Investors' hopes for major reform of exchange practices and fees are dimming considerably, following two recent legal setbacks for the Securities and Exchange Commission.
On June 16, a much-anticipated transaction fee pilot program designed to examine the "maker-taker" system, where some brokers are charged fees and others are offered rebates, came to an abrupt halt. In a challenge brought by the exchanges, the U.S. Court of Appeals for the District of Columbia said the SEC "clearly exceeded" its authority to launch the program, which had been widely supported by market watchdogs and investor groups, including scores of U.S. and Canadian pension funds. The court agreed with the exchanges that more than just a "benign quest for data," the pilot could have hurt liquidity and widened stock price spreads.
The decision was "disappointing … and frustrating," said Mehmet Kinak, Baltimore-based vice president and global head of systematic trading and market structure at T. Rowe Price Group. Mr. Kinak spent eight years advocating for the pilot, including three years on the SEC's equity market structure advisory committee. "Every time we had a discussion around market conflicts and market complexity, it kept coming back to fees and rebates. We said, instead of treating the symptoms, let's treat the actual illness," he said. The decision "basically dismisses everything we've been advocating for eight years to show the root cause," Mr. Kinak said.
Less than a week before the pilot ruling, the same federal court overturned an SEC challenge to some of the exchanges' fee increases for access to "depth-of-book" market data, ruling that the agency ran afoul of administrative procedures by rejecting fees already in effect. The order threw cold water on investor optimism that had been sparked in 2018 when the SEC rejected increases by Nasdaq and NYSE Arca and remanded more than 400 fee filings for further justification after a challenge from the Securities Industry and Financial Markets Association.
The legal setbacks were particularly discouraging to investor groups because other potential reforms, including rules designed to let institutional investors see how brokers prioritize orders, were put on hold in favor of the fee pilot.