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Exchange executives question SEC's 'ill-defined' trading pilot proposal

The three largest U.S. exchanges are pushing back on a possible pilot program designed to explore the ways exchanges attract trading liquidity.

In an Oct. 13 letter sent to Securities and Exchange Commission Chairman Jay Clayton, executives from Nasdaq Inc., Intercontinental Exchange Inc.-owned New York Stock Exchange and Cboe Global Markets Inc. expressed concern over a proposed access fee pilot that would explore the maker-taker model, which many exchanges use to pay rebates to market participants that provide buy and sell quotes.

"Investors today benefit from better market access, information, tighter spreads and lower trading costs than ever before," the exchanges said in a joint statement. "We believe the [Equity Market Structure Advisory Committee's] recommendations for a pilot program are as ill-defined as the problem that they seek to solve, and so will be detrimental to issuers and investors. Ten years later, a holistic review of Regulation [National Market System] is needed in order to effectively address its market impacts."

Originally recommended by the SEC's Equity Market Structure Advisory Committee in 2016, the pilot is currently under consideration by the SEC. If approved, the pilot would explore how the market would react if the amount exchanges could charge participants that take liquidity off their order books was lowered. Currently, the amount is capped at 0.3 cent under Regulation National Market System, or Reg NMS.

"Harming this critical component of our markets could have unintended cascading and irreversible effects," the letter said. New York Stock Exchange President Tom Farley, CBOE President and COO Chris Concannon and Nasdaq Stock Market CEO Tom Wittman all signed the letter.

The executives argued that the pilot is too narrowly focused and should factor in data from broker/dealers and alternative trading systems such as dark pools. Additionally, they said they would prefer the SEC to conduct a "broader review of the impact of remuneration on routing and trading, as well as a review of Regulation NMS."

If the SEC moves forward with an access fee pilot, the executives outlined several changes they would hope to see made to the pilot before it goes into effect, such as including a cost analysis for issuers and shareholders and data from alternative trading systems and broker/dealers. They also want the pilot to last no longer than one year.

On Oct. 10, SEC Commissioner Michael Piwowar said at a conference hosted by the Georgetown Center for Financial Markets and Policy that the regulator's staff is working toward an access fee pilot. The SEC declined to comment on the exchanges' letter or on the SEC's consideration of the access fee pilot.

The maker-taker model has faced increased scrutiny from lawmakers and industry participants including IEX Services LLC co-Founder and CEO Brad Katsuyama, who said in July that the practice of paying rebates is "the most harmful but easily addressed conflict" in equity markets.