Last week, a sub-committee panel of the SEC recommended that the SEC should experiment with cutting stock exchange fees and rebates. The subgroup of the SEC’s Equity Market Structure Advisory Committee said that testing this cut could show conflicts of interest between brokers and exchanges.
But on Tuesday, the head of the New York Stock Exchange as well as NASDAQ blasted the SEC plan’s proposals. Thomas Farley, president of the NYSE group, stated that such a proposal would increase the amount of dark trading and make investors worse off. According to Farley, “this access-fee pilot will not only ensure that there will be more dark trading but also that there will be worse prices on exchanges and off-exchanges.”
The proposed experiment would examine whether high fees and rebates are distorting broker behavior. The high exchange fees give brokers an incentive to increase off-exchange trading, which is less regulated.
Rebates and Maker-Taker Pricing System
But the rebates appear to be a bigger concern, as this experiment would take aim at the maker-taker pricing system used by stock exchanges like the NYSE Euronext’s Arca Options platform and NASDAQ OMX Group’s NOM platform. CNBC notes that “Maker-taker fees happen when exchanges pay market makers for providing liquidity (bids and offers) and charge for taking liquidity (for hitting those bids and offers).” The idea is that by providing the rebate, a stock exchange which uses maker-taker fees will encourage investors and facilitate trading.
However, critics are concerned that the fees and rebates encourage options brokers to go for the exchanges which offer the highest rebates instead of the exchanges which offer the best trades. And while Farley said that limiting the fees would encourage dark trading, critics of the maker-taker system argue it already encourages dark trading.
The idea of conducting an experiment is hardly new. Multiple financial CEOs such as Daniel Coleman with Knight Capital Group have expressed their concerns with the system, as well as the SEC and Senator Charles Schumer. The CEO of Intercontinental Exchange Inc., which oversees the NYSE, also voiced his concerns.
In fact, Thomas Farley himself stated in 2014 that he planned to eliminate the maker-taker system altogether because he felt that it created too many conflicts within the market.
NASDAQ Experimented With Similar SEC Plan
But things have changed since 2014. In February 2015, NASDAQ experimented with lowering the fees from the normal 30 cents per 100 shares to 7 cents. When the experiment concluded in June, NASDAQ found that it had lost market share to its exchange rivals. An official report on the experiment also noted that “liquidity takers do not appear to be responding to the reduced access fees” and that it found a “statistically significant” drop in market share. In the meantime, NASDAQ has emphasized that while it is committed to improving market structure, it is opposed to the SEC’s experiment.
The proposed experiment from the SEC would cap fees and rebates for three groups of stocks with a market capitalization of more than $3 billion. The cap would be 20 cents per 100 shares for one group of stocks, 10 cents per 100 shares for another group, and 2 cents per 100 shares for the final group.
Still, some groups have expressed their support for the SEC’s proposed experiment. Adam Nunes with Hudson River Trading LLC expressed his belief that the program would provide new and useful data.
SEC Plan Lacks Transparency
In addition to criticizing the proposed experiment, Farley also criticized the lack of transparency behind the SEC sub-committee’s meetings. While the NYSE and NASDAQ have been invited to the Equity Market Structure Advisory Committee, both groups have declined, stating that the meeting should be held in the light of day.