Sec Speeches Cryptocurrency Statement on Exchanges’ Volume-Based Rebates and Fees

Today, the Commission is considering a proposal regarding exchanges’ volume-based rebates and fees. 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.

Congress long has mandated that the SEC work to promote competition in the capital markets. In 1975, Congress amended the Exchange Act largely to address anticompetitive practices by market intermediaries. Congress added the word “competition” to the Exchange Act 20 times.[1]

In those 1975 provisions, Congress also mandated that exchanges’ rules “not [be] designed to permit unfair discrimination between customers, issuers, brokers, or dealers” and “provide for the equitable allocation of reasonable dues, fees, and other charges among its members.”[2]

Later, in 1996, Congress mandated that, in addition to investor protection and public interest, the SEC consider efficiency and competition, as well as capital formation, when considering rules.[3]

In light of these mandates, I think it’s appropriate that the Commission make today’s proposal along with alternatives requesting public feedback on a practice the exchanges use called volume-based transaction pricing—or, what one might call volume-based discounts.

Currently, the playing field upon which broker-dealers compete is unlevel. Mid-sized and smaller broker-dealers effectively pay higher fees than larger brokers to trade on most exchanges. This is because exchanges generally charge brokers net trading fees or pay rebates back to brokers that vary depending on the brokers’ trading volume. As a consequence, brokers with the largest trading volume receive the largest rebates and thus pay the lowest net fees. Sometimes, large brokers get rebates that are even larger than the fees they paid—leading to a situation where the exchange actually pays on net large brokers for their order flow.

These larger trading firms thus are able to offer customers more favorable transaction prices than smaller brokers. Further, this has contributed to a practice whereby mid-sized or smaller brokers—in an effort to capture higher rebates—route their orders through a handful of the largest brokers. A handful of the largest brokers are then able to collect a fee for that service and use that volume to qualify for even better tiers for themselves and other customers. What’s more, some have suggested that there might be some information leakage to the largest brokers due to these routing practices.

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.

In response, through today’s proposal, we request public comment regarding whether volume-based discounts should be prohibited, and if so to what degree. In addition, we request public input regarding the role that new disclosure requirements could play to address these practices.

Today’s release offers a number of alternatives for public comment regarding both possible prohibitions and disclosure requirements.

In addition, today’s release includes questions about how to promote competition amongst and between trading venues as well as brokers.

I look forward to the public’s input on these matters.

I’d like to thank members of the SEC staff for their work on this proposal, including:

• Haoxiang Zhu, David Saltiel, Andrea Orr, David Shillman, Eric Juzenas, Richard Holley, Terri Evans, Yvonne Fraticelli, Julia Zhang, Yue Ding, Sharon Park, and Roni Bergoffen in the Division of Trading and Markets;
• Jessica Wachter, Jill Henderson, Oliver Richard, Paul Barton, Ariel Lohr, Sherry Wu, John Ritter, Caroline Schulte, Lauren Moore, Charles Woodworth, Parhaum Hamdi, Gregory Scopino, and Julie Marlowe in the Division of Economic and Risk Analysis;
• Megan Barbero, Meredith Mitchell, Robert Teply, Janice Mitnick, Cynthia Ginsberg, and Ronesha Butler in the Office of the General Counsel;
• John Polise, Connie Kiggins, Michael Hershaft, and Carrie O’Brien in the Division of Examinations;
• Jane Patterson in the EDGAR Business Office;
• Charlotte Buford and Kerry Knowles in the Division of Enforcement; and
• Kevin Burris and David Fernandez in the Office of Legislative and Intergovernmental Affairs.