On October 18, 2023, in a 3-2 vote along party lines, the U.S. Securities and Exchange Commission (SEC or Commission) proposed new Rule 6b-1 under the Securities Exchange Act of 1934 (Exchange Act), which would prohibit national securities exchanges from offering volume-based transaction pricing in connection with the execution of agency or riskless principal-related orders in national market system (NMS) stocks1 The rule would also require exchanges that offer such pricing in connection with the execution of NMS stock proprietary orders to have certain antievasion rules and to disclose to the Commission, on a monthly basis, certain data, such as the number of members that qualify for each volume-based transaction pricing tier.
The SEC noted in its proposing release that one of the impetuses for the proposed rule is to remove a “competitive impediment” between higher-volume and lower-volume exchange members when they compete for customer business. As Chair Gary Gensler stated in an associated press release, the proposal will address a currently “unlevel” playing field whereby “mid-sized and smaller broker-dealers effectively pay higher fees than larger brokers to trade on most exchanges.”2 In a dissenting statement, Commissioner Hester Peirce countered that the proposal “appears to be the product of fear that is not rooted in reality,” expressing skepticism that existing data substantiates “concerns about unwarranted pricing inequities, concentration, and restraints on competition.”3
The comment deadline is January 5, 2024.
The proposal could raise costs for institutional investors whose executing brokers may no longer be able to obtain lower exchange fees for a high-volume orders routed to a particular exchange. The proposal may also present challenges for broker-dealers that effect trades in a riskless principal capacity (e.g., by taking liquidity off an exchange to fill a customer order) to ensure that they do not run afoul of the antievasion rules contemplated under the proposal. Reducing incentives to route orders to exchanges could also decrease displayed liquidity. The proposal would not apply to options markets, although the Commission solicited comment regarding whether the proposed prohibition should extend to options markets.
National securities exchanges that trade NMS stocks maintain pricing schedules that set forth the transaction pricing they apply to their broker-dealer members that execute orders on their trading platforms. Many exchanges have adopted complex transaction pricing schedules that feature differentiated incentives that depend on member volume, such as lower fees or higher rebates, as the number of shares the member executes on the exchange reaches higher predefined volume-based tiers. According to the proposing release, such volume-based transaction pricing may raise competitive concerns among both exchange members and exchanges as well as exacerbate potential conflicts of interest between members and their customers to the extent that exchange members route their customers’ orders to a particular exchange in an effort to obtain volume-based discounts.
Proposed Rule 6b-1
Prohibition on Volume-Based Transaction Pricing for Agency-Related Volume
Proposed Rule 6b-1(a) would prohibit exchanges from offering volume-based transaction pricing, including fees, rebates, or other incentives, in connection with the execution of agency or riskless principal4 (i.e., “agency-related”) orders in NMS stocks. The prohibition would apply broadly to all executions where a member is executing such an order for the purpose of filling a customer order and not trading for its own account but would not to an exchange member’s proprietary volume — that is, where the member is trading solely for its own account and not in connection with filing a customer order. Under the proposed rule, exchanges would be prohibited from counting any agency-related volume toward any volume-based transaction tiers applicable to the member’s proprietary volume.
To address Commission concerns that members may have a financial incentive to mischaracterize their agency-related orders to continue to qualify for volume-based pricing, proposed Rule 6b-1(b) would require exchanges that offer volume-based transaction pricing for proprietary orders to adopt antievasion measures. Specifically, such exchanges would be required to have a rule to require members to engage in practices that facilitate the exchange’s ability to comply with the prohibition. In addition, proposed Rule 6b-1(b)(2) would require the exchange to establish, maintain, and enforce written policies and procedures reasonably designed to specifically detect and deter members from receiving volume-based pricing in connection with the execution of agency-related volume.
Transparency for Volume-Based Pricing on Member Proprietary Orders
To increase transparency, proposed Rule 6b-1(c) would add a new disclosure requirement for exchanges that offer volume-based transaction pricing in connection with the execution of proprietary orders in NMS stocks for the account of a member. Specifically, the proposed rule would require disclosure to the Commission on a monthly basis of certain information about exchanges’ volume-based transaction pricing tiers in a high-level, anonymized summary table and the number of members that qualify for each tier during the reporting month. Such information would be required to be submitted electronically in machine-readable structured data tables in an interactive data file in accordance with Rule 405 of Regulation S-T, which would be publicly accessible through the SEC’s Electronic Data Gathering, Analysis, and Retrieval system(EDGAR).
1Volume-Based Exchange Transaction Pricing for NMS Stocks, Securities Exchange Act Rel No. 98766 (Oct. 18, 2023), 88 FR 76282 (Nov. 6, 2023), https://www.govinfo.gov/content/pkg/FR-2023-11-06/pdf/2023-23398.pdf.
2SEC Press Release, SEC Proposes Rule to Address Volume-Based Exchange Transaction Pricing for NMS Stocks (Oct. 18, 2023), https://www.sec.gov/news/press-release/2023-225.
3Statement of SEC Commissioner Hester M. Peirce, Fears for Tiers: Statement on Proposed Volume-Based Exchange Transaction Pricing for NMS Stocks (Oct. 18, 2023), https://www.sec.gov/news/statement/statement-peirce-proposed-volume-based-exchange-transaction-pricing-nms-10-18-2023.
4The proposed rule would define “riskless principal” to mean “a transaction in which, after having received an order to buy from a customer, the broker or dealer purchased the security from another person to offset a contemporaneous sale to such customer or, after having received an order to sell from a customer, the broker or dealer sold the security to another person to offset a contemporaneous purchase from such customer.”
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