The Securities and Exchange Commission on Oct. 18 proposed a rule to prevent stock exchanges from offering volume-based transaction pricing to their broker-dealer members when executing trades.
The SEC approved issuing the proposal in a 3-2 vote with the commission's two Republicans dissenting.
In unveiling the proposal, SEC Chair Gary Gensler said the current landscape is unlevel because smaller broker-dealers effectively pay higher fees than larger brokers to trade on most exchanges.
Many exchanges offer their broker-dealer members lower fees or higher rebates as the number of shares the member executes reaches successively higher predefined volume-based tiers, according to an SEC fact sheet. Volume-based exchange transaction pricing raises competitive concerns among exchange members and among exchanges, the SEC added.
"We have heard from a number of market participants that volume-based transaction pricing along with related market practices raise concerns about competition in the markets," Gensler said. "I am pleased to support this proposal because it will elicit important public feedback on how the commission can best promote competition amongst equity market participants."
Also under the proposal, exchanges that offer volume-based transaction pricing for member brokers' proprietary stock orders would be required to disclose certain information, including the number of members that qualify for each transaction pricing tier that the exchange offers. Exchanges would also be required to submit this information to the SEC monthly, and the public would be able to access the information through the commission's EDGAR system.
Moreover, those exchanges would be required to have anti-evasion measures, including written policies and procedures reasonably designed to detect and deter members from receiving volume-based pricing when a broker completes a "riskless principal" transaction and executes an order for themselves.
Commissioner Mark T. Uyeda, who voted against issuing the proposal, said volume-discount pricing promotes efficiency and cost-reduction.
"When wholesalers give volume discounts to retailers, they generally do not do this out of generosity or charity; they do it because moving items in bulk may be more efficient, and the volume discounts reflects that efficiency," Uyeda said. "In competitive markets, customers benefit from these volume discounts."
Nasdaq in a statement said that it and the SEC "share a belief that small brokers play a critical role in fostering a vibrant and competitive market. However, we believe that the SEC's proposal on volume-based pricingwill not achieve this goal and that rushed large scale changes could harm liquidity and overall market quality. We are actively reviewing the SEC's proposal and look forward to working with the industry to recommend pragmatic and data-driven market improvements."
The proposal will have a 60-day comment period upon publication in the Federal Register.
