Stock exchanges will have to provide more details before being allowed to raise fees or offer discounts to some traders, the Securities and Exchange Commission said in new guidelines issued Tuesday.
In addition to clearly describing proposed fee increases for market data or connectivity, exchanges will have to prove that the fees are "reasonable, equitably allocated, not unfairly discriminatory and not an undue burden on competition," the staff guidance said. Before an exchange can offer a discount, it "must explain why that structure represents an equitable allocation of fees," the SEC said.
The guidance "marks a major milestone in bringing more transparency in service of investors and their agents," said John Ramsay, chief policy officer for an exchange competitor IEX Group, in an emailed statement. "We applaud the commission's efforts to hold exchanges accountable for justifying the fees they charge for market data and connectivity — services where exchanges have rightly been criticized for exerting monopoly pricing power."
The SEC also moved late Tuesday to restart a transaction fee pilot program designed to provide a wholesale review of how exchanges charge customers. The two-year pilot program was approved by the SEC in December but slowed by a court challenge from New York Stock Exchange, Nasdaq and Cboe Global Markets Inc.
A notice announcing a six-month "pre-pilot" period for the Transaction Fee Pilot for National Market System said that beginning July 1, exchanges will have to compile data on fee and rebate practices, but will not have to send it to the SEC or publicly post it until the exchanges' legal challenge is addressed by the court. "Following a decision by the Court of Appeals regarding the petitions for review, the commission may issue further notices," the SEC said Tuesday in the pre-pilot program announcement.
The transaction fee pilot program is aimed at measuring the effects of maker-taker rebates on equity trade execution by studying routing behavior, execution quality and market quality. Maker-taker rebates refer to the practice of exchanges paying rebates to some broker members for order flow.
If the full pilot program is cleared by the court, it would separate equities into one of three groups. One will be a control group of the current cap-free trade regimen. Another group will bar exchanges from offering rebates and linked pricing; the third group will test a fee cap of 10 cents per 100 shares traded. National exchanges would have to publicly post transaction fee and rebate data monthly.
