Proposed Rule to Conduct a Transaction Fee Pilot in NMS Stocks
Chairman Jay Clayton
March 14, 2018
Good Morning. This is an open meeting of the U.S. Securities and Exchange Commission on March 14, 2018, under the Government in the Sunshine Act. The Commission today will consider two staff recommendations:
- first, whether to propose a rule to conduct a transaction fee pilot in NMS stocks, and
- second, whether to propose amendments to Form N-PORT and Form N-1A related to disclosures of liquidity risk management for open end management investment companies.
Before going any further, I would like to pause to mention that this is the first open meeting with our current Commission. To my fellow Commissioners—Kara, Mike, Rob, and Hester: Thank you for your collaborative and collegial approach to today's rulemakings, and your dedication to the Commission's vital mission. The thoughtful comments from you and your counsels have contributed greatly to these proposals.
The first of the two staff recommendations that we will consider today is to propose Rule 610T under Regulation NMS to conduct a transaction fee pilot in NMS stocks. As I noted, we will then consider the proposal regarding open-end fund liquidity risk management. We may take a short recess between the two. A theme that I have mentioned before, but bears repeating in respect of both of these two proposals is our obligation to continually assess and reassess our approach to market regulation to reflect, among other things, regular changes to our markets.
Now, to the pilot proposal.
The predominant fee model used by many equities exchanges today is the "maker-taker" fee model, in which, on the one hand, an exchange pays its members a rebate to provide (or "make") liquidity, and on the other hand, charges a fee to those that remove (or "take") liquidity. Maker-taker fee models, as well as the inverse "taker-maker" fee models adopted by some exchanges, have attracted considerable attention over the years from market participants, policy makers, and scholars.
- For example, some have questioned whether these fee structures create a conflict of interest for broker-dealers, who must pursue the best execution of their customers' orders while facing potentially conflicting economic incentives to avoid fees or earn rebates from the trading centers to which they direct those orders for execution.
- Others have posited that maker-taker fee models have positive effects on our markets – for instance, potentially enabling exchanges to compete with non-exchange trading centers and narrowing quoted spreads by subsidizing posted prices.
The many questions and debates around these issues are extremely complex and multi-faceted. They are also significant to a question that I am asking myself on a daily basis: Whether our markets are structured to meet the needs of and benefit our long-term retail investors.
However, we do not currently have data to help us meaningfully analyze the effects of exchange fees and rebates on order routing behavior, execution quality, and our market structure generally. I believe that the pilot proposal that the staff is presenting today would help us address this data gap. In my view, the proposed pilot, if adopted, would lead to a more thorough understanding of these issues, which would help the Commission make more informed and effective policy decisions in the future, all to the benefit of retail investors. I note also that experts from a range of viewpoints—including the Equity Market Structure Advisory Committee—have urged the Commission to conduct a pilot to gather market-wide data to help answer many of these questions.
Before turning the meeting over to the staff, I would like to thank our Division of Trading and Markets for their work on this proposal – particularly Director Brett Redfearn, as well as Gary Goldsholle, David Shillman, Richard Holley, Johnna Dumler, Erika Berg, Benjamin Bernstein, Devin Ryan, Moshe Rothman, and Andrea Orr.
I would also like to thank our Division of Economic and Risk Analysis for their vital contributions, particularly Chief Economist Jeffrey Harris, as well as Hari Phatak, Amy Edwards, Jennifer Juergens, Lauren Moore, Mike Willis, Hermine Wong, and Walter Hamscher.
My thanks as well to staff in our Office of General Counsel for their excellent work on this proposal, particularly Meridith Mitchell, Lori Price, Robert Teply, and Cynthia Ginsberg.
Now, I will turn the meeting over to Brett to present the staff's recommendation.