Contentious U.S. stock exchange pricing on regulatory agenda: SEC

Traders work on the floor of the New York Stock Exchange (NYSE) February 29, 2016. REUTERS/Brendan McDermid

NEW YORK (Reuters) - A U.S. Securities and Exchange Commission sub-committee will advise the regulator next month on whether to test limiting a controversial pricing model used by most stock exchanges, a top SEC official said on Thursday.

The dominant pricing system on exchanges, known as the “maker-taker” model, pays brokers to send bids and offers not intended for immediate execution to the exchange. This provides liquidity for other brokers to trade against. A broker pays a fee for orders that can be immediately executed.

Critics say the model creates conflicts of interest because brokers have incentives to send customers’ orders to exchanges that pay the biggest rebates, not necessarily those with the best price or execution. Brokers say the rebates offset high exchange fees.

A subcommittee of the SEC’s Equity Market Structure Advisory Committee will make a recommendation at its next meeting in late April on whether the regulator should test eliminating the model for some stocks, Stephen Luparello, director of the SEC’s Division of Trading and Markets told a U.S. Senate committee.

“I think there will be broad-based support,” he said.

Eliminating the pricing structure on all 12 U.S. exchanges for some stocks while allowing it to be used for others would allow the SEC to study the effects on brokers’ order routing practices and evaluate whether further action should be taken.

Nasdaq Inc ran a four-month-long experiment last year on its exchange in which it lowered fees and rebates for a group of stocks. It found that it lost market share in those stocks as many electronic market making firms sought higher rebates on other exchanges.

Rival exchange operator BATS Global Markets has recommended lowering fees for the most active 200 stocks, but increasing them for less active ones. The size of rebates would move in tandem, giving greater incentives for brokers to create two-sided markets in thinly traded stocks.

Reporting by John McCrank; Editing by Richard Chang