SEC delays disputed plan to probe exchange pricing conflicts

March 29, 2019

By John McCrank

NEW YORK (Reuters) – The U.S. Securities and Exchange Commission on Thursday delayed a controversial plan aimed at evaluating how stock exchange fees and incentives affect how brokers trade, while the exchanges sue the regulator in an attempt to kill the experiment.

The SEC approved its so-called Transaction Fee Pilot in December, aimed at testing how lucrative rebate payments from exchanges to brokers for stock orders that others can trade against influences brokers’ behavior.

But Nasdaq Inc, Cboe Global Markets and Intercontinental Exchange Inc’s NYSE, which together own 12 of the 13 U.S. stock exchanges, all filed lawsuits against the SEC in February saying the plan was an exercise in government price-setting and would put controls on competition.

“Without addressing the merits of petitioners’ challenges to the rule or the pilot program, the Commission has determined to exercise that discretion to grant a stay, in part. Pending a decision by the court of appeals,” the SEC said as it put the plan on hold on Thursday.

The big exchange operators had said the one-to-two-year pilot program would hurt the companies whose stocks would not be eligible to receive rebates for liquidity-adding stock orders.

“The Commission’s action is a positive development for publicly-traded companies and Main Street investors, as it recognizes the arbitrary nature of the program and the complexity of its implementation,” Nasdaq spokesman Joseph Christinat said following the SEC’s announcement.

Cboe also said it was “pleased” with the SEC’s decision.

The SEC, in part, aimed to gather data from the experiment that could show if the rebates, which added up to around $2.5 billion last year, create conflicts of interest by giving incentives to brokers to send customer orders to the exchanges that pay the biggest rebates.

Those customers might get better results elsewhere, say critics of the rebate regime, which include some of the world’s largest asset managers.

The exchanges say rebates help attract liquidity, while also compensating brokers, especially market makers, for taking the risk of providing two-sided bid and ask prices for others to trade against.

The pilot program was recommended by a SEC-appointed committee of market experts, as well as by the U.S. Treasury in a report in late 2017.

Because the SEC granted only a partial stay of the pilot, the exchanges will still have to begin gathering data on broker order routing behavior to provide to the regulator if the pilot goes ahead.

(Reporting by John McCrank; Editing by Kim Coghill)

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