Commissions, Markups, and Markdowns
FINRA has a number of specific rules governing the acceptable range of commissions, markups, and markdowns related to a transaction. A markup is added to the ask/offer price when a customer purchases a security, while a markdown is taken off the bid price of a security when a customer sells the security.
A standard FINRA rule of thumb for determining pricing fairness has been the 5% Policy, a policy that states 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 help to determine whether a commission, 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 typically have a lower markup than BBB corporate bonds because AAA bonds carry a lower risk than