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NYSE, Cboe, Nasdaq move to block SEC transaction fee pilot program

New York Stock Exchange and its affiliated exchanges asked a federal court on Thursday to stop the SEC's transaction fee pilot program.

Nasdaq and Cboe filed similar petitions Friday.

The Securities and Exchange Commission approved a transaction fee pilot program Dec. 19 to measure the effects of maker-taker rebates on equity trade execution.

The NYSE's petition for review to the U.S. Court of Appeals for the District of Columbia Circuit asked to have the pilot program ruled unlawful under both the Securities Exchange Act of 1934 and the Administrative Procedure Act, saying that it is "arbitrary and capricious," does not promote competition and exceeds the agency's authority. NYSE will also ask the SEC to stay the pilot, but if that does not happen, the group will sue for a stay, the lawsuit said.

"We are challenging the SEC's transaction fee pilot in the federal court to protect our publicly listed companies, investors and the free-market principles that are core to our values," NYSE spokeswoman Kristen Kaus said in an email. She added that the lawsuit was filed after efforts to reach a compromise with the SEC on an alternative approach failed.

A Cboe spokesperson said the decision was not taken lightly, but "the pilot is so intrusive, ill-conceived and likely to harm the equities markets, there was no choice." One Cboe criticism is that it selectively imposes price controls while ignoring off-exchange dark pools, which could disrupt trading "and will undoubtedly cost investors."

Nasdaq said in a statement that it believes the SEC's pilot "will harm capital formation, severely damage market participation with wider spreads, and increase the cost of capital for corporate issuers."

The pilot program is supported by members of the Council of Institutional Investors, which represents public pension funds, corporate pension funds, endowments and foundations with a collective $4 trillion in assets.

CII Executive Director Ken Bertsch said in an interview that the lawsuit was not a surprise. The exchanges "have a lot at stake here. The pilot is really important to see what's going on," Mr. Bertsch said. "Our members became convinced this is really needed. The SEC has really thought this through. They need this information, and we need this information."

The start date has not been set for the pilot, which will separate equities into one of three groups, including a control group maintaining the current cap-free trade regime. 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. National exchanges would have to publicly post their transaction fee and rebate data monthly.

Similar lawsuits from Nasdaq and Cboe Global Markets are expected, said Tyler Gellasch, executive director of Healthy Markets, an investor-oriented non-profit organization that advocated for the pilot. "Having lost its battle with the SEC, NYSE is now appealing to the courts of public opinion and the federal judiciary," Mr. Gellasch said, while acknowledging that the lawsuit could significantly delay implementation or even lead to a revised rule if challenges to the SEC's rule-making process succeed.

Still, Mr. Gellasch said, "Even if NYSE were to win the case, its business model is coming under pressure from every angle. That's not going to change."