Risk & Compliance

Exchanges Sue to Block SEC Trading Fee Plan

An SEC pilot program approved in December “represents an unprecedented attempt to distort free market mechanisms," the NYSE says.
Matthew HellerFebruary 18, 2019
Exchanges Sue to Block SEC Trading Fee Plan

The three largest U.S. stock exchange operators have sued the U.S. Securities and Exchange Commission to stop a regulatory initiative that would limit fees they can charge for trading.

Over the objections of the exchanges, the SEC in December approved a transaction fee pilot program in December as part of an effort to measure the effect that “maker-taker” rebates — which exchanges pay brokers to stimulate trading activity — have on equity trade execution.

But the NYSE, Nasdaq, and CBOE exchanges last week asked a federal appeals court to declare the program unlawful, saying it is “arbitrary and capricious,” does not promote competition, and exceeds the SEC’s authority.

“This really represents an unprecedented attempt by the SEC to distort the free market mechanisms that govern the competition among trading venues,” Michael Blaugrund, head of transactions at NYSE, told reporters.

As Reuters reports, the SEC is seeking “to shed light on whether rebate payments, collectively around $2.5 billion last year, create conflicts of interest by incentivizing brokers to send customer orders to the exchanges that pay the biggest rebates rather than to those that would obtain the best results for the end clients.”

The program would divide equities trading into one of three groups — a control group that operates under the current cap-free regime, a test group that will bar exchanges from offering rebates and linked pricing, and another group that will test a fee cap of 10 cents per 100 shares traded.

“The pilot is really important to see what’s going on,” Ken Bertsch, executive director of the Council of Institutional Investors, told Pensions & Investments. “Our members became convinced this is really needed.”

The exchanges, however, contend the program would benefit private stock trading venues, which would not be subject to the restrictions, and that bid-ask spreads would widen without rebates, creating hundreds of millions of dollars in new costs for investors.

“It’s a very difficult decision to decide to take your primary regulator to court,” Blaugrund said. “That being said, we feel this is overreaching, and we need to draw a clear line in the sand.”