10.30.2017
By Rob Daly

OPINION: Keep the Access Fee Pilot on the Shelf

If this were a perfect world, the access fee pilot would never see the light of day.

It is not an argument in favor of conflicts of interest or inferior executions, but for the efficient use of time and resources to produce insightful data.

The access fee pilot recommended by the Securities and Exchange Commission’s (SEC) Equities Market Structure Advisory Committee in July is a half measure.

As proposed, the access fee pilot would change the access fee cap on three buckets of stocks to $0.02, $0.01, and $0.002 to see what effect the caps will have on each bucket’s liquidity.

If the SEC launches access fee pilot in mid-2018, which is the timeframe that many expect, it will finish in mid-2020.

I feel pretty safe saying that the $0.02 bucket likely will see the most liquidity while the $0.002 bucket will experience the least.

The SEC will use the pilot’s results to start discussing eliminating the maker-taker model. Repealing it would take another year or two as the sell-side and exchange operators fight tooth and nail to prevent it from happening.

Now it is mid-2020 and close to the end of Chairman Jay Clayton’s term as chairman. Would Clayton want to make such a significant market structure change as he has one foot out the door? And would the incoming chairman wish to roll it out so early in his tenure?

Say that the regulator decides to eliminate the maker-taker model. After four to five years of hard work by the industry, there is no more conflict of interest over order routing anymore, right?

Well, what about the tiered pricing models that the exchanges use?

If broker-dealers are not earning rebates, it makes sense that they would route orders to where they are charged the lease to their execute trades, and the entire conflict of interest conversation goes back to square one.

And after regulators address tiered pricing, they can investigate the impact of exchange ownership on order routing behavior as well.

Instead of handling this conflict of interest issue in a piecemeal fashion, let it be part of a thorough review of Regulation NMS.

For the past nine years, the SEC has had its hands full with implementing its portion of the Dodd-Frank Act and has had little bandwidth for market structure reform, except for establishing the market-wide circuit breakers.

Would it be so bad if the SEC and the industry waited for Columbia Law School to publish its New Special Study of the securities markets?

The New Special Study’s breadth and scope are expected to be on par with the original study that the SEC commissioned in 1961.

It just makes far more sense to discuss market structure changes in context rather than pulling on a single thread to see what happens over and over again.

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