The two largest US stock exchanges have filed lawsuits against their own regulator.
NYSE and Nasdaq both filed suits against the Securities and Exchange Commission this week for what they say is an unfair pilot program the regulator plans to launch examining their pricing model for transaction fees and rebates.
The Transaction Fee Pilot, which was approved in December, was designed by the SEC to examine how exchanges' transaction fees and rebates impact where brokers choose to route clients' orders. Some market participants have suggested orders are routed not where brokers can get the best execution but instead where they'll see the highest rebates, fees paid by exchanges to brokers for bringing liquidity to their markets.
The SEC's pilot, which could last up to two years, will create two test groups of securities in which either transaction fees will be limited or rebates will be prohibited.
In an op-ed published Thursday in the Wall Street Journal titled "We're Suing the SEC to Protect the Stock Market", Stacey Cunningham, NYSE's president, laid out the exchange's reasoning.
"In practice, the new rule amounts to an unnecessary exercise in government price-setting that will add a new layer of complexity to equity markets," Cunningham said in the op-ed, which also appeared on her LinkedIn.
Nasdaq filed its own lawsuit on Friday morning and published a report from its chief economist, Phil Mackintosh, detailing analysis of the markets is possible without collecting more data. Chicago-based Cboe Global Markets followed suit on Friday as well.
While the three exchanges all filed separately, Tal Cohen, the senior vice president of North American equities at Nasdaq, told Business Insider the crux of their arguments are similar.
"We don't think this serves capital formation well. We think this picks winners and losers between issuers. That is corporate and ETFs. We think it's a bad precedent. We think it is price controls. We think it alters the competitive dynamics," Cohen said.
Read more: The Wall Street battle over skyrocketing market data fees could reach a boiling point in 2019
In a media roundtable on Friday, Michael Blaugrund, head of transactions at NYSE, explained the potential ramifications of the pilot, singling out exchange-traded products as one victim.
Two exchange-traded funds could be based on the same index, he said, effectively making them interchangeable. If one is required to no longer offer rebates as part of the pilot, its competitor could benefit significantly as it would attract more market makers and be able to offer a tighter price spread, he added.
"That strikes us as a totally inappropriate role for the SEC to play, picking winners and losers amongst issuers," Blaugrund said. "Proposal will be for two years, which could well be long enough to put an ETF out of business."
Cohen echoed similar sentiments about the risk the pilot poses the ETF market.
"For these young ETFs, if the market makers pull back, if lit liquidity spreads out, then investor interest will wane," Cohen said. "If investor interest wane, AUM will go down or doesn't grow. You absolutely could see, especially with the new continuous listing rules, some of these ETFs facing a tough decision."
The SEC declined to comment.
The fight over the merits of the SEC's pilot is just one of the ongoing industry debates Nasdaq and NYSE are at the center of. Deliberation over exchanges' market data fees has heated up recently, with some market structure experts predicting that the continued increase of fees has reached a boiling point where a compromise is imminent.
A win against the SEC over the Transaction Fee Pilot could also be considered bittersweet, as the exchange will need to continue to interact with the regulator going forward. However, Blaugrund stands by the choice.
"It's a very difficult decision to decide to take your primary regulatory to court," Blaugrund said. "That being said, we feel really strong that this is overreaching and we need to draw a clear line in the sand because we do work with them on every aspect of the business."
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