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SEC puts transaction fee pilot on hold during court challenges

An upcoming transaction fee pilot program at the Securities and Exchange Commission was put largely on hold late Thursday while legal challenges raised by the exchanges are addressed.

In an order posted on the SEC website, the agency said the stay "appropriately balances the commission's statutory duty to ensure the economically efficient execution of securities transactions, the public interest and the harms petitioners assert they would suffer should the pilot proceed during the pendency of litigation."

The SEC approved the transaction fee pilot program Dec. 19 to measure the effects of maker-taker rebates on equity trade execution but had yet to announce the start date. Maker-taker rebates refer to the practice of exchanges paying rebates to some broker members for order flow. The pilot would separate equities into one of three groups — a control group with current practices, another group that would bar exchanges from offering rebates and linked pricing and a third group would test a fee cap of 10 cents per 100 shares traded.

On Feb. 15, the New York Stock Exchange, Cboe and Nasdaq asked the U.S. Court of Appeals for the District of Columbia Circuit to have the pilot program ruled unlawful. The exchanges also asked the SEC to stay the pilot.

The stay could be a short-term setback for investors but also push the SEC to more directly address potential conflicts of interest over transaction fees and rebates, said Tyler Gellasch, executive director of watchdog group Healthy Markets Association. "The SEC and investors have already spoken: the status quo is no longer acceptable, so stopping this study seems more likely to lead to more dramatic action to reform the current trading model, not inaction."

The stay order does not address the merits of the legal challenges and leaves in place a requirement that the exchanges continue to collect, but not transmit, "pre-pilot" data to be used for a baseline if the pilot program resumes. Since the partial stay puts on hold a requirement that the exchanges alter their fee and rebate structures, report pre-pilot data, or publicly disclose it, that "avoids the majority of the potential harms petitioners allege," the order said.

A statement from Nasdaq called the stay "a positive development for publicly traded companies and Main Street investors as it recognizes arbitrary nature of the program and the complexity of its implementation."

A Cboe spokeswoman said that the stay "is in the public interest and prevents the unnecessary disruption to the U.S. equities markets we expect, should the pilot move forward."

NYSE declined to comment.

The pilot program is supported by the Council of Institutional Investors, which represents pension funds, endowments and foundations with $4 trillion in assets. During a 2018 public comment period, several public pension funds voiced strong support for the pilot, spearheaded by the $358.4 billion California Public Employees' Retirement System and the C$193.9 billion ($145.2 billion) Ontario Teachers' Pension Plan.