SEC Approves Rebate Pilot

Rebates are abou to come under more scrutiny.

After much ballyhooing and bellybucking, the Securities and Exchange Commission (SEC) hass approved a pilot program designed to examine the fee structure paid to brokers to route order flow to exchanges and other venues.

The SEC adopted new Rule 610T of Regulation NMS to conduct a Transaction Fee Pilot in NMS stocks.The pilot is designed to generatedata that will help the Commission analyze the effects of exchange transaction fee and rebate pricing models on order routing behavior, execution quality, and market quality generally.Data from the Pilot will be used to facilitate an empirical evaluation of whether the exchange transaction-based fee and rebate structure is operating effectively to further statutory goals and whether there is a need for any potential regulatory action in this area.

The Transaction Fee Pilot, which will apply to all stock exchanges, will create two test groups with new restrictions on the transaction fees and rebates that exchanges charge or offer to their broker-dealer members.One test group will prohibit exchanges from offering rebates and linked pricing and the other group will test a fee cap of $0.0010.

“I applaud our staff for their thoughtful approach to the design of the Transaction Fee Pilot,”said SEC Chairman Jay Clayton. “I expect the data provided by the pilot will help us make effective policy assessments that will benefit our markets and our investors. I would also like to thank former Commissioner Mike Piwowar for his contribution to this proposal during his time at the Commission, including while he was Acting Chairman.His work on market structure was extensive, and this pilot is only one example.”

The Commission’s action follows a recommendation from the Equity Market Structure Advisory Committee to conduct a pilot.The pilot will last for up to two years, and the Commission will subsequently announce by notice the commencement dates for data collection and the pilot period.Approximately one month prior to the beginning of the pilot period, the Commission will issue the list of pilot securities.

The approval is a big win according to IEX CEO and co-founder Brad Katsuyama, who said in a release that This is a monumental win for investors and other stakeholders who have pushed for a fairer and less conflicted market throughout the years. We applaud the SEC for taking this important step.