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Fears for Tiers: Statement on Proposed Volume-Based Exchange Transaction Pricing for NMS Stocks

Oct. 18, 2023

Thank you, Mr. Chair. Regulators, as a general matter, are instinctively cautious. Caution can be a good thing. It can enable us to recognize dangers or threats early and to prepare appropriate responses. Caution, when tempered by a prudent and open mind, can help us protect investors and keep our markets fair and efficient. But sometimes healthy caution can metastasize into unhelpful and unproductive fear. This rulemaking appears to be the product of fear that is not rooted in reality. Accordingly, I cannot support it.

In proposing to restrict volume-based pricing tiers, the Commission points to concerns about unwarranted pricing inequities, concentration, and restraints on competition. If strong data substantiated these concerns, a rulemaking could be an appropriate response. However, rather than provide evidence of definitive harms currently happening, the release muses repeatedly about what “may” happen. As one example, the release states: “While the current trend of consolidation may be concurrent with lower prices for investors and better service, increased market power among the high-volume broker-dealers could eventually lead to increased costs for investors. . . . it is conceivable that dominant broker-dealers may eventually choose to exercise market power more aggressively.”[1] Though replete with concerns about possible future harms, the release fails to mention what, if any, harm has occurred to justify the proposed changes. Maybe commenters will fill in the missing data, but so far, I am not convinced that we need to step in to override exchange pricing with a sweeping rule of the type we are considering today.

For those of us who have shopped at bulk goods warehouses, volume-based discounts are standard fare. My brother mocks me for the number of paper towel rolls spilling out of every corner of my apartment, and I respond smugly with the great price I paid. The same store that sells me the paper towels also cuts me a check each year based on how much I spend there. Skeptical brother meet volume-based pricing. Economies of scale trigger discounts in almost every industry. You buy in bulk, and you pay less. Why should similar discounts be unavailable in this industry?

The Commission worries that tiered pricing could affect adversely competition among exchanges and among exchange members and exacerbate a conflict of interest between broker-dealers and their customers. But the release is half-hearted in describing these problems and explaining why the proposal is a sensible solution.

First, the release acknowledges that exchange pricing is far from unregulated. As the release explains, “exchanges are subject to unique principles and processes that do not apply to other businesses.”[2] Existing law requires exchanges to file proposed fee changes with the Commission and to justify those changes. They must demonstrate that proposed fees are equitably allocated, do not unfairly discriminate between customers, issuers, brokers, or dealers, and do not impose undue burdens on competition.[3] After receipt of a fee filing, the Commission has 60 days to suspend these proposals to allow for proceedings to decide whether they should be approved.[4] In addition, exchanges must post their pricing schedules on their public website.[5]

Second, although the release explains that volume-based pricing can make it hard for small exchanges to attract liquidity and harder to innovate, the release equivocates on how the proposal would affect smaller exchanges. We should work on making it easier for exchanges to compete through innovations, but the proposal does not seem to be the right tool.

Third, the release acknowledges mitigants to the conflict between a broker and its customer posed by volume-based tiers. Yes, an exchange member may have an economic incentive to execute an agency order on the exchange to qualify for a volume-based discount, even if doing so will not yield best execution for the customer. But the member’s best execution obligation, which the Commission recently proposed to supplement, stands in the way of its acting on that incentive. Absent a best execution factor that would favor executing a trade elsewhere, a member should execute an agency order where it is most cost effective to do so. Moreover, as the release points out, other “forces in the market for equity brokerage services that serve to limit the extent to which this conflict of interest can alter behavior” include the Order Protection Rule, which constrains routing discretion, and trade-by-trade monitoring by some institutional customers.[6]

Fourth, although the Commission points out the competitive disadvantage faced by small exchange members that cannot pass the benefits of tiered pricing on to their customers, the proposal’s attempt to level the playing field may not be beneficial. Smaller broker-dealers—who “may not have the scale economies of larger broker-dealers, [but] may have firm-specific expertise valued by particular investors”[7]—might choose to route through larger-volume members whether or not volume-based pricing is available. Regardless of pricing tiers, technological disadvantages put many smaller broker-dealers at a competitive disadvantage to higher-volume exchange members. The proposal would mean that smaller broker-dealers that trade through high-volume members will no longer be able to benefit from savings passed through from high-volume members.[8] Further, “dispersing order flow across the broker-dealers may reduce allocative efficiency,”[9] which could harm investor welfare.

Without setting up a solid foundation for the rule, the Commission proposes to prohibit equities exchanges from offering volume-based exchange transaction pricing in connection with the execution of agency or riskless principal orders in NMS stocks. We eschewed a more moderate approach, such as providing greater transparency about volume-based pricing tiers as the Investor Advisory Committee recommended in 2020.[10] We need more evidence before taking the extreme step of imposing an outright ban on a particular approach to pricing. An unsubstantiated fear that there could be problems does not justify adding an onerous and potentially ineffective rule to an already over-prescriptive equity market-structure ruleset.

Although I cannot support this rule proposal, I appreciate the staff’s hard work on a complex topic. I am looking forward to seeing what commenters say about this rule, including any data commenters submit. Thank you to staff in the Division of Trading and Markets, the Division of Economic and Risk Analysis, and the Office of General Counsel.

I have some questions:

  1. Last December, we proposed a number of other market structure rulemakings. How does this latest proposal interact with the four outstanding market structure rulemakings?
  2. I share the concern expressed in the release about the declining number of brokers-dealers.
    1. Do we anticipate that this proposal will turn that trend around?
    2. Are we planning to use the number of brokers as a metric for assessing the success of this rule in several years?
  3. The release acknowledges that some and maybe even all savings from higher volume members are passed down to lower-volume members that route transactions to them. Could a rule like this one, which is focused on agency trading, hurt smaller brokers by preventing them from benefiting from favorable pricing tiers as they do now?
  4. What, if any, effect do we expect this proposal to have on liquidity provision?
  5. If adopted, what kind of compliance period are you contemplating?

[1] Release at 101-02.

[2] Release at 5 (citation omitted).

[3] See 15 U.S.C. 78f(b)(4) (requiring that the rules of an exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities); (b)(5) (requiring that the rules of an exchange, among other things, not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers); and (b)(8) (requiring that the rules of an exchange do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Securities Exchange Act). See also 15 U.S.C. 78k-1(a)(1)(C)(ii) (finding it in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure fair competition among brokers and dealers and among exchange markets, and between exchange markets and markets other than exchange markets).

[4] 15 U.S.C. 78s(b)(3)(C). For a discussion of how the Commission handles fee filings, see note 6 in the release.

[5] See 17 CFR 240.19b-4(m).

[6] Release at 94.

[7] Release at 115.

[8] See, e.g., Release at 122 (“To the extent that average exchange pricing on agency-related orders become more expensive than the previous top-tier pricing, investors and any intermediating broker-dealers who previously benefitted from the high-volume broker-dealers’ passing through the volume-based exchange transaction pricing may be worse off.”).

[9] Release at 118.

[10] Recommendation of the SEC Investor Advisory Committee Regarding Exchange Rebate Tier Disclosure (Jan. 24, 2020),

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