May 30, 2017 / 3:00 PM / 2 years ago

Exchange operator Bats shifts to flat fee model for EDGA market

NEW YORK (Reuters) - Exchange operator Bats said on Tuesday it will stop paying rebates on one of its U.S. exchanges, shifting to a low-cost, flat-fee model ahead of an expected industry pilot program that will test whether rebates lead to conflicts of interest among brokers.

Bats, owned by CBOE Holdings CBOE.O, said as of June 1, its EDGA stock exchange, the smallest of the four it runs in the United States, will charge buyers and sellers of stocks 3 cents per 100 orders executed. Buy and sell orders that are not displayed to the public will be matched for free.

Most U.S. exchanges charge a fee for buy and sell orders that are immediately executed, and pay a rebate for orders that remain on the exchange for others to trade against. EDGA uses a version of this model that pays rebates for immediately executed orders.

The U.S. Securities and Exchange Commission is working on a pilot program that will test the effects on the industry of lower exchange fees and rebates.

Exchange rebates create potential conflicts of interest because they give brokers an incentive to send their customers’ orders to the exchanges with the highest rebates, even if another exchange might give them better execution results.

The pilot program will provide the SEC with data on how brokers’ order routing practices are affected by exchange pricing, along with other metrics that will help inform the regulator on whether the fee and rebate model, known as “maker taker,” needs to be changed or eliminated.

The fee overhaul could also present a challenge to IEX Group, which was featured in Michael Lewis’ book, “Flash Boys: A Wall Street Revolt,” and has operated the Investors Exchange using a flat fee model since it launched last August. IEX charges 9 cents per side for orders that are hidden from public view and executes visible, or “lit” orders, for free.

The operator of the New York Stock Exchange, which is owned by Intercontinental Exchange Inc (ICE.N), has said it also will shift one of its exchanges to charge a "competitive flat fee" and will also copy other aspects of IEX's exchange model. (

EDGA a has a market share of 1.9 percent month-to-date, according to Bats data. Collectively, Bats’ exchanges have a 19.2 percent market share. That compares with 22.5 percent for NYSE, 18.1 percent for Nasdaq Inc (NDAQ.O), and 2.2 percent for IEX.

Reporting by John McCrank; Editing by Dan Grebler

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