With less than a week before the comment period closes for the US Securities and Exchange Commission's proposed access-fee pilot, the buy side has had the loudest voice among submitted comments and meetings with the SEC.
A few broker-dealers, academics, and a vendor have chimed in, but written or in-person comments from exchange operators remain conspicuously absent.
Of the nine published comment letters, three came from asset managers; two came from broker-dealers; two from universities, and one from the vendor community.
Morgan Stanley, RBC Capital Markets, and TD Ameritrade, each have met with the SEC's Division of Trading and Markets in the past few months while regulator met once with Vanguard and twice with State Street Global Advisors over the same period.
Although nine comment letters may appear to be a small chorus of industry voices, 21 asset management firms formally endorsed the comments made by Southeastern Asset Management in its filing.
All but one of the submissions support the Commission’s proposal, while documentation submitted by Morgan Stanley's Institutional Equity Division recommended that the access-fee pilot be a part of a holistic review of Regulation NMS.
“This is the standard argument that the industry has been using to slow down market structure reform for the past decade,” wrote Sal Arnuk and Joe Saluzzi, co-founders and co-heads of equity trading at Themis Trading, in their comment letter. “They do not want any change to the very profitable model that they have built since Reg NMS took effect in 2007. The entire industry sees through this argument; hopefully, the Commission does as well.”
Asset managers and academics suggested to the Commission that it should start the access-fee pilot before concluding other regulatory initiatives, such as further guidance on order-handling disclosures and regulations regarding alternative trading systems.
“We believe the subject of the pilot is of great importance and therefore urge the Commission to not delay the pilot by waiting for completion of other initiatives,” noted Brent Woods and Joseph Scafidi, the CEO and director of trading at Brandes Investment Partners respectively. “While many participants advocate a holistic reform, it remains an elusive goal seemingly more and more unreachable given the various market participants' competing interests.”
To Tweak or Not to Tweak
In regards to the pilot' design, the buy-side representatives agreed that the pilot should cover all exchanges no matter which rebate model an exchange uses or if it charges a flat fee.
"Excluding inverted exchanges or not including all exchanges would distort routing incentives and skew the data outputs from the pilot," wrote Woods and Scafidi. "We understand the challenges with broadening the scope of the pilot beyond the parameters of Rule 610 and therefore accept the exclusion of ATSes."
Including ATS operators within the pilot would require the inclusion of every market participant's negotiated fee schedule, according to Sean Paylor, a trader at investment adviser AJO.
“Including off-exchange data in the study would be invaluable if there were a viable way to do it," he added. "However, as previously stated, we believe the inclusion of ATSs and other off-exchange venues in the Pilot is unrealistic.”
The asset managers also desired the pilot to include tickers with all sizes of market capitalization, not just those with a market cap more than $3 billion.
Omitting specific market-cap sizes would provide an incomplete view of the market and bias the study, wrote Paylor, who also recommended that issuers should not have an opportunity to opt-out of the pilot.
Tim Quast, president at ModernNetworks IR, took the opposite view in his filing and recommended that the SEC form an Issuer Advisory Committee that could weigh data and let companies opt into or out of a test.
"Realize that success measures for issuers differ from those for intermediaries," he wrote. "For issuers, what matters is a vibrant secondary market where there is an attractive opportunity for writing research and supporting it, and where prices can be set by investors instead of speculators.”
The majority of commentators also found the SEC's proposed two-year pilot with an option to end it after a year reasonable and practical.
“The desire to ‘wait out’ the Pilot by standing still and the incentive to alter behavior to distort the Pilot’s results will be reduced,” wrote Mason Hawkins, chairman and CEO of Southeastern Asset Management, as well as other executives from the firm.
