NYSE says U.S. SEC plan to limit exchange rebates would hurt investors

[June 02, 2018]   By John McCrank

NEW YORK (Reuters) - A proposal by the U.S. Securities and Exchange Commission (SEC)to lower stock exchange fees and limiting the rebates exchanges pay to brokers to attract orders could cost investors more than $1 billion dollars a year, the operator of the New York Stock Exchange estimated.

"We don't think there is any question that if you reduce the incentive to make tight markets, markets will widen," Michael Blaugrund, head of equities at Intercontinental Exchange Inc's <ICE.N> NYSE unit, said in an interview on Friday.

The U.S. Securities and Exchange Commision (SEC) in March said it planned to test the effects of lowering stock exchange fees and rebates, which would be banned altogether for some stocks, for one to two years, following widespread criticism of the current pricing system.

Critics, including several large asset managers, say the pricing regime creates conflicts of interest by giving incentives for brokers to send customers' orders to the exchanges that pay the highest rebates rather than to the exchanges that would obtain the best results for their clients.

But if exchanges cannot offer rebates, the brokers that set prices by posting buy and sell orders for others to trade against will widen out their spreads, and those costs will be passed on to investors, NYSE said in a letter to the SEC dated May 31.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., May 29, 2018. REUTERS/Brendan McDermid

Doug Clark, head of market structure for the Americas at brokerage Investment Technology Group <ITG.N>, which runs a private trading venue, took issue with NYSE's analysis in a note to clients on Friday. He pointed to Canada where exchange access fees were lowered in 2015 without any notable increase in spreads.

But NYSE also questioned the legality of the SEC's proposal, in part because it would make it harder for the exchanges to compete against off-exchange trading venues, like the one ITG runs, which would not be subject to the program and could offer trading incentives that exchanges would not be allowed to match.

"The SEC has to operate according to the law and we think that there are elements of this proposal that raise serious questions about whether it is legal," Blaugrund said.

Rival exchange operators Nasdaq Inc <NDAQ.O> and Cboe Global Markets <CBOE.O> have also opposed the SEC's proposal, while IEX Group, which does not pay rebates on its exchange, supports the plan.

The SEC declined to comment.

(Reporting by John McCrank)

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