An amendment to the Securities Exchange Act of 1934 to prohibit national securities exchanges from offering volume-based transaction pricing in connection with the execution of agency-related orders in certain stocks has been proposed by the SEC. The exchanges would be required to have certain anti-evasion rules and written policies and procedures, and to disclose certain information if they offer volume-based transaction pricing for member proprietary volume in NMS stocks.

The proposed rule received a 3-2 vote, with Commissioners Hester Peirce and Mark Uyeda dissenting.

NMS refers to the National Market System, the system for equity trading and order fulfillment in the United States that consists of trading, clearing, depository, and quote distribution functions. So an NMS stock is basically any US listed equity. The NMS System’s primary focus is ensuring transparency and full disclosure regarding stock price quotations and trade executions.

Proposed Rule 6b-1

Proposed Rule 6b-1 under the Securities Exchange Act of 1934 would prohibit national securities exchanges from offering volume-based transaction pricing in connection with the execution of agency-related orders in NMS stocks. It also would require exchanges that offer volume-based transaction pricing in connection with the execution of members’ proprietary orders in NMS stocks to disclose certain information. This would include the number of members qualifying for each transaction pricing tier that the exchange offers.

The proposed rule … comes as a response to concerns about market competition and equity among participants.

Exchanges would be required to submit this information to the SEC on a monthly basis, and the public would be able to access the information through the agency’s EDGAR system.

The proposed rule would also require exchanges that have volume-based transaction pricing for member proprietary orders in NMS stocks to have anti-evasion measures. These would include rules requiring members to facilitate the exchange’s ability to comply with the prohibition and to have written policies and procedures reasonably designed to detect and deter members from receiving volume-based pricing in connection with the execution of agency-related orders in NMS stocks.

The proposing release will be published in the Federal Register, and the public comment period will remain open until 60 days after the date of publication of the proposing release in the Federal Register.

The proposed rule is aimed at leveling the playing field for broker-dealers by banning volume-based transaction pricing on national securities exchanges, and it comes as a response to growing concerns about market competition and equity among participants. And it comes amid concerns that the US investment landscape often favors large brokers at the expense of their smaller counterparts.

Commissioner statements

“Currently, the playing field upon which broker-dealers compete is unlevel,” said SEC Chair Gary Gensler. “Mid-sized and smaller broker-dealers effectively pay higher fees than larger brokers to trade on most exchanges. This proposal will elicit important public feedback on how the Commission can best promote competition amongst equity market participants.”

“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.”

Hester Peirce, SEC Commissioner

SEC Commissioner Caroline Crenshaw issued a statement in support of the rule, saying the current system of volume-based transaction pricing has led to a situation where large trading firms can offer more favorable transaction prices than smaller brokers. As a result, smaller brokers often route their orders through larger brokers to capitalize on higher rebates, further entrenching the advantages of the big players.

SEC Commissioner Hester Peirce issued a dissent that will make people (of a certain age) start humming “Everybody Wants to Rule the Rule,” (since she referenced “Fears for Tiers” in her dissent title), saying the rulemaking appeared to be the product of fear that is not rooted in reality.

“[T]he 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.”

She acknowledges the agency should work on making it easier for exchanges to compete through innovations, but she said the proposal does not seem to be the right tool for this purpose.

Commissioner Uyeda observes that the proposal would except proprietary traders, so “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 [rather than help them.]”