The Securities and Exchange Commission (SEC) has recently put forward a proposal to ban volume-based pricing on American stock exchanges. This move comes as a response to concerns about the disadvantage it poses for smaller brokers and their customers.
Unleveled Playing Field
Chairman Gary Gensler argues that volume-based pricing confers an unfair advantage to larger brokers while imposing higher fees on midsize and smaller broker-dealers. He states, "The playing field upon which broker-dealers compete is unlevel." The proposed ban aims to restore fairness and promote healthy competition among trading venues.
A Division of Votes
During a Wednesday morning meeting, Chairman Gensler, along with his two Democrat colleagues, voted in favor of the proposal. Their votes prevailed over the panel's two Republican members who suggested that volume discounts exist due to the operational efficiency of exchanges handling large volumes of orders.
Complex Pricing Schemes
Currently, the country's 16 exchanges utilize intricate pricing schemes to attract brokers' orders. An example of this is the recent announcement by the BZX Exchange unit of Cboe Global Markets (ticker: CBOE), which offers discounts for brokers based on combined volumes of stocks and options.
By challenging the practice of volume-based pricing, the SEC aims to level the playing field for all brokers and enhance competition within the market.
Exchanges' Pricing Strategies and Proposed Ban on Volume-Pricing
Exchanges employ various pricing strategies to incentivize brokers and attract liquidity. One common approach is offering discounts on per-share trading fees to brokers who generate the highest monthly trading volumes. In contrast, brokers who provide liquidity by posting offers to buy or sell stocks receive rebates. By netting these fees and rebates, some high-volume brokers can even generate a profit by routing their order flow to an exchange.
While there are 16 national exchanges, a majority of the trading volume is concentrated among three exchange operators. The parent company of the New York Stock Exchange, Intercontinental Exchange (ICE), holds 34% of the stock-trading volume according to SEC measures. Nasdaq (NDAQ) accounts for 30% of the market share, while Cboe captures 24%.
Concerns have been raised by some regarding the advantages these exchanges provide to the largest stockbrokers, as it may enable further concentration of power in the market. Democratic Commissioner Jaime Lizárraga emphasizes this point.
The proposed ban on volume-pricing, which was announced on Wednesday, is just one of the many changes to stock-trading practices that the commission introduced in December 2022. These December proposals have faced considerable opposition from large brokers, market makers, and most exchanges. The SEC will now collect feedback specifically on the volume-pricing ban.
Republican Commissioner Hester Peirce expressed skepticism about how this new proposal would interact with the December 2022 proposals. It remains to be seen how these two sets of regulations will function together.
Meanwhile, fellow Republican Mark Uyeda highlights that volume discounts are common in various industries. In the stock market, he argues that they reflect economies of scale and contribute to overall market efficiency.
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