"We are heartened that the SEC is going to move forward with the pilot. Any opportunity to have a measured thoughtful approach on this makes sense," said Dennis Simmons, executive director of the Committee on Investment of Employee Benefit Assets in Washington, whose members are chief investment officers managing more than $2 trillion of retirement assets for Fortune 500 companies.
Even some of the most outspoken critics of exchange fee and rebate practices were pleasantly surprised by the SEC's detailed approach in the extensive staff guidance, officially called SRO Rule Filings Relating to Fees.
Now, exchanges will have to clearly describe proposed fees and prove that they are "reasonable, equitably allocated, not unfairly discriminatory and not an undue burden on competition," the SEC guidance said. Going forward, before an exchange can offer a discount to some brokers, it "must explain why that structure represents an equitable allocation of fees."
For investors grumbling that exchanges find new ways to deliver and charge for multiple services, the guidance now requires exchanges to explain how new products compare to similar ones already offered, and how they might impact different market participants.
"This SEC seems very focused on how fees and rebates impact both investors and the brokers who serve them," said Tyler Gellasch, executive director of Healthy Markets in Washington, an investor-focused non-profit organization whose members include several large public pension funds.
Joe Wald, CEO of agency broker Clearpool Group in New York, considers the guidance "the strongest signal yet that the commission is taking a proactive role in ensuring that markets are fair and that costs are allocated on a fair and equitable basis."
Mr. Wald added that he would not be surprised if exchanges take legal action to stop it.
The moves are also being welcomed by money managers. "We're pleased the SEC is taking this significant step to increase transparency around future market data fee increases, which will help ensure they are fair, reasonable, and in line with the letter and spirit of the law," said Jennifer Han, associate general counsel of the Managed Funds Association in Washington.
Nasdaq and Cboe Global Markets declined to comment on the guidance or the pre-pilot. NYSE said in a statement that it "provides tremendous value to investors, listed companies and our members. Every aspect of our operations, including fees, has been and continues to be reviewed by the SEC for consistency with the Exchange Act."
The biggest effect of the guidance is likely to play out when the exchanges seek to make changes in pricing or rebates. "We see it as likely that market participants will start aggressively objecting to future transaction fee changes that don't adequately address the higher standards related to reasonableness, discrimination and competition," CalPERS' Mr. Pontes said.
While it is less clear how the guidance will help investors challenge previous filings, such as pricing tiers, the potential is there.
"The SEC has historically avoided weighing in on pricing tiers, in part because they don't want to be fee setters. That seems to be changing," said Mr. Gellasch, who concedes that SEC staff now will have to reconcile thousands of unique, customized fees and rebates with the obligations of the underlying statute, the Securities and Exchange Act of 1934.
Investors and other market participants are also hopeful that other countries are watching, including in Canada, where a similar pilot study of trading fee rebates and their impact on execution quality and market routing behavior is being considered, along with temporary pricing restrictions on some trading fees.