The Securities and Exchange Commission proposed in October 2023 to restrict the use of volume-based discounts for agency-related orders on national exchanges. The proposal’s comment period expired on January 5, and the proposal received mixed feedback, including opposition from most major exchanges.
The SEC’s proposal would prevent exchanges from offering privileged pricing and rebates to broker/dealers on the basis of their trading volume for agency-related trades. Agency trading refers to offsetting trades between various clients of the broker. It does not, however, regulate proprietary trading or broker/dealers trading on their own account. The proposal would also require exchanges to implement anti-evasion measures and disclose their pricing tiers to their members.
In Opposition
Larger exchanges, such as Nasdaq and the New York Stock Exchange, both called upon the SEC to withdraw the proposal.
Both exchanges argued that volume discounts are common in many industries and often serve to promote competition. According to the NYSE’s letter, “volume-based pricing arrangements are widely accepted across industries throughout the U.S. and global economy, and are generally considered pro-competitive under U.S. antitrust law.”
The two also argued that pricing tiers are one way in which exchanges distinguish themselves from their competition to attract larger brokers to their exchange. “The Proposal would eliminate one of the ways in which exchanges can compete with, and endeavor to differentiate themselves against, other exchanges. As such, the Proposal would impede exchange vs. exchange competition,” the NYSE’s letter stated.
The Securities Industry and Financial Markets Association also opposed the rule. It noted that preventing bulk discounts would likely cause the costs of trading to increase, and brokers would have to pass those costs on to their clients.
In Support
The IEX Exchange, a market exchange, wrote in support of the proposal. IEX argued that tiered pricing keeps smaller brokers out of the market and thereby undermines competition: “tiered pricing substantially hinders competition for agency orders, in that lower-volume firms are driven to route orders through their competitors, and it helps to concentrate principal trading volume into the hands of an increasingly smaller pool of firms.”
IEX added that tiered pricing undermines best execution standards because it can incentivize brokers to route orders to exchanges, with an eye to volume rebates, sacrificing both pricing and speed in the process.
John Ramsay, the IEX’s chief market policy officer, notes that brokers that get the rebate are “not obligated to pass them back” to their clients “and typically don’t.” Ramsay says most clients “wind up worse off when their orders are routed to get these rebates.”
Better Markets, a nonprofit financial markets advocacy group, agreed that tiered pricing can undermine best-execution: “Volume-based pricing may incentivize members to route customer order flow to certain exchanges for the purpose of reaching volume thresholds and achieving preferential pricing, which may harm customers if it comes at the expense of execution quality.”
Better Markets also concurred that pricing tiers undermine competition among brokers: “The use of volume-based transaction pricing harms competition by preventing smaller exchanges from competing with larger exchanges and by preventing smaller brokers from competing with larger brokers.”
Tags: best execution, Better Markets, IEX Exchange, John Ramsay, Nasdaq, New York Stock Exchange, Securities and Exchange Commission, SIFMA, trading, volume-based discounts for agency-related orders