SEC considers curbs on trading fee models

In an effort to level the playing field between small and large brokerage firms, the U.S. Securities and Exchange Commission (SEC) is proposing a rule that aims to curb volume-driven trading prices.

The SEC wants to prohibit exchanges from offering volume-based transaction pricing on agency orders in national market stocks, and it would require exchanges that offer volume-based pricing for prop trades to make certain disclosures and to have certain anti-evasion rules in place.

Among other things, the proposals are designed to address the advantage that large firms can have under certain exchanges’ trading fee models.

Those models are often highly complex and difficult to understand, and the existence of volume-based pricing “raises competitive concerns” among brokerage firms and among exchanges, the SEC said in a notice accompanying the proposal.

The current market landscape also “exacerbates a conflict of interest” between brokers and their customers when it comes to order routing decisions, and creates an incentive for smaller firms to send their orders through the large brokers, allowing those big firms to capture fees for that service too.

Additionally, “some have suggested there might be some information leakage to the largest brokers due to these routing practices,” it said.

“Currently, the playing field upon which broker-dealers compete is unlevel,” said SEC chair Gary Gensler in a release. “Through volume-based transaction pricing, mid-sized and smaller broker-dealers effectively pay higher fees than larger brokers to trade on most exchanges.”

Gensler noted that the regulator has heard complaints that this practice distorts competition in the brokerage business.

“I am pleased to support this proposal because it will elicit important public feedback on how the commission can best promote competition amongst equity market participants,” Gensler said.

The proposal is out for a 60-day comment period.