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Top U.S. Exchanges Sue Their Regulator to Block a Proposed Test

Feb. 15, 2019, 10:08 PM

The top three U.S. stock exchanges are suing their primary regulator, attempting to block a government review of the system of fees and rebates that powers most of the business.

The New York Stock Exchange on Feb. 14 asked a federal appeals court to stop the Securities and Exchange Commission’s study. Nasdaq Inc. filed its own complaint Feb. 15, and Cboe Global Markets Inc. said it has, too. The SEC declined to comment.

At issue is the regulator’s planned transaction fee pilot program, designed to examine the fairness of the system -- sometimes dubbed “maker-taker” -- through which most exchanges charge some traders for buying and selling while paying rebates to others. Critics argue the practice leads to conflicts of interest, prompting brokers to route orders to maximize their own profits instead of prioritizing what’s best for their clients.

“It’s a very serious decision to cross the Rubicon” and sue the SEC, Michael Blaugrund, NYSE’s head of transactions, told reporters in New York Feb. 15. “That being said, we feel really strongly that this is overreaching, and we need to draw a clear line in the sand.”

The SEC approved the pilotin December. It would reduce the amount that exchanges can charge for trades in hundreds of stocks and ban rebates in hundreds of others. Exchanges say those rebates are necessary to ensure an adequate number of buyers and sellers for stocks.

NYSE, Nasdaq and Cboe own all but one of the nation’s stock exchanges. The 13th, the Investors Exchange, is controlled by IEX Group Inc., which welcomes the pilot program.

Exchanges are suing “to protect their own markets, which are propped up by rebate payments that investors condemn,” John Ramsay, chief market policy officer at IEX, said in a statement. “The SEC has taken a very measured approach with this pilot, and the exchanges’ reaction shows how much they have to lose if markets become less conflicted.”

Nasdaq’s main concern is that “the transaction fee pilot won’t do anything to cultivate liquidity, especially in times of stress,” Nelson Griggs, an executive vice president at the company, said in an interview.

NYSE President Stacey Cunningham emailed the companies her exchange lists, explaining why she took action. NYSE, a unit of Intercontinental Exchange Inc., “rewards behavior” that ensures a robust market for stocks, she wrote.

“As a result, companies listed on the NYSE trade with less volatility than those listed on other exchanges, even more so during periods of higher overall market volatility,” Cunningham wrote. “The SEC action would prohibit us from providing these incentives -- but only for a subset of companies, increasing costs for investors of some companies but not others.”

She also lamented the “unprecedented level of government price controls” embedded in the program.

Exchanges do face a cap on fees today, though. The SEC’s Regulation NMS, implemented in 2007, limits how much U.S. stock exchanges can charge for trades to 30 mils per share, which works out to 30 cents per 100 shares.

©2019 Bloomberg L.P. All rights reserved. Used with permission

To contact the reporters on this story: Nick Baker in Chicago at nbaker7@bloomberg.net; Ben Foldy in New York at bfoldy@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net Peter Jeffrey, Dan Reichl

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