(Bloomberg) — One widely dislikedfeature of U.S. equity markets is the cap on stock-exchange fees at 30 cents per 100 shares. Exchanges don’t actually have 30 cents of cost to trade 100 shares, so you might think that the fees would be competed down to well below the regulatory cap.
But the way the cap works is, exchanges tend to charge the full 30 cents to people who take liquidity, and then rebate most of it to people who provide liquidity,and this drivesa significant portion ofmarket kookiness, as banks look to avoid paying the fees by routing orders to their own dark pools, and as high-frequency traders take advantage of banks’ fee-driven routing of customer orders.
So here is a proposal from the New York Stock Exchangeto cut the exchange-fee cap from 30 cents per 100 to 5 cents,and to introduce a trade-at rule that would requireorders for fewer than 5,000 shares to trade on exchanges unless dark pools can offer significant price improvement. The idea is to get banks to move their trading from their dark pools back onto exchanges,in part by requiring them to do so, and in part by making it cheaper.
Apparently Credit Suisse, the largest dark-pool operator,has signed on, and Nasdaq “also broadly supports the proposal,”but this is not something that NYSE can do unilaterally, and there are those who oppose it.
KCG Holdings, for instance, whose business involves a lot of internalization of retail orders, is not happy, sincethe proposal would more or less ban that practice.
So it’s hard to tell how real the NYSE plan is at this point, though if you asked me whether exchange fee caps will be more like 30 cents or 5 cents in five years I guess I’d take 5 cents.
Elsewhere, the European Securities and Markets Authority is skeptical about dark pools.
(Edited from Levine’s original column.)