By Rob Daly

Access-Fee Pilot: Fewer Fees, More Fragmentation?

The access-fee pilot proposed by the U.S. Securities and Exchange Commission may increase fragmentation in the equity markets as Cboe Global Markets considers launching two additional order books to offset the pilot’s fee caps and prohibitions.

Chris Concannon,
Cboe Global Markets

“We have six exchanges, but we use four for equities and four for options,” said Chris Concannon, president and COO of Cboe, during the National Security Traders Association’s 2018 Market Structure Symposium in Chicago. “I promised the industry previously that we would not light up those books, but with the access-fee pilot, that is off the table.”

However, SEC officials seem more intent than ever that the pilot will move forward.

“While there might not be consensus on some element of a pilot, it is one of the few areas where there is significant consensus around market participants that something needs to be done,” said Brett Redfearn, director of the Division of Markets and Trading at the SEC, during the symposium.

The SEC’s now-defunct Equities Market Structure Advisory Committee recommended most of the pilot’s design, but it was the SEC that inserted a no-transaction-fee test bucket into the proposed pilot.

“Given the comments we were given in connection with the EMSAC recommendation and all of the related issues at stake, I believe we would be missing a very important opportunity to fully evaluate exchange pricing models without proposing this feature within the scope of the pilot,” said Redfearn.

The SEC expects to use the data from the pilot to help it understand how rebates and rebates at various levels affect order routing, liquidity provisioning, order-book depth, and the size of the spread across various segments of securities.

Redfearn would like to see how low or no rebates would affect whether institutional traders would be more or less likely to obtain queue priority and capture the quoted spread as often as they do now.

“Would there be more or fewer retail limit orders displayed on exchange and what would the net effect be on market quality,” he asked.

Potential outcomes of the pilot may be a single access-fee cap or a tiered access-fee cap structure based on stocks’ liquidity characteristics, according to Redfearn.

“This scenario also would require a hard look at the appropriate role of regulation in transaction-fee pricing,” he said. “In contrast, the test bucket without exchange rebates we would like to understand better whether competitive market forces could successfully cap access fees without a government imposed cap.”

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