By John McCrank
(Reuters) - The U.S. Securities and Exchange Commision (SEC) on Wednesday agreed to a long-awaited experiment to test the effects of lowering stock exchange fees following criticism the current pricing system ultimately hurts investors.
The pilot would force exchanges to lower the fees they charge for matching buy and sell orders and the size of rebates they pay market makers, allowing the SEC to analyze if the current system distorts traders' decisions about where to send orders.
Consumer advocates say the current pricing regime creates conflicts of interest by giving incentives for brokers to send their customers’ orders to the exchanges with the biggest rebates rather than to exchanges that would obtain the best result for the end clients.
Currently, the fees exchanges can charge for trades they execute are capped at 30 cents per 100 shares. Rebates, which not all exchanges pay, are generally in line with the fee cap.
The so-called access fee pilot, first proposed in July 2016 by a committee of market experts picked by the SEC, would require all exchanges to test capping fees lower than their current levels across different buckets of stocks, reducing the amount of funds available to pay rebates.
One bucket would offer no rebates at all.
On Wednesday, the Commission voted unanimously in favor of the proposal for the transaction fee pilot.
"The transaction-fee pilot should give the Commission significantly more robust data than we have now to assess how fees and rebates affect order routing, execution quality, and market depth," Commissioner Robert Jackson said in a statement.
The three main U.S. exchange operators had strongly opposed the plan, saying it would make stocks harder to trade. Those operators are the New York Stock Exchange, which is owned by Intercontinental Exchange, Cboe Global Markets Inc, which owns No. 2 U.S. stock exchange Bats, and Nasdaq Inc
The bourses collectively pay around $2.5 billion a year in rebates, which they have said compensate market makers for the risks of providing liquidity. Without that additional liquidity, investors, listed companies and exchanges would all suffer, they say.
The exchanges also said that without the ability to pay rebates, it would be harder for them to compete with private broker-run trading venues, known as dark pools, which have fewer regulatory burdens.
The full details of the SEC pilot proposal will be released at a later date and subject to industry feedback.