By John McCrank
NEW YORK (Reuters) – A disputed plan by U.S. regulators to study how stock exchange fees and incentives affect brokers’ trading habits is in the best interest of investors and should go forward, trade groups representing many of the largest asset managers said in a legal filing on Thursday.
The U.S. Securities and Exchange Commission’s “Transaction Fee Pilot” is aimed at evaluating how rebate payments most stock exchanges make to brokers for stock orders that add liquidity influences brokers’ behavior. The regulator delayed its start date in March after the three largest exchange operators sued to kill the pilot.
The exchanges say rebates help attract liquidity, while also compensating brokers, especially market makers, for taking the risk of providing two-sided bid and ask prices for others to trade against. Without them, bid-ask spreads will widen out, making it more costly to trade, the exchanges have argued.
The system has many critics.
“The transaction fee pilot is a constructive and long overdue first step toward fixing an outdated and byzantine pricing model that is badly in need of reform,” the Investment Company Institute (ICI) and the Council of Institutional Investors (CII) said in a joint amicus brief in support of the SEC. “It should be allowed to proceed.”
The trade groups, which represent institutional investors managing tens of trillions of dollars worth of assets, said the pricing system gives brokers an incentive to send customer orders to the exchanges that pay the most, even if those customer orders might get better results elsewhere.
Collectively, Nasdaq Inc (O:), Cboe Global Markets (Z:) and New York Stock Exchange owner Intercontinental Exchange Inc (N:), paid out about $2.5 billion last year in rebates, which can be key drivers in attracting market share.
ICI and CII also said the system increases market complexity by fueling the proliferation of trading venues that offer various pricing models catering to high-speed traders, which make up half the trading volume in the market, looking to harvest rebates.
NYSE operates five stock exchanges, Cboe four, and Nasdaq three. The need to connect to all of these exchanges raises costs for investors, the trade groups said.
The pilot, which was recommended by an SEC-appointed committee of market experts as well as the U.S. Treasury in a report in late 2017, would in some cases ban the rebates altogether for some stocks and lower exchange transaction fees.
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