Although the SEC is considering implementing a ban on volume-based pricing, its actions do not go far enough to combat conflict-of-interest issues around cost-sensitive order routing, according to a recent report from Acadian Asset Management.
Volume-based pricing is used by exchanges to attract order flow. Through this approach, member firms who route orders to a particular exchange will benefit from lower fees or greater rebates if their execution volumes pass a certain threshold.
The SEC proposed a rule to prohibit national securities exchanges from offering volume-based pricing in October 2023, but Acadian argues that further regulatory scrutiny should be applied to conflicts associated with cost-sensitive order routing.
By amplifying brokers’ financial incentives, volume-based pricing can lead to brokers making decisions based on profit rather than what the best outcome would be for customers, Acadian’s report explained. Trading firms inevitably opt for the venues that will pay them rebates, but “the key question for investment managers and asset owners, whose portfolios the brokers are trading, is whether cost-sensitive routing is harming their interests”, Acadian stated.
As end investors are paying non-discounted prices of stocks purchased in the market, brokers reap the benefits of rebates. Further, Acadian cites research indicating that these non-discounted prices are worse than they could be if brokers were not routing to maximise rebate payments.
Acadian advises that asset owners should take note of this issue, as volume-based pricing could have a direct impact on the performances of their equity strategies and portfolios.
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