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SEC Steers Pilot on Equity Trading Fees and Rebates Amid Headwinds
Traders Magazine Online News, May 2, 2018
Diving into one of the more controversial issues in equity market structure, U.S. regulators are moving forward with the transaction-fee pilot that will force stock exchanges to lower the fee caps on rebates they pay to brokers and market makers.
“I think the SEC is about to embark upon a productive time for assessing market structure reforms,” said Brett Redfearn, Director of Trading & Markets in remarks at the Securities Industry Financial Markets Association (SIFMA) Equity Market Structure Conference, which was held on April 18.
Brett Redfearn
At the same time, the SEC has decided to sunset the tick-size pilot, which its due to expire on Oct. 2nd. An assessment by exchanges is due on July 3rd.
But the SEC’s transaction-fee pilot has stirred up debate over whether the regulator should be involved in setting fee caps on rebates that stock exchanges pay to brokers and market makers.
The proposed pilot, which is open for public comment until May 13, is slated to run for two years with an automatic sunset after one year unless the Commission extends it.
The transaction-fee pilot was announced in March to address criticism over the maker-taker system of rebates, which reward brokers that route client orders to the exchanges with the highest rebates. The practice has been controversial as some say it distorts the order routing behavior of brokers.
Buy-side firms and other critics maintain that the rebates cause conflicts of interest by incentivizing brokers to route their orders to the highest rebate exchanges, and not necessarily to the exchange that will provide the best execution.
“Exchange rebates, maker-taker and inverse (i.e., taker-maker) pricing, as well as other incentives have become a growing concern for investors, ” wrote Southeastern Asset Management, with $18 billion in assets under management, in a comment letter sent to the SEC in April. The letter was signed by a group of 21 asset managers, including the likes of Franklin Templeton Investments, Janus Henderson Investors and hedge funds such as Greenlight Capital, Pershing Square, and Oak Tree Capital, showing a groundswell of support for the pilot.
Some panelists were skeptical of regulators setting market fee caps or rebates. They contend the government should not be involved.
Proponents of the maker-taker fee model contend it has increased liquidity and narrowed spreads for investors.
A Cboe executive speaking at the SIFMA conference, said the SEC should not be banning rebates.
“I have a problem with banning rebates,” said Chris Concannon, president and COO of Cboe Global Markets, who called it “Draconian” and warned of its impact on investors. “The consensus is that if you adjust the rebate, it will widen spreads,” he said. “Impacting the rebate is taking money out of investors pockets,” he added.
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