Missing: The Access Fee Pilot Proposal


Back in July of 2016, almost a year and a half ago, the SEC’s Equity Market Structure Advisory Committee (EMSAC) recommended that the SEC propose an access fee pilot program.  Their recommendation was structured similar to the Tick Size Pilot with multiple access fee buckets that would be capped at different rates.  Their proposal, however, did not address banning rebates altogether.

Since the EMSAC recommended the access fee proposal, a lot has changed at the SEC.  A new Chairman has been selected and two new Commissioners are pending final Senate approval. The SEC also came under fire from Congress recently for a cybersecurity breach that affected its EDGAR filing system.  While these are certainly big issues, we believe that they are no excuse for the SEC dragging their feet on an access fee pilot proposal.

There have been a few comment letters written about the EMSAC’s proposal and today we wanted to highlight the IEX comment letter which was filed on November 15, 2017.

The IEX letter directly responds to an earlier letter which was co-written by the three major exchanges (NYSE, Nasdaq, BATS).  IEX points out that the major exchanges are lobbying against an access fee pilot proposal because “they have no interest in seeking alternatives to the current structure given how their business model has become completely reliant on the payment of rebates.” IEX notes that the exchanges have undertaken a three pronged attack against the access fee pilot proposal: deny (“what’s the problem”), deflect (“let’s do a holistic review”) and delay (“the SEC has better things to do first”) campaign.

IEX has two recommendations that the original EMSAC proposal did not include:

1) Ban rebates for a defined set of securities.  Included in this ban should be a sample of high-liquidity stocks

2) Include “inverted” exchanges in the pilot. IEX notes these venues are nearly 10% of total market volume and pose their own set of issues that need to be examined in a pilot.

We agree with both of these recommendations and believe they are necessary for an effective pilot to be built. We’re also confident that the SEC’s new head of the Division of Trading and Markets understands this and will consider these recommendations.

IEX also stated that it was their “understanding that the Commission is considering proposing such a pilot through SEC rule making.”  They noted this is a good thing since the alternative would have been designing a pilot through a NMS plan where the exchanges would have crafted the proposal.  We agree with IEX and commented to the House Financial Services Committee this summer that if exchanges were allowed to design an access fee proposal it would be equivalent to “allowing the fox in the henhouse”.

IEX has once again proven that they are not afraid to take on the establishment.  Maybe this is one of the reasons why we like them so much.  Time and time again, whether it’s designing an institutional friendly order type or writing a comment letter calling out the conflicted, status-quo exchanges, IEX is a voice of reason.  We realize that there are some folks in the industry that see IEX differently than we do and that is not a bad thing especially when debating such an important issue as equity market structure.  There are two sides (or more) to every argument and we’re proud to say that we keep finding ourselves on the same side as IEX.