The U.S. Securities and Exchange Commission should mandate an experiment in cutting stock exchanges fees and rebates. A sub-committee of the regulator has recommended this action since it could allegedly illuminate flaws in a pricing model that critics say creates conflict of interest.
According to Reuters, the high exchange fees have been named as one of the reasons for a boost in off-exchange trading. Nearly 40 percent of the U.S. Stock trading took place on lightly regulated private trading venues, which increased sharply from 16 percent in 2008.
A lot of exchanges also pay rebates to brokers. This would send them bids and offers not intended for immediate execution, providing liquidity for others to trade against.
Opponents of this move say that the model only creates conflict of interest since the brokers have incentives to send customers' orders to exchanges that pay the biggest rebates. However, this is not necessarily done to those with the best price or execution. Brokers also state that the rebates offset high exchange fees.
CNBC reported that a subgroup of the agency's Equity Market Structure Advisory Committee suggested that the regulator test reducing fees and rebates in three separate groups of stocks with market capitalization of more than $3 billion for one or two years. The plan is cited in a memorandum on the SEC's website on April 19. The whole committee, which is made up of equity market executives and experts, is set to meet on Tuesday to tackle the proposal.
Exchange fees are currently capped at 30 cents per 100 shares. The rebates are generally below 30 cents per 100shares, but can be higher.
In the experiment, fees and rebates would be capped at 20 cents per 100 shares for the first group of stocks. Then, 10 cents per 100 shares for the second group and 2 cents per shares for the third group.
SEC would be allowed to look at factors, including changes in trading behavior on exchanges and private trading platforms. They would also assess the impact on bid-ask spreads and the amount of displayed liquidity for every group of stocks.
The SEC planned experiment would employ to all exchanges suck as the Intercontinental Exchange Inc's New York Stock Exchange and Bats Global Markets. In fact, it has been claimed by a senior brokerage industry regulator that SEC is likely to approve the startup stock exchange planned by the IEX Group Inc despite months of lobbying the Wall Street firms, as it sought to hinder its launch, as claimed by the Wall Street Journal.
Meanwhile, SEC still has not disclosed some information about the mandated proposal. Moreover, the sub-committee also did not recommend a schedule for the startup of the experiment.
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