February 20, 2024

SEC to Ban Exchange Volume-Based Pricing Tiers

While the SEC meddling in industry pricing and other commercial matters is not a new phenomenon, a recent SEC proposal reflects an enhanced willingness by the agency to tightly grip the industry’s purse strings (and a slow but steady regulatory creep that some would argue has degraded free enterprise). In taking this step, the agency has also pitted those exchanges that currently use volume-based pricing tiers against their members that historically have not been able to qualify for the most attractive pricing. This proposal also comes at a peculiar time, given that the SEC has separately proposed changes to minimum stock pricing increments, access fee caps, and best execution standards that could conflict with, if not wreak havoc on, exchange and member pricing and order routing decisions.

What Happened?

On October 18, 2023, the SEC proposed new Exchange Act Rule 6b-1, which, if adopted, would prohibit national securities exchanges like NYSE and Nasdaq from charging members based on the volume of their agency and riskless principal orders.

Why This? Why Now?

For nearly 20 years, many exchanges have charged their members lower fees or provided higher rebates to incentivize increased transaction volume. SEC staff in the Division of Trading and Markets grew tired of these and other pricing proposals, and the tiering likely contributed to staff issuing “fee filing” guidance to the exchanges in May 2019. That guidance mostly focused on the core requirements that exchange fees be reasonable, equitably allocated, and not unfairly discriminatory, and not create an undue burden on competition. Inherent in these requirements, however, is that exchange pricing is permitted to discriminate among members and place some burden on competition — provided the exchanges justify it (more on that at the end).

In the tier ban proposal, the Commission noted that exchange transaction pricing schedules are increasingly complex and expressed concern that volume-based exchange transaction pricing raises competitive concerns among exchange members and exchanges themselves. The Commission also expressed concern that a desire to qualify for volume-based transaction pricing tiers could create a conflict of interest between members and their customers when members route customer orders for execution. Members can economically benefit from their routing decisions, even to the point of raising concerns under Regulation Best Interest and the SEC’s proposed Regulation Best Execution (which is yet another pending rulemaking that could affect firm and exchange pricing and order routing decisions).

Other Requirements

In addition to the ban on pricing tiers for agency and riskless principal orders, proposed Rule 6b-1 would also require exchanges that offer volume-based transaction pricing for execution of members’ proprietary orders to:

  • Electronically submit monthly tables via structured data format that disclose the number of members that qualify for each volume-based transaction pricing tier and other information.
  • Implement anti-evasion measures, including rules requiring members to engage in practices that facilitate the exchange’s ability to comply with the proposed rule and written policies and procedures reasonably designed to detect and deter members from receiving volume-based transaction pricing in connection with the execution of agency-related orders.

Just One of Many Steps

The proposed pricing-tier ban is one of a dozen or more pending and recently approved SEC rulemakings that will upend and reshape equity “market structure” and related areas. The comment file for the proposal includes dozens of submissions that vary from strong support to vehement opposition.

Curiously, new Rule 6b-1 would require that exchange rules and transaction pricing schedules cannot be designed to permit unfair discrimination between brokers, nor impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. As we noted earlier, though, these requirements are already hard-coded into various Exchange Act provisions and rules. Not surprisingly, many in the industry are asking why the Commission even needed to propose the ban — why not just enforce existing statutory requirements? Ultimately, the proposed pricing- tier ban may simply be a streamlined way for the Commission to eliminate the need for Trading and Markets staff to review (and often reject) dozens of monthly fee filings from exchanges seeking to implement volume-based pricing in a way that complies with applicable laws and the staff’s 2019 fee filing guidance. Unfortunately, steps like this and others from the SEC in previous decades risk rendering the exchanges less like the hubs for capitalism, capital creation, and “self-regulatory” organizations that they have represented for so long, and more like any other government-regulated utility with rates and other commercial terms set by regulators and political appointees in Washington, DC.


This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.