Abstract: Financial institutions, including brokers and intermediaries, are profitmaking firms which sell services to savers and investors. Information and transactions services are two important services provided by financial firms. The object of this paper is to analyze the revenues and costs of providing these services using the traditional tools of the theory of the firm. This model will then be used to explain the demand functions and supply functions for a model of financial securities markets. With these models we will derive the effects on the interest rate structure of a technological change that lowers the cost of financial transactions. There exist many models concerning financial firms; usually they analyze indetail, some particular aspect of their operation. There are models deriving principles for optimal portfolio selection (see, for instance [12, 13, 14, 16, 20]), models analyzing scale economies in banking [2, 4, 9, 11], models representing the structure of the banking market and the effectiveness of regulation [1, 5, 6, 7, 8, 19], and models concerning various aspects of nonmonetary financial intermediaries [3, 10, 17, 23]. However, the analysis of information costs and transactions costs is strangely neglected in the firlancial literature, although economizing on information and transac-