‘While many market participants have suggested something should be done to address maker-taker pricing and transaction fees, there is less agreement about what specifically should be done,’ said Brett Redfearn, director of the SEC’s division of trading and markets, at the NIRI national conference earlier this month.
Redfearn is the man behind the SEC’s transaction-fee pilot, which has sparked fierce debate and recently led three exchanges – the NYSE, Nasdaq and the Chicago Board Options Exchange – to sue the SEC in an attempt to block the pilot. Just last week, three high-speed trading firms – GTS, Citadel Securities and IMC – also initiated legal action to oppose what they describe as an ‘ill-conceived’ rule.
Redfearn confirmed at the NIRI national conference that the SEC agreed to put a pause on the start date of the transaction-fee pilot as a result of the legal action from the exchanges, but it will require the exchanges to begin collecting data on July 1.
The SEC’s pilot, which it voted to approve late last year, would split more than 1,500 public companies into three buckets to examine how rebates paid by exchanges to market-makers affect order routing, liquidity and spreads. The third bucket would offer no rebate at all. The pilot has proven to be contentious, with more than 100 letters submitted to the SEC during the open comment period from issuers, investors, exchanges, banks and academics.
Speaking at the NIRI conference, Redfearn said: ‘Many asset managers submitted comment letters supporting the zero-rebate group and raised a variety of issues, including rebate trading, excessive intermediation and broker conflicts. Including a zero-rebate bucket will also enable us to assess the continued appropriateness of any fee cap in one or more segments of the market, and to test equilibrium pricing for transaction fees.’
Institutional investor support
Redfearn finished his remarks by pointing out that ‘nearly every institutional investor that submitted a comment supported conducting a pilot and testing a zero-rebate group’. In August 2018 the Council of Institutional Investors wrote to directors at 37 publicly traded companies that had backed the NYSE’s position on the transaction-fee pilot.
But speaking at the CIRI annual conference, Kevin Tyrrell, senior director of strategy and research at the NYSE, pointed out that several institutional investors – including BlackRock and State Street Global Advisors – had asked for their ETF products not to be included in the transaction-fee pilot.
In a conversation with IR Magazine in March 2019, Phil Mackintosh, chief economist at Nasdaq, questioned whether the pilot would give the SEC the data it intends to gather, given that it would only monitor the ‘lit’ markets – such as Nasdaq, the NYSE and BATS. According to recent estimates, up to 40 percent of daily trading takes place off-exchange in dark pools.
CSA fee pilot
Last year the Canadian Securities Administrators (CSA) announced plans to run a similar pilot scheme in conjunction with the transaction-fee pilot. The CSA pilot would temporarily stop Canadian exchanges and alternative trading systems from paying rebates to dealers for executing orders. The trial is set to include highly liquid and actively traded, medium-liquidity securities, according to a press release.
Kevin Sampson, president of equity trading at TMX Group, confirmed during a panel at CIRI that TMX Group does not support the CSA pilot. Tyrrell confirmed that the NYSE is also against the CSA pilot. But Peter Haynes, managing director of index products for institutional equities at TD Bank, accused the exchanges in both the US and Canada of ‘scaremongering’.
Do IROs need to know?
Following Redfearn’s remarks at NIRI – and CIRI’s market structure panel – attendees discussed how much they need to know about market structure issues such as the fee pilots.
Speaking to IR Magazine in favor of IROs spending the time needed to get up to speed on it, Joe Saluzzi, partner and co-founder of Themis Trading, said: ‘You have to understand why this market structure issue matters. Why do rebates matter? Because they distort the routers that are being used to trade your stock. And if [they’re] distorting the routers, [they] could be distorting the price.’
Saluzzi recommends IR teams speak to their sell-side analysts, their institutional investors and their market-makers to understand how inclusion in different buckets of the access-fee pilot could affect stock performance, spreads or trading activity. Likewise, Haynes suggested that IROs start by reading the transcript of Redfearn’s comments at the NIRI national conference, underscoring that this is an important issue for the IR community to educate itself on.