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Curatia Analysis for Wed, Jun 19

The Voices Duking It Out Over the Transaction Fee Pilot

As is typical with controversial SEC initiatives, the Transaction Fee Pilot saga has unfolded with all the celerity of a medieval siege. With newsworthy developments few and far between, the antagonists have had wide windows in which to craft and deploy coordinated messaging.

That messaging has revealed for-profit exchanges probing the boundaries of their autonomy, the buy side’s growing voice in industry affairs, and a danger of increasing polarization.

Taking Stock (So To Speak)

Following the SEC’s December approval of the Transaction Fee Pilot, the three largest US stock exchanges filed suit separately in a federal appeals court within a two-day span in mid-February to stop the pilot.

In carefully worded statements, the exchanges voiced ambivalence over the unprecedented move. “‘It’s a very difficult decision to decide to take your primary regulator to court,” NYSE head of transactions Michael Blaugrund told reporters then. “‘It’s a very serious decision to cross the Rubicon.’”

“‘This action was not taken lightly,’” Cboe said in announcing its legal challenge.

“‘It’s never a decision that’s taken lightly,’” NYSE president Stacey Cunningham said in an interview echoing Cboe’s sentiments two weeks later. The parallel comments imply a high degree of coordination in both the words and actions of established exchanges.

They also signal for-profit exchanges’ awareness that they’re probing the boundaries of their regulatory autonomy — a notion further evidenced by mounting SEC scrutiny of market data fees and, in March, the launch of an investigation into exchanges’ multi-tiered pricing scheme.

The SEC effectively paused the Transaction Fee Pilot in March pending the outcome of the exchange appeals. In May, though, it opted to move ahead with mandating the exchanges collect six months’ worth of pre-pilot transactional data beginning July 1 — a sign it expects the initiative to move forward and hopes courts will move quickly to resolve the current impasse.

Taking Sides

With the pilot largely reduced to a waiting game, advocates and opponents alike have busied themselves writing comment letters and blog posts staking out their positions.

In April, Nasdaq chief economist and apple inventor Phil Mackintosh used tick-pilot data to argue the Transaction Fee Pilot could reduce quote depth and “may even increase the cost of liquidity for larger traders.”

Upstart exchange IEX launched its own salvo from the other side of the proverbial moat in April, pointedly calling the incumbent exchanges’ legal challenge “baseless.” In May, commentary by Themis Trading rebuked the exchanges in an opinion piece titled “Don’t Sue Your Regulator.”

The drip-feed drama has also allotted both sides ample time to organize industry coalitions and coordinate messaging. Last week, HFT firms and rebate recipients Citadel Securities, GTS Securities, and the US arm of IMC voiced their opposition to the pilot in a joint court filing.

The filing called the pilot “ill-conceived” — the same descriptor a Cboe spokesman was quoted using in a March Pensions & Investments story detailing the face-off over the pilot.

Buy-Side Cohesion

Pilot proponents have likewise organized. Last year’s pilot comment period elicited a joint response from pension funds including CalPERS with a combined $1.4T in assets citing their “deep interest in market structure reform.”

For asset managers and owners, the Transaction Fee Pilot and exchange market structure reform more generally aren’t merely about cutting costs amid downward pressures on their own fees (although they certainly are about that). The standoff is equally about building buy-side cohesion in order to wield industry influence.

That influence has waxed organically in recent years with the rise of passive investing. It has also been a consequence of an increasingly top-heavy industry in which the major players have greater visibility than a wealth of smaller players in a more fragmented space once did.

Now the buy side is angling to organize around industry issues with the same energy and efficiency as their sell-side counterparts. “‘The reality is that exchanges and big banks have been very vocal for quite some time. I am really encouraged that the pension community is getting a voice,’” CalPERS investment director for financial markets Don Pontes said.


The complex dynamics of multiple and overlapping business interests among partners and competitors in finance has long staved off the sort of tribalism that’s increasingly defined politics and media in the internet age.

But the drawing of starker battle lines around exchange market structure reform arguably threatens to replace pragmatism with polarization of a more ideological nature. For both employees and employers, downward fee pressures in an industry reorganizing itself around technological efficiencies have lent the debate an air of existential crisis.

Moreover, the slow-developing nature of the debate leaves time for alliances and enmities to cement themselves, increasing the odds they’ll endure even after the issues are resolved.

Those are the broader stakes underlying the tense back-and-forth of the Transaction Fee Pilot — concerns as important for all sides to remember as they are unpleasant to ponder.