10.19.2017
By Rob Daly

OPINION: Keep the Access Fee Pilot Simple

Despite the recent pleas from the CBOE, Intercontinental Exchange, and Nasdaq that an access fee pilot would harm the market and lead to “unintended cascading and irreversible effects,” the pilot is pretty much a done deal, according to the US Securities and Exchange Commission.

Although the SEC has not set a date for the pilot, the regulator plans to use its rulemaking power to implement such a pilot, said Commissioner Michael Piwowar during a conference hosted by Georgetown University’s McDonough School of Business earlier this month.

The one request that I would like to make to the SEC is that it does not try to slip in a second pilot into the access fee pilot like it injected a trade-at variable into the tick size pilot.

The pilot should never have had three test groups of stocks. The SEC should have stopped at testing two trading methodologies: one that quotes in a $0.05-increment and trade in $0.01-increments and another that quotes and trades in a $0.05-increment. Adding a third set that trades like the second set but with the trade-at proviso does not add much to the overall results.

According to a recent market-structure report, the author, Richard Johnson, vice president, market structure and technology at Greenwich Associates, the difference in performance between Group Two and Group Three is relatively negligible.

Of the 52 institutional respondents Greenwich polled for its study, 6% agreed that Group Two’s trading methodology improved liquidity while 42% disagreed and 52% were unsure. For Group Three, 4% of the respondents thought its methodology added liquidity while 44% disagreed and 52% were unsure.

If the SEC decided to implement its access fee pilot strictly based on the proposal made by its Equities Market Structure Advisory Committee in July 2016, it should not run into the same issues it did with the tick size pilot.

The authors of the recommendation suggest the pilot consist of four buckets, which would each would be comprised of 100 stocks with market capitalizations more than $3 billion, which prevents any overlaps with stocks in the tick-size pilot. Besides the control bucket, the other three would have access fee caps of $0.002, $0.001, and $0.0002 respectively.

Members of ESMAC explicitly stated that they were against adding a trade-at component to the pilot in their recommendation. The authors noted that since part of the pilot’s purpose is to generate data to determine if a trade-at rule is needed, including it in the pilot would skew the results.

The SEC should keep the pilot as simple as possible and not try to kill two birds with one stone.

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