January 5, 2024
By Electronic Submission
Vanessa Countryman
Secretary
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington DC 20549
Re: File No. S7-18-23; Volume-Based Exchange Transaction Pricing for NMS Stocks
Dear Ms. Countryman:
The Securities Industry and Financial Markets Association (“SIFMA”)1 respectfully submits this letter to the U.S. Securities and Exchange Commission (“Commission” or “SEC”) to comment on the above-referenced proposal to prohibit national securities exchanges from offering volume-based transaction pricing in connection with the execution of agency and riskless principal orders (collectively, “agency-related orders”) in NMS stocks (the “Proposal”).2 As a threshold matter, SIFMA believes that it is not possible to provide meaningful comment on the Proposal without understanding how the Commission views the Proposal intersecting with the Commission’s other pending proposals related to equity market structure.3
SIFMA appreciates the Commission’s interests in promoting free and fair competition among market participants. However, SIFMA disagrees with the Commission’s assertion that broker-dealers currently compete on an unlevel playing field.4 To the contrary, in the current market structure environment, all broker-dealers have an equal opportunity to obtain the lowest exchange fees and highest exchange rebates available for their customers through volume-based transaction pricing and all exchanges have the ability to offer such pricing to incentivize the routing of order flow to their venues. The Proposal, on the other hand, appears designed to tip an already-level playing field in favor of lower-volume broker-dealers and exchanges, an action which is not within the Commission’s statutory mandate. And the Commission’s proposed mechanism for this change—a government-mandated prohibition on volume-based transaction pricing for agency-related orders—is an extreme measure that will interfere with the interplay of market forces that would otherwise determine exchange transaction fees and rebates.5 SIFMA believes that the Commission should avoid interfering in well-functioning markets, absent extraordinary circumstances.
SIFMA also continues to believe the Commission should take a cautious approach to reform that is narrowly tailored to an identified market failure. Here, the Commission has failed to identify a particular market harm or harm to investors caused by volume-based transaction pricing. Instead, the Commission has premised the Proposal on (1) remediating a potential conflict of interest in routing orders—without explaining why existing rules such as FINRA’s best execution rule or the SEC’s Regulation Best Interest do not already address such concerns, and (2) theoretical enhancements to competition that do not survive scrutiny.6
SIFMA believes that the Proposal is unlikely to achieve its intended goals and would, in fact, (i) negatively impact market efficiency and competition both among exchanges and among broker-dealers; (ii) raise costs for smaller/medium-sized broker-dealers and investors; and (iii) reduce exchange liquidity by disincentivizing the routing of orders to exchanges. The Commission’s own economic analysis indicates that the Proposal could reduce market efficiency, harm lower-volume exchange members and result in wider spreads to the detriment of all market participants.7
For these reasons and because SIFMA believes that the Proposal would negatively impact the current equity market structure, SIFMA cannot support the Proposal. Notwithstanding these concerns, SIFMA would not be opposed to the Commission requiring that exchanges periodically disclose to the Commission certain information if they offer volume-based transaction pricing for any NMS stocks, for both principal and agency-related orders.
1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly one million employees, we advocate for legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.
2 Securities Exchange Act Release No. 98766 (Oct. 18, 2023), 88 FR 76282 (Nov. 6, 2023).
3 See Letter from Ellen Greene, Managing Director, SIFMA, to Vanessa Countryman, Secretary, Commission, dated Mar. 31, 2023, at 12-21, https://www.sec.gov/comments/s7-32-22/s73222-20163541-333880.pdf (“SIFMA EMS Proposals Comment Letter”) (commenting on the Commission’s December 2023 equity market structure proposals and raising similar concerns with respect to the intersections between such proposals).
4 See e.g., Gary Gensler, Chair, SEC, Statement on Exchanges’ Volume-Based Rebates and Fees (Oct. 18, 2023) https://www.sec.gov/news/statement/gensler-volume-based-rebates-and-fees-101823 (“Currently, the playing field upon which broker-dealers compete is unlevel.”); Jamie Lizárraga, Commissioner, SEC, Fairer and More Competitive Public Markets (Oct. 18, 2023), https://www.sec.gov/news/statement/lizarraga-statement-volume-based-rebates-and fees-101823 (noting that the Proposal would, among other things, “level[] the playing field”
5 SIFMA agrees with Commissioner Peirce’s statement that “[w]e need more evidence before taking the extreme step of imposing an outright ban on a particular approach to pricing. An unsubstantiated fear that there could be problems does not justify adding an onerous and potentially ineffective rule to an already over-prescriptive equity market structure ruleset.” Hester M. Peirce, Commissioner, SEC, Fears for Tiers: Statement on Proposed Volume-Based Exchange Transaction Pricing for NMS Stocks (Oct. 18, 2023), https://www.sec.gov/news/statement/statement-peirce proposed-volume-based-exchange-transaction-pricing-nms-10-18-2023.
6 SIFMA agrees with Commissioner Uyeda’s statement that “the Commission would have been better off making a serious attempt to study and identify the root causes of how pricing and trading volume on exchanges has led to current conditions.” Mark T. Uyeda, Commissioner, SEC, Statement on Volume-Based Exchange Transaction Pricing for NMS Stocks (Oct. 18, 2023), https://www.sec.gov/news/statement/uyeda-statement-volume-based-rebates-and fees-101823.
7 See infra Part III.c of this Letter.