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SEC Open Meeting 10.18.23

U.S. Securities and Exchange Commission
Open Meeting
Wednesday, October 18, 2023

Topline

  • Commissioners voted 3-2 in favor of the volume-based exchange transaction pricing for National Market System (NMS) stocks rule.

Opening Statement
Gary Gensler, Chairman, Securities and Exchange Commission
Gensler opened the meeting by expressing his support for the proposal, noting that it will allow for important public feedback on how the SEC can best promote competition amongst equity market participants. He noted that Congress mandated that when the SEC engages in rulemaking, the SEC must consider—in addition to investor protection and public interest—efficiency and competition, as well as capital formation. Gensler also said that in considering these mandates, he thinks it’s appropriate for the SEC to make today’s proposal along with several alternatives. Gensler closed by asking the public for comments addressing whether volume-based discounts should be prohibited, and if so, to what degree.

ITEM 1: Volume-Based Exchange Transaction Pricing for NMS Stocks
The Commission will consider whether to propose a new rule to prohibit national securities exchanges from offering volume-based transaction pricing in connection with the execution of agency or riskless principal (“agency-related”) orders in NMS stocks; and to require national securities exchanges to have certain anti-evasion rules and written policies and procedures and disclose certain information if they offer volume-based transaction pricing for member proprietary volume in NMS stocks.

As an alternative to the proposed prohibition of volume-based transaction pricing for agency-related orders in NMS stocks, the Commission might instead prohibit exchanges from offering volume-based transaction pricing for all volume in NMS stocks.

Staff Discussion
Haoxiang Zhu, Director, Division of Trading and Markets
Zhu explained that the proposed rule being considered would promote competition and transparency while mitigating the potential conflict of interest in the routing of customer orders. He said volume-based transaction pricing raises concerns among competition between exchange members. Volume-based tiers provide an advantage for high volume customers as compared with low volume, which effects competition amongst members. Zhu also highlighted that some listing exchanges provide favorable pricing to closing auction which impacts the ability of other exchanges to compete for order flow during market hours. Zhu noted that it also would require exchanges to provide disclosures about pricing for non-agency-related order flow. Zhu closed by noting that the proposed rule would enhance tiers and among exchange members and exchanges, enhance transparency of exchanges and transaction pricing tiers, and mitigate conflicts of interest in all routing.

Richard Holley III, Assistant Director, Division of Trading and Markets
Holley provided additional details on the proposal. He stated that the proposed rule consists of three principal parts.

  • The first part prohibits exchanges from offering volume-based transaction pricing in connection with executions where a member is executing an agency or riskless principal order in an NMS stock for the purpose of filling a customer order and is not trading for its own account. He noted that the proposal refers to these as “agency-related orders.” Holley also said that the proposal would not prohibit exchanges from continuing to offer tiered transaction pricing in connection with member proprietary volume.
  • Holley said the proposed rule also contains two provisions designed to help ensure compliance with the proposed prohibition. Holley said there would be a requirement for exchanges to have rules requiring members to engage in practices that facilitate the exchange’s ability to comply with the proposed prohibition.
  • In addition, Holley explained the rule would require exchanges to establish, maintain and enforce written policies and procedures reasonably designed to detect and deter members from receiving volume-based transaction pricing in connection with agency related volume in NMS stocks.

He closed by noting that the proposal contains a new public disclosure requirement for exchanges which requires them to submit data tables of certain information about their volume-based transaction pricing tiers and the number of members that qualify for each tier to the Commission’s EDGAR system.

Jessica Wachter, SEC Chief Economist
Wachter reiterated that the proposal would prohibit exchanges from offering volume-based transaction fees, rebates, or other incentives in connection with the execution of agency or riskless principal orders in NMS stocks. Wachter then explained that broker dealers transact on exchanges for their own account, namely as principal or on behalf of others, namely as agent. This proposal, Wachter said, would ban volume-based tiers for the agency part of that flow because when broker dealers act as agents there is the potential for a divergence of interests in that the broker dealer earns more on the rebate whereas the customer benefits from other elements of execution quality such as price. Wachter said that conflict can drive routing towards specific exchanges where execution is less beneficial for the customer and harm competition in the long run because it creates a self-reinforcing advantage for large agency brokers.

Commissioner Questions and Comments
Commissioner Peirce
Commissioner Peirce noted that being instinctively cautious can be a good thing but said that sometimes healthy caution can metastasize into unhelpful and unproductive fear. She said that this proposal appears to be a product of fear that is not rooted in market realities, and therefore she cannot support it. Peirce noted that rather than staff providing evidence of definitive harms currently happening, the rule repeatedly discusses what may happen down the road. Peirce then said that tiered pricing of scale triggers discounts in almost every industry. She questioned why similar discounts should be unavailable in this industry.

Peirce asked multiple questions of the staff. First, she inquired about how this proposal would interact with other proposals already put forth by the SEC. Zhu said that the four proposals relating to equity market structure that were put out in December 2022 are separate proposals that address different problems. Peirce then asked for clarification on if these proposals would interact with the proposed rule. Zhu clarified that the proposals from December 2022 are about transaction, transparency, and execution quality, minimum trading increment, best execution across all asset classes, and the transaction of retail orders while the current proposed rule is about differentiated pricing, so there wouldn’t be significant interaction. Peirce asked about the timeline of the proposed rule being enacted. Zhu did not answer as he said he did not want to speculate. Peirce asked whether this rule could help address the declining number of broker dealers and whether that would be considered a measure of success for the proposal. Zhu responded saying that while this rule would not reverse that trend by itself, it is the hope of the Division that it will slow down the concentration of broker dealer services. She also asked Wachter how they are planning to measure routing behavior. Wachter stated that she cannot answer that question at the moment, but she would like to set up a briefing to provide additional information.

Commissioner Crenshaw
Commissioner Crenshaw said that competition among firms benefits consumers. She said that competitive markets promote economic efficiency and growth, and their benefits can include better prices and better products for consumers as well as a more level playing field for small businesses that seek to enter new markets or expand their market share. Crenshaw noted that she is concerned about the impact of tiered pricing on competition between exchange members such as when broker dealers are competing for customers. She stated that this proposed rule is an avenue to address all concerns the SEC has on tiered pricing, which would prohibit equity exchanges from offering tiered pricing in connection with the execution of agency-related-volume in certain stocks while also requiring transparency for tiered pricing related to member propriety volume.

Commissioner Uyeda
Commissioner Uyeda said that rather than moving forward with this proposal, the SEC would have been better off making a serious attempt to study and identify the root causes of how pricing and trading volume on exchanges has led to the current conditions. He noted that the proposal would prohibit exchanges from extending volume discounts to broker dealers if those broker dealers are engaged in transactional services for their customers. Uyeda closed by saying that it is important that when the SEC looks at these proposals that there is a deep dive into what exactly are the root causes of current conditions.

Commissioner Lizarraga 
Commissioner Lizarraga said the proposed rule would increase transparency of the complex and opaque system of tier transaction pricing. He noted that many exchanges use complex pricing schedules or tiers that offer lower fees or higher rebates based on how much a member trades on that exchange. Lizarraga then noted that exchanges are currently not required to disclose the number of members that qualify for any tier, including the tiers that offer the lowest fees or largest rebates. He closed by recognizing that the proposed rule would bring increased transparency to the pricing structure and promote competition.

Chair Gensler
Chair Gensler said he supports the proposed rule and looks forward to public comment.

Gensler asked staff about alternatives to a wider ban. Holley said alternatives include broader prohibition on tiering for all volume and member proprietary volume, a ban on all volume-based pricing except for registered market makers as well as a disclosure only approach.

Vote
Chairman Gensler called the role. The item was approved 3-2. Peirce and Uyeda voted no.

 

For more information on this meeting, please click here.
For an archive of past SIFMA hearing coverage, please click here.