Brokers Attack SECs Plan as Trojan Horse Designed to Hurt Them

(Bloomberg) — Wall Street brokers are in rebellion against a plan to test ways of encouraging more trading of the smallest U.S. stocks, saying the effort was hijacked by exchanges seeking an edge over their rivals.

The Securities and Exchange Commissions pilot program is meant to spur trades in about 30 percent of publicly traded U.S. companies. One of its provisions — called a trade-at rule — is really a stealth attempt to hurt brokers that run private trading systems that compete with the likes of the New York Stock Exchange, representatives from JPMorgan Chase & Co. and Citigroup Inc. said yesterday at an industry conference.

The exchanges who have a hand in this and seek to benefit from the onerous version of a trade-at basically put the screws to us, Michael Masone, legal counsel for equities at Citigroup, said at an event sponsored by the Securities Industry and Financial Markets Association.

Supporters of the one-year pilot program, including lawmakers in Congress, say it will encourage market makers to buy and sell shares by making each transaction potentially more profitable. This, the theory goes, could stimulate initial public offerings because investment banks would have more money to bankroll research departments to tout newly public companies.

The SEC started seeking public comment on the proposals on Nov. 3. The securities regulator must approve the programs final design. The experiment, which could start next year, will widen the minimum price, or tick, at which shares are quoted on exchanges. For many companies, the tick size is now 1 cent.

Wrong Target

Stephen Luparello, the SECs director of trading and markets, said at the same industry event yesterday that brokerage firms have read too much into the regulators plans. The SEC is open to feedback and hasnt sided with the goals of exchanges, he said. If the SECs primary goal was really to test ways of discouraging trading on private trading platforms, the regulator wouldnt target the smallest companies, he said.

If you were going to do a trade-at pilot, that is not the segment of the market you do it in, Luparello said.

Joe Christinat, a Nasdaq OMX Group Inc. spokesman, declined to comment, as did Eric Ryan of Intercontinental Exchange Inc.s NYSE Group division. Bats spokesman Randy Williams said the company remains opposed to the trade-at rule.

The plan as proposed would create four groups of companies with market values less than $5 billion. One segment will require quotes in increments of 5 cents or more, and another will require both quotes and trades to be in 5-cent steps. In a third group, trading will be discouraged on private venues that compete with public exchanges. A fourth group will trade normally.

Heavy Comment

It almost feels a little bit like, Is this a tick pilot or a trade-at pilot? said Brett Redfearn, Americas head of market structure strategy at JPMorgan, speaking at the same event as Masone and Luparello.

Opposition to the program isnt new. The SECs Investor Advisory Committee voted 13-3 in January to urge the agency not to conduct the pilot program. The SEC went ahead anyway. Opponents including Fidelity Investments say investors will have to pay more to buy and sell shares of small companies.

Getting it done this year would be pretty complicated, SEC Commissioner Daniel Gallagher, a Republican, said last month at a conference in Washington. My guess is well get some pretty heavy comment on this thing, and it might buckle under its own weight.