March 8, 2019, | AtoZ Markets – The US SEC stock exchange fairness report tells that whether the multi-tiered pricing system used by stock exchanges favors large brokers at the expense of small ones, citing a person familiar with the matter.
Under the current system, Wall Street banks and other massive traders get hefty rebates based on how much business they funnel to exchanges. The result of this complex and often opaque system is that big users can end up trading for free, or barely get paid to trade, while small brokers offer substantial fees. Most exchange operators, including New York Stock Exchange-owner Intercontinental Exchange Inc., Nasdaq Inc., and CBOE Global Markets, have embraced the system in at least some of their exchanges to help boost volumes and fatten their bottom lines.
SEC stock exchange fairness report
While the SEC has not launched a formal civil investigation, it is seeking information from the exchanges on the pricing system. If the SEC were to determine the tiered structure is unfair, exchanges could be forced to simplify their pricing models, potentially costing them millions of dollars in fees.
SEC spokeswoman Judith Burns declined to comment. NYSE and Nasdaq declined to comment on the SEC probe into multi-tiered pricing. Moreover, CBOE said it offered various types of pricing tiers catering to all of its clients and that the tiers are the result of years of intense competition among exchanges.
Bryan Harkins, co-heads of CBOE’s markets division quoted that:
“At this point, we do not have plans to change our pricing schedules.”
More generally, exchanges say that fierce competition in the industry has resulted in tighter bid-ask spreads that benefit all investors. The regulatory scrutiny remains part of a broader effort by the SEC under Chairman Jay Clayton to improve transparency around exchange pricing and ensure it is fair and equitable as required under the Exchange Act.
The regulator has also ordered exchanges to justify recent fee hikes for market data and has mandated a pilot program to test banning rebate payments that exchanges make to brokers for liquidity-adding stock orders. ICE, Nasdaq, and CBOE have issued lawsuits or appeals challenging the SEC’s authority on those two mandates.
Tackling US exchanges is one of the few areas where Republicans and Democrats agree. Republicans believe the current rules are anti-competitive, while Democrats worry existing exchange structures and incentives could hurt small and large investors.
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