The New York Stock Exchange and Nasdaq would no longer be able to offer a kind of special discount that rewards Wall Street brokerages for routing large amounts of trade orders to them under a new plan from the Securities and Exchange Commission.
(Bloomberg) — The New York Stock Exchange and Nasdaq would no longer be able to offer a kind of special discount that rewards Wall Street brokerages for routing large amounts of trade orders to them under a new plan from the Securities and Exchange Commission.
The SEC on Wednesday proposed banning so-called volume-based transaction pricing. The arrangements involve charging reduced fees or offering rebates to brokerages specifically based on how many stock trades they send each month on behalf of clients.
This tiered setup can result in larger trading firms offering customers better transaction prices than smaller ones, SEC Chair Gary Gensler said during the meeting. That can drive smaller and mid-size brokers to route their orders through larger ones, he said.
“A handful of the largest brokers are then able to collect a fee for that service and use that volume to qualify for even better tiers for themselves and other customers,” Gensler said.
The SEC voted 3-2 to advance the plan, which will be open for public comment for 60 days and then will require another vote months later to be finalized. It’s the latest effort by the SEC to tackle aspects of the stock market that could pose conflicts of interest. The SEC wouldn’t entirely prohibit exchange fees or rebates — a cornerstone of the stock market — just those based on transaction volume.
Late last year, the agency proposed four separate, sweeping regulations that delve into how trades are ordered and executed in the world’s biggest equities market. Those are still under consideration and, if enacted, they would have a far greater impact on how stocks trade than a volume-pricing ban.
The planned rule received swift industry criticism.
“We remain concerned that the SEC continues to propose wholesale changes to US equity market structure without identifying a market failure or evidence of repeated market harm,” Ellen Greene, a managing director at the Securities Industry and Financial Markets Association, said in an emailed statement. “It is critical that regulators tailor their interventions to address a market failure without unnecessarily harming or disrupting markets.”
Nasdaq said small brokers play a critical role in fostering a vibrant, competitive market. “However, we believe that the SEC’s proposal on volume-based pricing will not achieve this goal and that rushed large scale changes could harm liquidity and overall market quality,” it said in a statement to Bloomberg.
But Ronan Ryan, co-founder and president of IEX Group Inc., a far smaller exchange that champions itself as fair and transparent, said the SEC was right to take up the issue due to “the potential abuses inherent in how they are structured and negotiated.”
“Any comparison of exchange rebate tiers to regular volume-based pricing in many other businesses fails to understand or appreciate the details of how these structures harm investors and impair fair market competition,” he said.
The NYSE declined to comment on the SEC’s planned rule.
Read More: Wall Street Trade Group Fires Salvo in Fight Over SEC Stock Plan
Under Wednesday’s proposal, exchanges could still offer lower fees and rebates to brokers and banks that are trading with their own funds. However, exchanges would have to make monthly disclosures about their volume-based pricing tiers and the number of exchange members that qualify for each tier.
Hester Peirce, one of the SEC’s two Republican commissioners, questioned the need for the proposal.
“Economies of scale trigger discounts in almost every industry,” she said. “Why should similar discounts be unavailable in this industry?”
Typically only the largest banks or other large traders can attain the most advantageous pricing tiers, meaning the largest firms would likely be most affected if the plan was finalized.
Separately, in an interview with Bloomberg TV after the SEC meeting, Gensler declined to offer a timeline for deciding whether to approve a handful of much-anticipated spot Bitcoin ETFs.
A false report that the SEC had approved a BlackRock-backed Bitcoin ETF surfaced Monday on the social-media platform X, formerly known as Twitter, sending the price of Bitcoin about 10% higher before it fell following reports that the application was still under review.
–With assistance from Kailey Leinz.
(Updates with trade-group reactions beginning in seventh paragraph.)
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