US SEC Prohibits Volume-Based Trading Discounts for Brokers

The headquarters of the US Securities and Exchange Commission (SEC) is seen in Washington July 6, 2009. REUTERS/Jim Bourg/File Photo Acquire Licensing Rights

Oct 18 (Reuters) – Wall Street’s top regulator proposed new rules on Wednesday that it said should level the playing field among broker-dealers operating on U.S. exchanges by ending pricing arrangements that tend to favor bigger players.

At a public meeting in Washington, a divided US Securities and Exchange Commission voted 3-2 to propose that exchanges be prohibited from offering lower transaction fees and discounts to brokerages with higher trading volumes, something officials said creates unfair competitive advantages for larger firms. .

“Sometimes the big brokers get discounts that are even bigger than the fees they pay, or actually have a situation where the exchanges are paying the biggest brokers for that order flow,” SEC Chairman Gary Gensler said.

However, the commission’s Republican members objected, saying the proposal was a solution in search of a problem.

The number and complexity of pricing tiers that can exist among exchanges, leaving different brokerages with significant differences in costs, can make pricing arrangements complex and difficult to understand, officials said ahead of the meeting.

Ending such benefits would also help prevent conflicts of interest, where brokers may send orders for execution to larger firms or in ways that benefit the broker but not the client, according to the SEC.

The ban on rebates and discounts on transaction prices would not apply when brokers deal for themselves, SEC officials said ahead of the meeting.

In these cases, the exchanges must disclose price levels and the number of exchange members that qualify to the SEC, which will make this available to the public.

Republican Commissioner Hester Peirce, a critic of the SEC’s regulatory agenda, said agency staff who drafted the proposal had not shown it was necessary.

“While filled with concerns about possible future harm, the release fails to mention what, if any, harm has occurred to justify the proposed changes,” she said in prepared remarks at the meeting.

“Economics of scale trigger discounts in almost every industry. You buy in bulk and you pay less. Why shouldn’t similar discounts be available in this industry?”

The proposal is now subject to a period of public comment and may be revised prior to any decision on whether to adopt it.

The American Securities Association, a trade group, said Wednesday it would study the proposal but appeared to share the concerns behind it, adding that the commission had “an obligation to promote competition and transparency.”

Ellen Greene, executive director of equity and options market structure at the Securities Industry and Financial Markets Association (SIFMA), said her organization would also review the proposal, but argued that the SEC again proposed broad-based changes “without identifying a market failure or evidence of repeated market injury.”

Reporting by Douglas Gillison; editing by Jonathan Oatis

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