SEC contradicts itself on exchange pricing, say firms
Cboe warns ban on volume-based rebates will not improve pricing for investors
The US Securities and Exchange Commission is doing battle with itself on equity market structure reforms, according to market participants. The regulator last month issued a proposal that would prohibit national securities exchanges from offering volume-based transaction fees on agency orders. But some in the industry think the rule will not achieve its goals, and may instead collide with some of the proposals in the wide-ranging market structure overhaul the SEC adopted in December 2022.
“There are just inherent contradictions, as if one rule said everybody needs to go to the left side of the ship, and the next proposal says everybody needs to go to the right side of the ship, and then they say: ‘Please comment’,” said Gregg Berman, managing director of market analytics and regulatory structure at non-bank market-maker Citadel Securities. “The comment is I don’t know which one you want us to go to first – tell me, and then I’ll be able to give you a robust comment.”
Berman was speaking at a conference on November 2 organised by the Securities Industry and Financial Markets Association (Sifma).
There are just inherent contradictions, as if one rule said everybody needs to go to the left side of the ship, and the next proposal says everybody needs to go to the right side of the ship, and then they say: ‘Please comment’
Gregg Berman, Citadel Securities
In announcing the latest proposal on October 18, SEC chair Gary Gensler said the aim was to create a more level playing field among agency brokers. The proposed rule would allow volume-based pricing to continue for proprietary trades, but with anti-evasion measures to ensure no agency execution is circumventing the ban.
“Through volume-based transaction pricing, mid-sized and smaller broker-dealers effectively pay higher fees than larger brokers to trade on most exchanges,” said Gensler. “We have heard from a number of market participants that volume-based transaction pricing along with related market practices raise concerns about competition in the markets.”
However, speaking at the Sifma event, Adam Inzirillo, head of data and access solutions at Cboe Global Markets, argued that the proposal would not foster competitive markets.
“Pricing is a mechanism for exchanges to be able to compete effectively, not just with other exchanges but also with off-exchange market participants,” said Inzirillo. “If you look at the recent agency fee proposal, it seems to contradict that.”
The SEC’s rulemaking unveiled on December 14, 2022, tackled the topic of exchange fees from a different direction. Previously, the National Market System regulation (Reg NMS) allowed exchanges to calculate volume-based tiering and fee rebates at month’s end. But the SEC said this “impedes the ability of market participants, including investors, to evaluate the total price of a trade at the time of execution and impedes a market participant’s ability to evaluate best execution and order routing”.
Therefore, one of the numerous planned reforms to Reg NMS in the December rulemaking was a requirement that all fees and rebates must be determined at the time of execution. Berman complained that this reform would become largely pointless if tiering and rebates for agency trades were banned outright.
“The SEC stated in the NMS proposal they do not want to have volume tiers that are retroactive, because it is too difficult for agency brokers to pass the fees back if they don't know what those fees are,” said Berman. “Now… if you are going to eliminate tiers for agency orders, then doesn’t that mean 100% of all the concerns that they raised about the backward-looking tiers are no longer a concern?”
Whatever the SEC’s view of volume-based tiering as a concept, said Berman, the agency should not be issuing two rulemakings that are so “contradictory”.
Editing by Philip Alexander
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