It’s been a few months now since the SEC Market Structure Proposal comment letter period officially closed but that hasn’t stopped the major exchanges from trying to convince the SEC not to go forward on certain parts of the proposal. For example, Nasdaq has met with the SEC at least three times since the comment period ended and has also just file another comment letter trying to convince the SEC not to lower the access fee cap. 

We were disappointed with the disrespectful tone of Nasdaq’s letter particularly towards the SEC and fellow commenters. Nasdaq begins their comment letter by saying that the SEC and certain commenters, who have called for a reduction in access fees, are “mistaken and misguided”. They specifically cite five commenters (footnote #3) in this “misguided and mistaken” group: Themis Trading, Better Markets, BlackRock, Vanguard and the Council of Institutional Investors. We’re proud that Nasdaq included us in this group of commenters who all truly represent the public and long-term investors.

The Nasdaq letter reads as if a market maker was the ghost writer and they just slapped Nasdaq’s letterhead at the top of the page.  Considering that Nasdaq and the other major exchanges have continually bent over backwards to please their largest revenue clients, this tone shouldn’t really surprise us. The Nasdaq letter relies on the same old arguments and fear tactics about spreads and liquidity and really doesn’t bring anything new to the table. 

Here are a few things that Nasdaq cites in their letter to support their argument that access fees shouldn’t be reduced:

Inflation – this is probably the most laughable part of the letter. Nasdaq claims, “When accounting for inflation, the real cost of the access fee cap has not remained constant. Instead, the cost of access fees has actually fallen since 2005 by one-third.” Sorry, but the cost of equity trading and inflation have nothing to do with each other. When was the last time a broker called you and said they needed to raise their commission rates because the the price of eggs was up?

Fragmentation – Nasdaq, the owner of three stock exchanges, claims that fragmentation of liquidity has increased costs. They claim “market makers already are receiving lower rebates to offset costs that are rising – costs wrought by the fragmentation of liquidity across a proliferating number of venues”. Maybe Nasdaq should close two of their sub-1% market share exchanges (BX and PSX) to help with this fragmentation problem?

Spreads and Liquidity – Nasdaq likes to use the widening spread and shrinking liquidity threat to support their case to offer high rebates. They threaten that “tight spreads are evidence that access fees and rebates are effective, not evidence that they are excessive or unnecessary…rebates are powerful bulwark that keep liquidity from pouring out into the darkness.” This is a strange argument since almost half of all US equity volume is traded off-exchange. Maybe the reason institutional investors shun placing displayed orders on the major exchanges is because they know that information on their orders will be leaked through the order-by-order information proprietary data feeds that the major exchanges sell?

We can go on picking apart the Nasdaq letter but we think you get the picture. Nasdaq’s largest clients enjoy receiving large rebates every month and they want that to continue. If access fees are reduced, rebates will also be reduced and Nasdaq’s largest clients might start looking for ways to recover those lost funds. Maybe they will request that Nasdaq lower the cost of their proprietary data feeds? Maybe they will request lower colocation fees? Either way, lower access fees are a threat to the major stock exchange revenue model which now centers on data-related services.  

While Nasdaq may threaten to sue the SEC and claim the SEC used “superficial logic of its fee cap proposal and the absence of evidence underlying it”, we think their latest letter shows they know they are losing the access fee battle.