MARKETS Exchanges’ Fees and Rebates Could Get a Cut SEC proposes test on trading without system of incentives that have been criticized The facade of the New York Stock Exchange. Jeffrey Sprecher, chief executive of NYSE-parent Intercontinental Exchange Inc., has promoted plans to get rid of the ‘maker taker’ incentives. PHOTO: MICHAEL NAGLE/BLOOMBERG NEWS By Dave Michaels Updated March 14, 2018 11:58 a.m. ET 0 COMMENTS WASHINGTON—A system of fees and rebates that promotes trading in stocks would be reduced under a pilot program proposed by regulators on Wednesday. Critics of the system, known as “maker taker,” say it can distort brokers’ decisions about where to send orders and attracts high-speed traders whose strategies sometimes focus on capturing rebates. The two-year experiment, now open for public comment, would allow the Securities and Exchange Commission to analyze whether reducing the incentives affects where brokers send orders or curtails the appetite of speedy traders for some stocks. RELATED Stock Exchanges Question SEC’s Plan to Revamp Trading (Oct. 17, 2017) Massachusetts Probes Retail Brokers Over Exchange Payments (Aug. 15, 2017) SEC to Consider Trading Test Without ‘Maker-Taker’ Pricing System (Aug. 2, 2016) Maker taker has been a feature of pricing on stock trading venues for 20 years. The system rewards entities that “make” trades happen by providing standing orders, known as limit orders. Exchanges charge a fee to brokers and investors who “take” those quotes. A primary criticism of the system is that fees pose a conflict of interest for brokers, who might choose exchanges that pay them rebates, instead of picking the one that is the best place to get a client’s order filled. There are also concerns that investors pay artificially high trading fees to offset the rebates that exchanges offer traders who provide them with limit orders. Used by exchange operators such as Intercontinental Exchange Inc. and Nasdaq Inc., maker taker also gets blame for making the stock market more complex. Brokers seeking to avoid paying fees have an incentive to route orders to bank-owned alternative trading venues known as “dark pools,” which unlike exchanges don’t publish their quotes. In theory, exchanges could benefit from lowering the fees they charge brokers to access their quotations. That might prompt brokers to send more orders to public exchanges, instead of less transparent dark pools. ICE chief executive Jeffrey Sprecher has promoted plans to get rid of the incentives. But exchanges haven’t been willing to dump the system of fees and rebates unless their rivals do so as well. The SEC’s pilot program would require all exchanges to test how lower fees and rebates affect trading in three different groups of stocks. “While there may not be consensus of some of the elements of the pilot, this is one of the few areas where there is significant consensus among market participants that something needs to be done,” said Brett Redfearn, the SEC’s director of trading and markets. Exchanges maintain complex pricing schedules, with bigger traders capturing higher rebates and retail participants sometimes paying less to trade. Trading fees generally cost 30 cents per 100 shares. Under the pilot program approved Wednesday, all exchanges would be required to test trading on three groups of stocks with trading fees set lower than current rates. The program would also use a control group, with fees set at the level under existing rules. For one sample of stocks, the maximum trading fee would be 15 cents per 100 shares. A third group would have trading fees set to 5 cents per 100 shares. SEC commissioners voted unanimously Wednesday to approve the proposal. The SEC believes that lowering the trading fee would prompt exchanges to reduce the rebate they offer as well, since market centers make money on the difference between the fee and the rebate. In a fourth group, exchanges wouldn’t be allowed to offer any rebate or offer participants a discount on trading fees in exchange for providing the market with a large volume of limit orders. The proposal spells out a system of measures that regulators would use to determine if market quality has improved after lowering fees and rebates. The metrics could change based upon feedback from investors, brokers, exchange operators, and other interested parties. Write to Dave Michaels at dave.michaels@wsj.com