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NYSE executives hint that SEC's trading test could end up facing litigation

An SEC pilot program to test the impacts of lowering trading fees charged by exchanges could end up in litigation, a New York Stock Exchange official said.

Speaking at the Security Traders Association's Annual Conference, Michael Blaugrund, the New York Stock Exchange's head of transactions, said the SEC's proposed structure of the pilot conflicts with the Administrative Procedure Act.

The pilot, known as the access fee pilot, has evoked a swath of opinions over the test's merits and structure, with exchanges such as Intercontinental Exchange Inc.-owned New York Stock Exchange, Cboe Global Markets Inc. and Nasdaq Inc. standing in opposition.

"It's quite likely that it's going to end up in litigation," Blaugrund said Oct. 4.

The pilot program marked the SEC's long-awaited attempt to assess the impacts that exchanges' fees and rebates have on brokers' routing patterns. Market participants including a number of broker/dealers, asset managers and others have protested exchanges' maker-taker models, in which certain market participants pay a fee to an exchange for trading while others receive a rebate. Critics of the practice claim that the payment of rebates promotes brokers to route orders to the trading venue with the highest rebate, and not to the venue with the best price for their clients' orders.

Just days before Blaugrund's remarks, New York Stock Exchange President Stacey Cunningham proposed an alternative version of the SEC's pilot, one with a "less complex, less controversial approach," she wrote in a letter to the SEC.

Cunningham also hinted at possible litigation over the SEC's pilot, adding that the alternative model "changes the levels of existing regulatory price controls without introducing new classes of restrictions, thereby limiting both the likelihood of a court challenge and the complexity of implementation."