, a date famously known as "May Day," the Securities and Exchange Commission (SEC) mandated the abolition of these fixed commissions, pushing for a more competitive environment5, 6. This deregulation allowed brokerage firms to set their own commission rates, leading to a dramatic shift in the industry and paving the way for the rise of discount brokers4. The transition from a system where commissions were measured in "clicks" to one driven by competitive pricing fundamentally reshaped how investors accessed markets and influenced the subsequent development of modern trading platforms.
Key Takeaways
- "Clicks" historically represented 1/8th of a dollar (12.5 cents) and was used to calculate fixed brokerage commissions.
- The fixed commission system, of which "clicks" were a part, was abolished on May 1, 1975 ("May Day"), leading to commission deregulation.
- The elimination of "clicks" and fixed commissions fostered competition among brokerage firms and contributed to lower trading costs for investors.
- Modern trading often involves fees quoted in basis points or per-share rates, or even zero-commission models, a direct evolution from the "clicks" era.
- Understanding "clicks" provides historical context for the current state of market fees and the ongoing pursuit of market efficiency.
Formula and Calculation
While "clicks" itself isn't a complex formula, its application was straightforward. Before deregulation, commissions were often quoted as a fixed amount per share, with portions of a dollar represented by "clicks."
If a commission was, for example, "$0.25 per share," this could be conceptualized as two "clicks" per share. The total commission for a trade would then be:
Where the "Commission Rate Per Share" was often denominated in increments of 12.5 cents, or "clicks." For instance, a commission of "$0.50 per share" would be equivalent to four "clicks" per share. This explicit cost structure formed a significant portion of the total transaction costs for investors.
Interpreting the Clicks
The interpretation of "clicks" lies primarily in its historical significance within the landscape of financial regulation and trading volume. In the era of fixed commissions, the "click" system meant that the cost of executing a trade was standardized and often substantial, especially for smaller orders. This uniformity of pricing, mandated by exchanges, meant that brokerage firms competed not on price, but on the quality of their services, research, and advice.
For investors, a higher number of "clicks" meant a more expensive trade, directly impacting the profitability of their investments. This contrasted sharply with the implicit costs such as the bid-ask spread that also influence trading expenses. The abolition of "clicks" and fixed commissions paved the way for a competitive pricing model, where brokers could differentiate themselves by offering lower rates, which ultimately benefited investors through reduced explicit trading costs.
Hypothetical Example
Imagine a retail investor in 1970 looking to buy 100 shares of a company. Under the fixed commission system of the time, the brokerage firm might have a standardized commission schedule.
Let's assume the prevailing commission rate for an order of 100 shares was 20 "clicks" plus a percentage of the trade value.
20 "clicks" = ( 20 \times $0.125 = $2.50 )
If the stock was trading at $50 per share, the trade value would be ( 100 \text{ shares} \times $50/\text{share} = $5,000 ).
Suppose the additional percentage fee was 0.5% of the trade value:
( 0.005 \times $5,000 = $25.00 )
The total commission for this hypothetical trade would be:
( $2.50 \text{ (from clicks)} + $25.00 \text{ (from percentage)} = $27.50 )
This total commission was an explicit cost, directly visible to the investor, unlike modern, often less transparent fees like payment for order flow. This example highlights how "clicks" contributed to the overall cost of investing before deregulation fundamentally altered commission structures.
Practical Applications
While "clicks" are no longer a direct component of active trading, their historical impact reverberates through modern financial practices. The deregulation spurred by the abolition of "clicks" led directly to the rise of discount brokers and, eventually, zero-commission trading models, making investing more accessible to a broader population.
Today, regulators and market participants continue to focus on ensuring fair and efficient order execution. The Securities and Exchange Commission (SEC), for instance, has proposed new regulations to formalize a federal best execution standard, which requires brokers to obtain the most favorable terms for their customers under prevailing market conditions3. This standard considers not just price but also speed, likelihood of execution, and quality of execution. The evolution from fixed "clicks" to dynamic, digitally-driven commission structures highlights the continuous efforts to optimize transaction costs within market operations. The study of how market participants interact and how prices are formed, known as market microstructure, continues to be a crucial area of research for institutions like the Federal Reserve Board2.
Limitations and Criticisms
The fixed commission system, characterized by the use of "clicks," faced significant criticism for several reasons. Primarily, it limited competition among brokerage firms, leading to artificially high transaction costs for investors. Regardless of the size of the trade or the efficiency of the broker, the commission remained fixed, which disproportionately affected smaller investors and discouraged frequent trading. This lack of price competition meant that brokers had less incentive to innovate or offer more cost-effective services, as their revenue stream was guaranteed.
Furthermore, the fixed "clicks" system was criticized for hindering market efficiency. It created a disincentive for large institutional investors to trade actively, as their transaction costs were not scaled proportionally to their trade size. The abolition of "clicks" on May Day was a direct response to these criticisms, aiming to inject competition and reduce investor costs. While the direct impact of "clicks" is gone, the challenges of minimizing trading costs, including complex issues like market impact for large orders, remain a central concern for financial professionals today1.
Clicks vs. Basis Points
The distinction between "clicks" and basis points lies in their historical context, definition, and application in financial markets.
Clicks:
- Definition: A historical unit of price quotation and commission, equivalent to 1/8th of a dollar or 12.5 cents.
- Application: Primarily used in the U.S. stock market to calculate fixed brokerage commissions prior to May 1975. Commissions were often quoted as a fixed amount of "clicks" per share or per transaction.
- Context: Explicitly referred to a specific monetary value, a remnant of a fixed-rate commission environment where brokers did not compete on price.
Basis Points (BPS):
- Definition: A common unit of measure in finance, equal to one one-hundredth of one percent (0.01%). One hundred basis points equal 1%.
- Application: Used widely today to denote changes in interest rates, bond yields, and most pertinently, to express fees and transaction costs as a percentage of the trade value. For example, a commission of 5 basis points on a $10,000 trade is ( 0.0005 \times $10,000 = $5 ).
- Context: A flexible, percentage-based measure suitable for a market where fees are often a function of the trade's value and competition drives commissions to be a smaller fraction of the transaction.
While "clicks" were a rigid, absolute monetary value applied to commissions, basis points represent a relative, percentage-based measure. This shift reflects the broader evolution from a fixed-price brokerage model to a highly competitive, percentage-based or even zero-commission structure driven by technological advancements like algorithmic trading and high-frequency trading.
FAQs
What was the purpose of "clicks"?
The purpose of "clicks" was to standardize brokerage commissions during an era when fees for trading securities were fixed and non-negotiable. It provided a uniform way for full-service brokers to charge for their services, which included not just trade execution but also advice and research.
When did "clicks" stop being used?
"Clicks" effectively ceased to be a standard unit for commission calculation after May 1, 1975, often referred to as "May Day." On this date, the Securities and Exchange Commission (SEC) deregulated brokerage commissions, ending over a century of fixed pricing and ushering in an era of competitive commission rates.
How did the abolition of "clicks" impact investors?
The abolition of "clicks" and fixed commissions significantly benefited investors by introducing competition among brokerage firms. This led to a dramatic reduction in trading costs, making investing more affordable and accessible. It also paved the way for the emergence of discount brokers and the eventual trend toward commission-free trading.