How Should Stock Exchanges Make Money? The NYSE Has Some Ideas

(Bloomberg) -- The New York Stock Exchange proposed that U.S. regulators revise their test of how equity exchanges get paid and suggested freezing the rates that exchanges charge for market data, which are viewed by many investors and traders as already too high.

The Securities & Exchange Commission wants to test the incentive system that powers much of U.S. stock trading, whereby exchanges charge some traders while paying rebates to others. Critics say that system prompts traders to route orders to exchanges that pay the most, not necessarily the ones that would treat the customers’ trades the best.

As the pilot program is currently designed, some stocks would see lower trading fees while others wouldn’t be eligible for rebate payments. NYSE President Stacey Cunningham said in a letter to the SEC released Wednesday that many think the proposal is too complicated.

The alternative pilot offered by NYSE, whose parent is Intercontinental Exchange Inc., has two prongs. First, it would reduce the maximum amount exchanges can charge for trades to 10 cents per 100 shares, from 30 cents. If regulators agree, “the scale of exchange fees and rebates would be reduced materially, allowing the industry and SEC to study a number of interesting policy questions, including how a lower fee cap impacts the quality of displayed quotes and whether the lower cap results in better quality fills on exchange,” according to Cunningham’s letter.

In the second prong, exchanges would agree not to raise fees for “existing market data products, connectivity services and co-location.” In doing that, NYSE is stepping into a major industry controversy over the amount of leeway exchanges have over how much they charge for market data and for hooking up trading systems to their computers. Many traders and investors argue that exchanges are asking them to pay too much, and demanding that regulators take a look.

“We recognize that a large part of the industry’s support for the Transaction Fee Pilot is driven by a desire to reduce their cost to trade,” according to the NYSE letter. “We propose addressing this concern by taking fixed cost growth off the table during the Alternative Pilot and reducing the existing Access Fee Cap.”

Some in the industry would like to see market-data rates comes down, so simply freezing them, and thereby keeping the status quo, might not alleviate their concerns.

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