“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.”

Gary Gensler

In a significant regulatory pivot, the U.S. Securities and Exchange Commission (SEC) has proposed a new rule, Rule 6b-1, aimed at leveling the playing field for broker-dealers by banning volume-based transaction pricing on national securities exchanges.

The proposed rule comes as a response to growing concerns about market competition and equity among participants. It highlights the SEC’s unwavering commitment to ensuring transparency and fairness in a financial landscape that often favors large brokers at the expense of their smaller counterparts.

“Mid-sized and smaller broker-dealers effectively pay higher fees than larger brokers”

“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.”

Under the proposed Rule 6b-1, national securities exchanges would be prohibited from offering volume-based transaction pricing for the execution of agency-related orders in NMS stocks. Additionally, exchanges would be required to disclose certain information, including the number of members qualifying for each transaction pricing tier they offer. This data would be submitted to the SEC on a monthly basis and would be publicly accessible through the Commission’s EDGAR system.

The rule also mandates anti-evasion measures. These include written policies and procedures designed to detect and deter members from receiving volume-based pricing for the execution of agency-related orders.

Smaller brokers often route orders via larger brokers to capitalize on higher rebates

Congress has long directed the SEC to promote competition in the capital markets. Amendments to the Exchange Act in 1975 targeted anti-competitive practices, injecting the term “competition” into the act 20 times. Later, in 1996, Congress also mandated that the SEC consider efficiency, competition, and capital formation when contemplating new rules.

The SEC’s new proposal can be seen as an extension of these legislative mandates. It aims to tackle what many consider an “unlevel playing field” where larger brokers have the advantage due to volume-based transaction pricing.

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.

Moreover, this practice has raised concerns about information leakage, as larger brokers could theoretically gain insights into trading strategies of smaller firms routing orders through them. “We have heard from a number of market participants that volume-based transaction pricing along with these market practices raise concerns about competition in the markets,” Gensler added.

More equitable trading environment

The proposed rule reflects the SEC’s commitment to market transparency and fairness. By soliciting public comment on the prohibition of volume-based discounts and new disclosure requirements, the SEC is looking to address long-standing issues in equity market competition.

The proposal is open to public comment for 60 days after its publication in the Federal Register, signaling the SEC’s eagerness for input from market participants and the public at large. It also includes questions about how to foster competition among various trading venues as well as brokers.

As the SEC gears up for what could be a landmark change in securities trading, the onus is now on market participants to weigh in. The regulatory body’s openness to public comment suggests a comprehensive evaluation process that will take into account a variety of stakeholder perspectives before finalizing any rules.

By aiming to eliminate volume-based transaction pricing, the SEC is not just altering the mechanics of trading; it’s reshaping the competitive landscape of financial markets. If implemented, Rule 6b-1 could signal a shift towards a more equitable trading environment, fulfilling Congressional mandates that have been in place for decades but have proven challenging to implement.