Nasdaq has always embraced thoughtful and data-driven insights to improve markets. However, the SEC’s proposal on volume-based pricing is founded on false premise and speculative concerns without data-backed analysis. We believe this proposal is harmful to the NBBO, competition and the long-term health of the U.S. public markets.

Incentives Support the NBBO

The NBBO is the product of the liquidity on lit markets, and it is the North Star for investors in understanding the best prevailing price for equity securities in the U.S. markets.  Rebates are a key tool that national securities exchanges use to aggregate price forming liquidity which drives a robust and tight NBBO. To alter the rebate structure would siphon liquidity away from lit markets and leave the NBBO less robust and representative of true market prices. For example, Nasdaq estimates that with a 5% reduction in agency and riskless principal order flow, Nasdaq’s Best Bid and Offer (BBO) spread would increase 1%.

Volume-Based Pricing is a Model that is Rational, Pro-Consumer, and Pro-Competition

Exchange pricing practices are similar to how a retailer leverages its scale to attract vendors willing to supply their products to the retailer at a discount, which in turn allows the retailer to charge lower prices to consumers for everything from paper towels to toys. Likewise, brokers are most apt to send order flow to trading venues that have the deepest, broadest, and highest-quality liquidity pools; volume-based discounts and rebates enhance the attractiveness of exchanges by helping them to create and sustain these liquidity pools. 

Driving Activity Off-Exchange will Impact the NBBO

The proposal fails to account for the fact that similar pricing practices exist on off-exchange venues. Off-exchange market centers, including Alternative Trading Systems (“ATSes”), wholesalers, and single-dealer platforms, employ volume-based pricing discounts and incentives. By failing to incorporate pricing practices that occur off-exchange, this proposal may drive transaction traffic to these off-exchange venues, to the detriment of the NBBO and markets. The SEC fails to explain why, given this reality, it proposes to solve the problems it identifies with volume-based pricing only for exchanges, and not also for off-exchange market centers.

Lack of Data, Contradictions and Oversteps

There are some other overarching issues with the proposal. First, the proposal lacks any data-backed analysis to support its recommendation. Further, the SEC contradicts both its own precedent (having approved thousands of fee filings over the last two decades) and it fails to address why its proposal is needed or ripe when other rulemaking proposals are pending that purport to address the same concerns. Finally, the proposal exceeds the SEC’s rulemaking authority set forth in the Securities Exchange Act of 1934 because it fails to account for the impact of the proposal on the ability of exchanges to compete effectively with off-exchange markets for agency orders.