A potential access-fee pilot for the U.S. cash equities markets took a step closer to reality as the Regulation NMS sub-committee of the SEC’s Equities Market Structure Advisory Committee presented its initial pilot proposal to the full committee.
The sub-committee proposed a pilot framework that would only affect stocks that have market capitalizations more than $3 billion, which would prevent overlap with the market’s tick-size pilot that is slated to start in October, according to members of the sub-committee.
The pilot would consist of four separate ‘buckets’ of stocks. The first would be a control sample with the current $0.30 access-fee cap per 100 shares traded as mandated by Regulation NMS. The remaining three buckets would have caps of $0.20, $0.10, and $0.02.
Joseph Mecane, Barclays
“The two-cent bucket was a little bit of a compromise,” said sub-committee member Joe Mecane, managing director in the electronic equities and credit products business at Barclays. “We picked it in a n effort to have something at the very low end of the access-fee level. It reasonably limits rebates, but is sensitive to the fact that the average exchange capture rate is three to four cents per 100 shared traded. A two-cent per side fee would keep the net economic impact on the exchanges largely to what they are today.”
However, the proposed pilot will not effect alternative trading systems and exchanges with inverted taker-maker pricing, noted the proposal’s critics.
Mecane explained their conspicuous absence due to how the SEC wrote Regulation NMS, “The fee cap does not apply to them.”
Representatives from Nasdaq and NYSE see the current proposal as extremely skewed to the interests of non-SROs and institutional investors that the three organizations wrote a letter to SEC Chair Mary Jo White raising their concerns prior the day’s meeting.
The subcommittee consists of representatives of AARP, Barclays, Bats Global Markets, Bloomberg Tradebook, Carnegie Mellon University, ConvergEx, Invesco and T. Rowe Price.
“It lacks representation of retail investors,” said Jeffrey Davis, vice president and general counsel at Nasdaq. “It lacks a representative of a non-financial publicly traded company as well as two of the largest markets that list those companies.”
The proposal does not seem to aim at improving the market structure for issuers or holders of less-liquid securities and improving how those stocks are traded, he noted.
“I did invite our friends at Nasdaq and NYSE to participate, but unfortunately they decided not to do that,” said Kevin Cronin, global head of trading at Invesco and Regulation NMS sub-committee chairman. “But we tried to be as inclusive as possible.”
Other sub-committee members also took the chance to voiced their concerns over unintended consequences if the pilot moves ahead in its current state.
With the pilot’s $3-billion market-capitalization limit, “you will not know the impact it will have on less liquid stocks,” said Jamil Nazarali, senior managing director and head of execution services at Citadel Securities.
Only a small portion of the exchange-traded fund market would be affected by the pilot, according to Reginald Browne, senior managing director and global co-head of the ETF group at Cantor Fitzgerald.
“About only 10% of ETFs have a market capitalization over $ 3 billion and only another 15% of ETFs have a capitalization over $1 billion,” he said. “When we talk equity market structure, you have to think about the ETF market’s micro-structure and the changes that would take place. This would reduce the incentive to provide liquidity and we will see wider spreads and less innovation.”