Fair Prices and Commissions
A standard FINRA rule of thumb for determining pricing fairness has been the 5% Policy, a policy that markups, markdowns, and commissions should hover in the neighborhood of 5% of sales. While the 5% Policy is a generally accepted practice, FINRA adds some relevant factors that will determine whether a markup or markdown is fair and reasonable. They are:
• Type of security involved. The greater the risk, the higher the allowable markup (e.g., AAA corporate bonds would have a lower markup than BBB corporate bonds because AAA bonds carry a lower risk than BBB bonds).
• Availability of the security in the market. Thinly traded stocks have typically higher markups.
• Price of the security. The higher the price of the stock, the lower the markup.
• Amount of money involved in a transaction. The higher the value of the total transaction, the lower the markup.
• Disclosure. Disclosure of fees ahead of time is encouraged, especially for transactions without any precedence.
• Pattern of ma