JPMoran writes letter on transaction fee pilot

JPMorgan CEO Jamie
Dimon
REUTERS/Gary
Cameron

• JPMorgan recently submitted a letter to the SEC
  outlining its position on the so-called transaction fee pilot —
  a controversial proposal to shake up stock trading in the
  US. 
• The proposal is supported by startup stock exchange IEX
  but opposed by legacy exchanges like the New York Stock
  Exchange and Nasdaq. 
• It’s the first time that a big bank is weighing in on
  
  one of the biggest fights tearing Wall Street
  apart.
• JPMorgan, which is listed on NYSE, is surprisingly not
  taking the exchange’s side in the debate. 

A Wall Street giant is getting into the ring of
one of the biggest fights tearing apart Wall Street — and
it’s picked a surprising side to support.

JPMorgan recently submitted a letter to the Securities and
Exchange Commission outlining its position on the so-called
transaction fee pilot, a controversial proposal to shake up stock
trading in the US.

If implemented, the proposal would examine the impact of
rebates, a type of incentive some stock exchanges pay to brokers
to lure them to their venues, by eliminating them in certain
circumstances.

Startup stock exchange IEX, a slew of pension funds, and
some brokers have supported the proposal. Legacy stock exchanges,
including the New York Stock Exchange and Nasdaq, are against it,

with the NYSE saying in a letter to the SEC that it would put
venues like theirs in economic jeopardy.

The exchange has
urged its listed companies on several occasions to speak out
against the pilot. Now, JPMorgan, a NYSE-listed firm, has
spoken out. But not in the exchange’s favor.

“We believe that the ‘maker-taker’ pricing model and the
use of rebates within it by exchanges has reduced the accuracy
and clarity of securities quotes,” the financial services firm
said in a letter dated September 14. 

A representative for the New York Stock Exchange could not
be immediately reached for comment. 

Critics of the maker-taker model say it incentivizes
brokers to route client orders to the venue from which they will
get the largest rebate, not where those trades will be best
executed.

Exchanges like NYSE argue rebates incentive traders to
quote prices on public exchange venues.

JPMorgan, in its letter, argues the pilot would help the
market figure out the degree to which they are harmful or
beneficial.

The move by JPMorgan represents the first time a major
bulge bracket firm has weighed in on the rebate debate. It also
echoes remarks made by SEC Commissioner Robert Jackson on
Wednesday. 

“For example, an especially important aspect of our
proposal was to include a “no-rebate” bucket that will allow us
—and, more importantly, investors — to observe how markets
respond to the absence of rebates,” Jackson said in a speech at
George Mason University in Virginia.

One market observer said JPMorgan’s submission of a
letter
“is like an 800 pound gorilla wading
in.” 
“Plus they’re a NYSE issuer breaking
ranks,” the person added.

Still, JPMorgan did offer suggestions to improve the pilot.
For instance, the firm recommended the SEC shorten its duration
from two years.

It also expressed concerned about the pilot exposing large
brokers’ proprietary information. As part of the pilot, brokers
would be required to disclose information from the pilot.

“Should the SEC choose to proceed with public disclosure of
Pilot data, we recommend that broker‐dealers not be identified,
even on an anonymized basis, and that the SEC take responsibility
for aggregating feeds from each exchange and centralizing the
publication on its own site rather than requiring each exchange
to do so on their websites,” the bank wrote.

— Frank Chaparro is a senior correspondent at The Block, a
community of blockchain technology and crypto assets enthusiasts
built around information, education, and inclusion. He previously
wrote about digital assets, market structure, and fintech for
Business Insider.

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