BATS rejects compromise: calls for $1 billion US exchange fee cut
US exchange BATS Global Markets is calling for an 80% reduction in access fees to the US stock market’s most liquid securities, on grounds that nearly a billion dollars in fees could be slashed without adversely affecting the market. In an open letter to the industry, the exchange also rejected what it calls a “grand compromise” on exchange fees and called for greater transparency and the avoidance of anti-competitive rules.
BATS operates two main exchanges in the US, and has recently also become a regulated exchange in Europe. The origin of BATS’ proposals have to do with the increasing automation of securities markets and the proliferation of different trading venues over the last decade. In particular, BATS cites concerns about the amount of trading done away from the displayed exchanges, and complaints about the incentives received by brokers for routing orders to one destination over another.
These issues have led to a body of opinion in the industry calling for a trade-at prohibition, which would force order flow to the exchanges, in exchange for a decrease in access fees and a ban on exchange rebates for most market participants. Specifically, US regulator the SEC has been considering the trade-at rule since April 2014 – a measure which has been advocated by exchanges NYSE and Nasdaq for years on the grounds that it would help them to fight back and regain market share from competitor venues such as broker-run dark pools.
In its open letter to the industry, BATS rejects this “grand compromise”, on the grounds that while exchanges would stand to benefit from increase volume directed to them, and brokers would benefit from a reduction in exchange fees, investors would likely pay more both in the form of potentially wider spreads as well as fewer and inferior execution choices. Instead, the exchange claims that the introduction of tiered market access fees, depending on each security’s average daily volume, could save $850 million annually in the 200 most actively traded US stocks. BATS proposes the fees should begin at $0.0005 per share.
The exchange is also calling for greater order handling transparency and higher standards for small trading centres. The exchange says that alternative trading systems should be required to provide their rules of operation to customers, and Rules 605 and 606 of Regulation NMS should be amended to require additional disclosure of achieved execution quality on a broker by broker basis. Reg NMS should also be revised, BATS says, so that until an exchange or other protected market centre achieves greater than 1% share of consolidated average daily volume in any rolling three-month period, it should no longer be protected under the trade-through rule, and not share in any NMS plan market data revenue. The idea is to address the concerns of market participants that the current structure may artificially subsidise competition and encourages excessive complexity in the market.
“While the highly efficient, fair and transparent US equity market is widely viewed as the world’s most competitive market, a one size fits all approach may no longer best meet the needs of end investors, issuers and the industry’s many participants,” said Joe Ratterman, chief executive at BATS. “The market has long been defined by its continuous quest for improvement, and we believe that a material reduction in access fees for the most liquid securities, coupled with an intelligently tiered approach for less liquid stocks, is an excellent place to begin.”
BATS has called on the industry to respond to its open letter and to petition US regulator the Securities and Exchange Commission to accept its proposals.