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Statement on Volume-Based Exchange Transaction Pricing for NMS Stocks

Oct. 18, 2023

Thank you, Chair Gensler. Today’s proposal would “prohibit national securities exchanges from offering volume-based transaction pricing for agency-related volume in certain stocks and … require national securities exchanges to disclose certain information if they offer volume-based transaction pricing for proprietary volume in these stocks.”[1]

Volume-based transaction pricing is alleged to harm investors by allowing intermediaries to receive insufficiently disclosed incentive payments for routing orders to exchanges. However, upon closer examination, this simplistic explanation does not paint the full picture. Rather than moving forward with this proposal, the Commission 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 current conditions.

A key component of a market-based economy is the freedom to develop pricing mechanisms. These mechanisms may range from the pricing of various bundles of goods and services to everyday volume discounts that retailers receive from wholesalers when they purchase their supplies. Prices and price mechanisms send signals that optimize the allocation of scarce resources and is a far superior alternative than central planning.

When wholesalers give volume discounts to retailers, they generally do not do this out of generosity or charity; they do it because moving items in bulk may be more efficient, and the volume discounts reflect that efficiency. In competitive markets, customers benefit from these volume discounts. Today’s rule proposal would prohibit exchanges from extending volume discounts to broker-dealers, if those broker-dealers are engaged in transactional services for their customers.

Economies of scale are inherent in our securities markets. There are fixed costs that, on a per unit basis, reward scale, such as information technology and data expenses, investments in connectivity to exchange platforms, and compliance costs. Even though one would expect some degree of market power to evolve out of such scale economies, our brokerage industry is marked by a considerable amount of competition.[2] One reason is that inputs that would otherwise constitute scale economies can be sold by large broker-dealers—through technological connectivity—to small broker-dealers, thereby sharing the benefits of the scale. This is precisely what currently happens when exchange services are offered by member broker-dealers to non-member broker-dealers. As the proposal’s economic analysis notes “[t]hrough direct market and sponsored access services, … lower-volume broker-dealers choose to route orders through high volume broker-dealers.”[3] This renders the process of sending trades to a platform less expensive than it would otherwise be for small broker-dealers. In turn, this efficient mechanism is rewarded by the exchanges through volume pricing. Like the rest of the economy, volume-discount pricing promotes efficiency and cost-reduction. Yet, today’s proposal would prohibit it.

The proposal would except proprietary traders, meaning that exchange members who are trading for their own account could continue to receive volume-discounts, while those that facilitate transactions of customers could not. Ironically, this exception highlights the competitive damage inherent in the proposal because it will disadvantage small proprietary traders. The Commission’s proposal would preclude the availability of the benefits of volume-based discounts that would have been enjoyed by small proprietary traders—as customers of broker-dealers—but leave those same benefits in place for large proprietary traders who do not require such broker-dealer intermediation. How would this action benefit competition? How would it benefit retail investors?

Given the shift in incentives entailed by prohibiting volume-based discounts, the added anticompetitive burden on small broker-dealers—who may no longer be able to purchase transactional access services from other broker-dealers at as low a cost as previously—is the same as it is for the small proprietary traders. Thus, a new broker-dealer or small proprietary trading firm will be disadvantaged. This raises questions as to whether the Commission has sufficiently considered its obligations under the Exchange Act, which “prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the Exchange Act.”[4]

Liquidity has a positive externality. If you want to buy or sell a security, you want a platform where there are as many other buyers and sellers as possible to obtain the best price. In securities markets, liquidity begets liquidity and, for this reason, there will be a certain degree of market concentration that prevails among exchange platforms. Unsurprisingly, exchanges compete for increased liquidity, including through their pricing models. The National Market System was implemented to promote national competition for securities transactions through required information flows and obligations. Thus far, that framework has been largely successful. The proposal’s economic analysis highlights 16 exchanges in the United States. Within that number, there are three exchange “groups” that account for the bulk of the transactions, with “the Nasdaq group … making up 30% of the market by trading volume, the Intercontinental Exchange group … making up 34% and Cboe Global Markets making up 24%.”[5] In a securities market, where liquidity begets liquidity—where size begets size—that is a competitive outcome.

Nevertheless, the Commission should continue to evaluate the state of competition within the markets and the quality of execution services. For example, one improvement might include clearer disclosure regarding volume discounts to better inform the market.

Ultimately, given the anticompetitive harms likely associated with the proposal—which will harm smaller entities and retail investors—I cannot support it. I thank the staff in the Divisions of Trading and Markets and Economic and Risk Analysis as well as the Office of General Counsel for their efforts.

[1] See Volume-Based Exchange Transaction Pricing for NMS Stocks (“Volume-Based Transaction Pricing”), Release No. 34-98766, (Oct. 18, 2023), at 1, available at

[2] See, which indicates as of 2022, 3,378 securities firms regulated by FINRA, with over 150,000 branch offices.

[3] See Volume-Based Transaction Pricing at 103.

[4] Id. at 63; and see 15 U.S.C. 78w(a)(2).

[5] Id. at 71.

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