SEC Proposes Stock Transaction Fee Pilot Program

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By Andrew Ramonas

An SEC pilot program to lessen the fees traders pay for stock exchange access moved one step closer to fruition.

The Securities and Exchange Commission’s five members voted unanimously March 14 to propose a study of transaction fee changes, including modifications to the “maker-taker” model. Under the model, exchanges charge traders taking liquidity and provide access fee rebates to market makers giving it. Critics of the model claim brokers can direct orders to certain exchanges to capitalize on rebates and ignore the best prices or executions for clients.

Fees under the model usually are 30 cents per 100 shares traded, the maximum permitted by the SEC, with equivalent rebates for liquidity providers. The pilot would create a bucket with no rebates and linked pricing, along with groups with fee caps of 30, 15, and 5 cents per 100 shares traded. The test, which would run up to two years, would cover stocks of any market capitalization.

“We do not currently have the data to help us meaningfully analyze the effects of exchange fees and rebates on order routing behavior, execution quality, and our market structure more generally,” Chairman Jay Clayton said. “I believe that the pilot proposed by the staff today would help us address this data gap.”

Advisory Panel Recommendation

The commission’s Equity Market Structure Advisory Committee recommended a pilot that would put heavily traded stocks into buckets with fee caps from 2 to 30 cents per 100 shares traded, but didn’t have a group with no rebates.

Cboe Global Markets Inc., Nasdaq Inc., and Intercontinental Exchange Inc.’s New York Stock Exchange, which use the maker-taker model, raised concerns about the EMSAC recommendation and urged the SEC not to propose it.

“Around the world, the U.S. equity market is known for its depth and liquidity, and for consistently rewarding investors with ever-decreasing trading costs,” Cboe spokeswoman Hannah Randall told Bloomberg Law. “Anything that impacts those attributes of our current market has to be managed carefully against that very high bar of success.”

Representatives of NYSE and Nasdaq declined to comment.

Chester Spatt, an EMSAC member and former SEC chief economist, told Bloomberg Law he was “very pleased” by the proposal.

“The broadening of the pilot design and especially the inclusion of a ‘no rebate’ treatment bucket are significant enhancements to the EMSAC proposal, especially since a significant portion of the conflict of interest distortions is associated with the impact of rebates,” said Spatt, a visiting professor at the Massachusetts Institute of Technology Sloan School of Management. “Given its design, I anticipate that the potential pilot would greatly help regulators understand the impact of modifications to the current structure of fees and rebates.”

Mutual Fund Proposal

The SEC’s commissioners also voted 3-2 along party lines to propose a rule that would scale back liquidity reporting requirements for mutual funds.

Clayton, an independent, and Republican Commissioners Michael Piwowar and Hester Peirce voted in favor of the proposal amending disclosure stipulations for Form N-PORT for open-end investment management companies. Democratic Commissioners Kara Stein and Robert Jackson voted against it.

The proposal would require funds to use their annual report to detail the operation and effectiveness of their liquidity risk management programs, instead of using Form N-PORT every quarter to publicly disclose the percentage of their investments that fall into buckets ranging from “highly liquid” to “illiquid.” Clayton said he expects the agency would periodically report funds’ liquidity at a market level in lieu of the quarterly disclosures.

Rule 22e-4, adopted in 2016, directed funds to assign their investments to the buckets as early as December 2018, but the SEC in February gave them until at least June 2019 to comply.

“Make no mistake; this proposed change is a rollback of transparency,” Stein said. “And it is a change that I cannot agree with.”

Susan Olson, general counsel of the Investment Company Institute, which advocates for funds, told Bloomberg Law the proposal offered “sensible modifications.”

“The proposed annual disclosure offers a promising avenue for providing investors with better information about funds’ liquidity risk management programs to help inform their investment decisions,” she said in a statement.

The commission’s open meeting marked the first such gathering for Peirce and Jackson, who filled the last two vacancies on the five-member commission in January. The SEC hasn’t had an open meeting with a full slate of commissioners since 2015.

To contact the reporter on this story: Andrew Ramonas in Washington at aramonas@bloomberglaw.com

To contact the editor responsible for this story: Seth Stern at sstern@bloomberglaw.com

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