A long-anticipated pilot project that may have led to a ban on trading-fee rebates has been sidelined in the U.S. — and likely in Canada as well.
The U.S. Court of Appeals for the District of Columbia has ruled in favour of three stock exchanges that sued the U.S. Securities and Exchange Commission (SEC) in 2019 to prevent the pilot from happening.
In 2018, the SEC announced its plan to study the exchanges’ controversial “maker-taker” fee model, which has been criticized for incentivizing brokers to place trades on behalf of clients in exchange for a rebate.
The pilot study would have created two test groups: one in which trading-fee rebates were prohibited, and one in which fee caps were lowered. But a unanimous ruling by the U.S. Court of Appeals on June 16 scrapped the project.
Robert Keller, a securities lawyer who has written about the decision, said the SEC might have been successful if it had argued that trading-fee rebates were harmful to investors.
Instead, the SEC merely proposed to study the rebates. Such a study, the court found, would have imposed considerable cost and complexity on market participants without a “sufficient regulatory objective.”
“Ironically, the SEC’s attempt to be fair, even-handed and open-minded is exactly what the U.S. Court of Appeals seized upon to strike down the project,” Keller said in an interview. “I think the SEC was trying to do the right thing, and it came back to haunt them.”
The Canadian Securities Administrators (CSA) have also proposed studying trading-fee rebates. The CSA’s pilot would have gone further than the SEC’s by including alternative trading systems, but it was contingent on the SEC pilot going ahead.
In an email, a CSA spokesperson confirmed that the CSA will not proceed with its pilot if the SEC study is cancelled. And it is possible, Keller said, that the SEC’s pilot project may be down for the count.
“How much energy [does the SEC] have to expend on the same thing and go back to the drawing board?” Keller said. “The reality is there are other priorities they’ve got to get to.”
The SEC may simply abandon the study, or it could decide to unilaterally impose a ban on trading-fee rebates, Keller suggested — although an outright ban would carry further litigation risks.
A third possibility, Keller noted, is the SEC could lower the cap on trading fees. In fact, the New York Stock Exchange — one of the three exchanges that sued the SEC — proposed a pilot with lower fee caps in response to the SEC’s proposal.
“When you lower the cap on transaction fees, you lower the rebate and marketplaces adjust,” Keller said. “If they’re not making as much on the taker side, they’ve got to cut back on how much they’re giving out on the maker side.”