The New York Stock Exchange has come out swinging against a regulatory pilot program supported by influential pension fund managers and aimed at addressing a controversial practice.
Ontario Teachers’ Pension Plan, the California Public Employees’ Pension System and a group of pensions representing billions in assets came out last week in support of the Securities and Exchange Commission’s transaction fee pilot, which aims to end the payment of rebates to brokers with price caps and limits on payments to market-makers and brokers. Critics say the rebates create conflicts of interest, prompting brokers to execute orders at exchanges that pay the highest fees, rather than the venue that would be best for investors.
But the NYSE begs to differ, arguing in a 20-page letter sent to the SEC that the proposal to lower fees and limit rebates will cost investors at least $1 billion a year.
“The Proposal risks increasing costs to investors by both directing investors to less-regulated off-exchange venues and widening spreads across the market,” wrote the NYSE in its letter.
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The NYSE also states that issuers would be hurt by the proposal, making it more difficult to raise money from investors. “Issuers of securities that are subject to the Proposal’s price restrictions would face increased costs associated with raising capital due to wider spreads,” says the NYSE.
At the heart of the NYSE’s argument is its contention that the SEC is unfairly targeting national exchanges with restrictions. Other trading venues, such as alternative trading systems, won’t be subject to the limits. ITG, an alternative trading system, said in a statement that the NYSE’s analysis of costs to investors was flawed based on the experience in Canada. In 2015, exchange access fees were cut, but there was no “notable increase in spreads,” said ITG.
The NYSE’s criticism comes as big pensions — as well as asset managers such as Vanguard Group and BlackRock — are saying they support the proposal as a way to way level the playing field and end clear conflicts in trade execution.
“These pricing schemes as well as other fee incentives, have been generally criticized by a wide spectrum of asset managers, pension funds, endowments, members of Congress, academics and policy makers, including SEC economists, based on the potential conflict of interest it creates between brokers and their investor clients,” wrote Kevin Duggan, head of execution and Treasury in the capital markets group at Ontario Teachers, and Don Pontes, investment director of financial markets at CalPERS, last week.
