The boards of almost 40 public companies face pushback over their apparent opposition to an SEC pilot scheme that would limit the rebates on transaction fees that are paid to market-makers by stock exchanges.
The Council of Institutional Investors (CII) recently sent letters to directors of 37 publicly traded companies that the council says have submitted public comment letters opposing the pilot, with most supporting NYSE arguments against the project.
CII’s letter states that although the NYSE alleges the pilot will harm investors, most institutional investors support the plan. ‘In opposing the proposed pilot, many companies are aligning themselves against some of their largest shareholders,’ CII executive director Ken Bertsch writes. ‘More than 75 percent of issuers [that oppose] it have at least one of their five largest institutional investors supporting the pilot.’
The pilot has sparked debate between issuers, investors and national stock exchanges. The SEC voted in favor of the transaction-fee (also called access-fee) pilot – Rule 610T of Regulation NMS – in March 2018. The proposed trial would last for up to two years and is aimed at gathering data about the impact transaction fees and rebates have on order-routing behavior, execution quality and overall market quality.
Supporters of the trial include public pension funds and asset managers such as Vanguard, BlackRock, CalPERS and T Rowe Price, as well as IEX and the Securities Industry and Financial Markets Association. They argue that the pilot would collect information about whether the current system, where brokers (‘makers’) receive a rebate and customers (‘takers’) pay a fee for each transaction, contributes to market complexity or creates conflicts of interest.
Critics of the pilot – such as the NYSE, Nasdaq and the Security Traders Association of New York – suggest that placing issuers into fixed groups with different market conditions for a two-year term, as is proposed for the pilot, is risky.
Nasdaq and the NYSE say the pilot would be ineffective in gathering the data the SEC wants, and they worry that fee caps may push trading activity to dark pools – which would not be subject to the pilot. The NYSE also predicts that the trial would mean widened spreads from brokers, harming liquidity and investors’ execution quality.
CII takes a different stance. ‘As evidence cited by the SEC indicates, the current transaction fee structure may incentivize broker-dealers [to] route orders to exchanges that have the best quoted prices but are suboptimal for customers in other ways because orders are either less likely or take longer to execute,’ Bertsch writes. ‘We believe the proposed pilot as currently designed will facilitate actionable statistical analysis of the potential conflicts of interest presented by fees and rebates.’
CII also expresses support for the SEC’s proposed approach to the pilot. ‘In order to provide a meaningful and useful dataset, the pilot must encompass a wide range of [national market system] stocks and be of a sufficient duration to prevent the results from being skewed by any unrelated market events or distortions. The SEC’s proposal adequately addresses these concerns and will provide an appropriate dataset,’ Bertsch writes. He also asks that the directors receiving the letters share them with their full boards.