SEC approves controversial transaction fee pilot for stock exchanges

Securities and Exchange Commission unanimously approves a one-year programme, known as the transaction fee pilot, as part of a review of the ‘maker-taker’ trading system.

The US securities regulator has approved a controversial pilot scheme that would see major restrictions on pricing across the biggest stock exchanges.

The Securities and Exchange Commission (SEC) unanimously approved the one-year programme, known as the transaction fee pilot, as part of a review of the ‘maker-taker’ trading system, which typically provides a rebate to traders adding liquidity to an order book, with an access fee then charged when liquidity is removed.

“The pilot is designed to generate data that will help the Commission analyse the effects of exchange transaction fee and rebate pricing models on order routing behaviour, execution quality, and market quality generally,” the SEC stated.

The pilot will apply to all stock exchanges, and 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 expect the data provided by the pilot will help us make effective policy assessments that will benefit our markets and our investors,” said Jay Clayton, chairman, SEC.

Many of the biggest stock exchanges, including the New York Stock Exchange (NYSE), Nasdaq, and Cboe, strongly oppose the programme, and have questioned the legal authority of the SEC to enforce the changes.

NYSE believes investors building a position in pilot securities will end up paying more and receiving less when they exit, and estimate the added burden on investors could exceed $1 billion.

However, a report authored by Greenwich Associates last year found that 65% of buy-side equity traders agree that the maker-taker method can create pricing distortion and is generally bad for market structure.

Asset managers, including BlackRock and Invesco, expressed strong support for the access fee pilot in recently published comment letters. BlackRock stated that “lowering access fees and rebates would reduce their distortive effect on order routing, price transparency, and market quality”.