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Regulation

SEC approves transaction fee pilot program

The SEC on Wednesday approved implementing a transaction fee pilot program to measure the effects of maker-taker rebates on equity trade execution.

For the two-year pilot, the Securities and Exchange Commission will separate equities into one of three groups, two of which will have restrictions on the transaction fees and rebates that exchanges charge or offer broker-dealers, the SEC said in a news release.

One test group will bar exchanges from offering rebates and linked pricing, and the other group will test a fee cap of 10 cents per 100 shares traded. A control group will maintain the current cap-free rebate regime.

The two test groups were changed from the original proposal introduced by the SEC on March 14 in which one test group would have had a 15-cent trade fee per 100 shares, one with a 5-cent cap and one with a ban on rebates, though the last group would keep the existing 30-cent per 100-share cap on fees for removing liquidity.

The idea for a pilot was originally recommended by the SEC's equity market structure advisory committee in April 2016. The committee was disbanded in January.

The SEC did not set a date to begin the pilot program.

In comments submitted to the SEC in May, a group of 12 public pension funds led by the $342 billion California Public Employees' Retirement System, Sacramento, and the C$193.9 billion ($145.5 billion) Ontario Teachers' Pension Plan, Toronto, supported the pilot proposal.

In a letter to the agency, the pension funds said the rebates "have been generally criticized by a wide spectrum of asset managers, pension funds, endowments, members of Congress, academics and policymakers, including SEC economists, based on the potential conflict of interest it creates between brokers and their investor clients."

In a statement, the New York Stock Exchange said, “The SEC’s transaction fee pilot was hatched while the markets were still enjoying a multiyear run of low volatility. In this new period of spiking volatility, when trading volume predictably returns to the public exchanges, this is no time to embark on a risky experiment with our markets which imposes government-mandated price controls.”

Spokesmen for Cboe Global Markets and Nasdaq said the exchanges had no comment on the pilot’s approval.

Brad Katsuyama, co-founder and CEO of exchange operator IEX Group, said the pilot’s approval “is a monumental win for investors and other stakeholders who have pushed for a fairer and less conflicted market throughout the years. We applaud the SEC for taking this important step.”