Wall Street's chief regulator has finalized a rule package designed to test the models that exchanges use to attract trading liquidity.
On Dec. 19, the SEC's commission green-lighted a revised version of the agency's transaction fee pilot. Set to run for up to two years, the test program will force U.S. stock exchanges to tweak the complex systems of fees and rebates that drive trading activity to their venues.
Nearly every U.S. stock exchange — including those owned by Intercontinental Exchange Inc., Nasdaq Inc. and Cboe Global Markets Inc. — operates with a system known as "maker-taker." Through that model, the exchanges charge market participants a fee for taking liquidity off of their order books, while offering a rebate to liquidity providers. A select group of exchanges owned by those companies operate an inverse system known as "taker-maker," which will also fall under the SEC's pilot.
Currently, exchanges are only allowed to charge market participants a fee of 0.3 cent per trade. But the SEC is lowering that to 0.1 cent for a group of 730 stocks that will be included in the pilot. The exchanges will still be able to offer rebates when handling those securities, though. Another 730 stocks included in the program will operate with the current 0.3 cent fee cap, but the exchanges will not be able to offer rebates or linked pricing when those securities are dealt between market participants.
The pilot's finalization is the latest step in a years-long fight on Wall Street over exchanges' trading models. Critics have argued that the payment of rebates encourages broker/dealers to route their clients' orders to the highest-paying exchange, rather than the venue with the best price for the client.
The exchanges, on the other hand, have argued that their fees-and-rebates systems are vital to the operation of U.S. markets. ICE, Nasdaq and Cboe have all fervently opposed the pilot, as it could upend a key business line. New York Stock Exchange executives have even hinted that the SEC's proposal could have faced litigation.
The New York Stock Exchange said that it believes it is the wrong time "to embark on a risky experiment with our markets which imposes government-mandated price controls," according to a statement. An exchange spokesperson added that the ICE-owned venue believes the pilot will degrade market quality, increase trading costs for investors and "create winners and losers among issuers." Spokespeople for Nasdaq and Cboe declined to comment.
IEX Group Inc., the one exchange operator that has continuously supported the SEC's pilot program, applauded the agency's decision. The exchange's co-founder and CEO Brad Katsuyama described the pilot as a "monumental win for investors and other stakeholders who have pushed for a fairer and less conflicted market throughout the years," in a statement.
The SEC will announce the pilot's start date after the rule goes into effect 60 days after it is published in the Federal Register.