Asset managers back U.S. plan to limit stock exchange rebates

[April 10, 2018]  By John McCrank

NEW YORK (Reuters) - Financial firms representing more than $1 trillion in assets under management have endorsed a U.S. regulator's plan to test limiting the rebates and other incentives that stock exchanges can pay to brokers, a practice critics say creates conflicts of interest.

The U.S. Securities and Exchange Commission proposed a two-year pilot program in March that would force exchanges to lower their fees for matching aggressive buy and sell orders, as well as the rebates they pay to market makers for passive orders that add liquidity.

Southeastern Asset Management Inc, in a letter sent to the SEC and also signed by 21 other buy-side firms, laid out why it supported the program.

"The pilot will further the Commission's long-held goal of increasing market-enhancing competition among exchanges, with a focus on execution quality and service, as opposed to paying the highest rebate," Southeastern said in the letter to the SEC, dated April 6.

Among the other firms signing the letter were Franklin Templeton Investments, Greenlight Capital, Pershing Square Capital Management LP and Janus Henderson Investors.

Consumer advocates say the current pricing regime creates conflicts of interest by giving incentives for brokers to send customers' orders to the exchanges with the biggest rebates rather than to exchanges that would obtain the best result for the end clients.

The three main U.S. exchange operators - the New York Stock Exchange, which is owned by Intercontinental Exchange Inc, Cboe Global Markets Inc and Nasdaq Inc - had strongly opposed the plan, saying that limiting incentives to market makers would make stocks harder to trade.

The bourses collectively pay around $2.5 billion a year in rebates, which they say compensate market makers for the risks of providing liquidity.

Currently, the fees exchanges can charge for trades they execute are capped at 30 cents per 100 shares. Rebates, which not all exchanges pay, are generally in line with the fee cap.

The SEC is currently seeking public comments on the "access fee pilot," and will then decide whether to go ahead with the plan in its present form, as Southeastern has requested.

(Reporting by John McCrank; Editing by Leslie Adler)

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