SEC Proposes Limiting Volume-based Trading Discounts
Commentary by Steven Lofchie
The SEC proposed a rule that would prohibit national securities exchanges from offering volume-based transaction pricing to broker-dealers executing agency or riskless principal orders in NMS stocks. Under the proposed rule, exchanges could continue to offer volume-based exchange transaction pricing for members trading for their own account but not for filling an order for a customer.
The proposed rule includes an anti-evasion clause that would require equities exchanges offering proprietary volume discounts to implement rules and written procedures to ensure compliance with the prohibition on agency trading discounts. The SEC would also require equities exchanges to electronically submit on a monthly basis structured data disclosing the number of members that qualify for each volume-based transaction pricing tier.
Comments on the proposal must be submitted within 60 days after publication in the Federal Register.
Statements
SEC Chair Gary Gensler said that the proposed rule was necessary because the "playing field upon which broker-dealers compete is unlevel" due to the higher fees mid-sized and smaller broker-dealers must pay in comparison to larger broker-dealers.
SEC Commissioner Jaime Lizárraga said that the disclosure requirements would (i) increase transparency surrounding fees and rebates for proprietary trading and (ii) inform the SEC's decision-making as to whether a proposed fee filing meets standard law requirements.
In dissent, SEC Commissioner Hester M. Peirce argued that the SEC "need[s] more evidence before taking the extreme step of imposing an outright ban on a particular approach to pricing." She pointed to the SEC's failure to identify any harm that has occurred that would justify the proposed changes and instead "muses repeatedly about what 'may' happen."
SEC Commissioner Mark T. Uyeda argued that it is too "simplistic" to allege that volume-based transaction pricing causes harm to investors by allowing intermediaries to receive insufficiently disclosed incentive payments for routing orders to exchanges. Mr. Uyeda called the proposal's exception for proprietary traders "ironic[]," given that it "highlights the competitive damage inherent in the proposal because it will disadvantage small proprietary traders."
Commentary
There is no little irony to the SEC proposing a rule that purports to benefit small broker-dealers in light of the damage that the SEC's rule making rampage does to small and medium sized firms. As an alternative to adopting this rule, the SEC should consider withdrawing its set of trading rules that the SEC itself concedes are going to hammer smaller firms.