On January 5, 2024, Better Markets filed a comment letter with the Securities and Exchange Commission in response to the SEC’s proposal to prevent national securities exchanges from offering volume-based pricing in connection with certain transactions. The use of volume-based transaction pricing harms competition by preventing smaller exchanges from competing with larger exchanges and by preventing smaller brokers from competing with larger brokers. Because the rules of a national securities exchange must not permit unfair discrimination between brokers and must not impose any unnecessary or inappropriate burden on competition, the proposal is a necessary measure to foster competition in the markets in compliance with the law.
Why It Matters. National securities exchanges offer brokers lower fees or higher rebates as the number of shares the broker executes on the exchange reaches successively higher levels. An exchange’s volume-based pricing is designed to entice brokers to route orders to that exchange over other exchanges by lowering fees or increasing rebates as the broker reaches certain volume thresholds. So exchanges that do not already have a significant percentage of a broker’s order flow may not be able to compete for the broker’s remaining order flow as it will not be able to offer competitive pricing. Volume-based pricing also confers a substantial benefit on an exchange’s highest volume brokers because brokers with lower exchange volume will not qualify for the more favorable pricing available to higher volume brokers. Without that benefit, lower volume brokers may be unable to compete with higher volume brokers. The incentive to route orders to a particular exchange in order to qualify for that exchange’s advantageous volume-based pricing also harms customers. The economic incentive to route customer orders to a particular exchange to achieve volume-based pricing on that specific exchange can present a conflict of interest between brokers and customers when brokers do not fully pass through the favorable exchange pricing to their customers and instead retain the benefits of that pricing for themselves. The broker may be induced to route order flow to an exchange not because it offers the best execution quality for the customer but because it benefits the broker to route the order to the exchange that offers the broker more favorable pricing than other exchanges.
What We Said. We support the SEC’s proposal to curtail the use of volume-based pricing by national securities exchanges. The SEC should adopt the proposal so that existing exchanges cannot impede competition by using volume-based discounts to capture order flow that might otherwise go to other exchanges and so that higher volume brokers cannot take advantage of volume-based discounts to obtain customer orders that might otherwise go to other brokers.
Volume-based discounts allow established exchanges to get brokers to send them an increasingly large volume of order flow in exchange for preferential pricing. This preferential pricing prevents newer or less established exchanges from obtaining the order flow necessary to grow their businesses. Volume-based discounts thus present a barrier to entry for competing exchanges.
The preferential pricing that results from volume-based discounts also prevents smaller brokers from competing with larger brokers for customer orders because they will not be able to pass on the savings from volume-based discounts to their customers. So the proposal fosters competition by preventing smaller brokers from being unable to offer their customers competitive pricing. The proposal further eliminates the incentive for a broker to route a customer order to a particular exchange in order to reach a threshold to qualify for preferential pricing when doing so might not be in the customer’s best interest.
Bottom Line. Better Markets supports the SEC’s efforts to ensure competition among exchanges and brokers by preventing exchanges from using volume-based pricing to stifle competition.
You can find the comment letter here.