Court deals blow to SEC in battle with exchanges over fees

A US appeals court on Tuesday handed another legal win to the country’s biggest stock exchanges in their fight with their regulator, blocking a proposed experiment involving trading fees.

The decision was the second court loss in a fortnight for the Securities and Exchange Commission, which in recent years has toughened its scrutiny of major stock exchanges and sought to push down costs for traders.

The latest ruling from the federal Court of Appeals in Washington DC struck down an initiative announced by the SEC in December 2018 to test whether the incentive schemes offered by the New York Stock Exchange, Nasdaq and CBOE Global Markets created a conflict of interest.

The three groups account for the majority of trading in US equities markets, where more than $7bn of shares change hands every day. The SEC wanted to impose fee caps on 1,400 stocks to test whether rebates encouraged traders to send business to exchanges.

NYSE, CBOE and Nasdaq pay brokers to post orders and charge them for accessing bids and offers on stocks to attract business in a market where they compete with more than 75 banks and other alternative venues.

On Tuesday, a three-judge panel sided with the three exchanges, which sued to block the two-year-long experiment. The panel said the SEC’s plan would “impose significant, costly, and disparate regulatory requirements” and went beyond the regulator’s authority.

Under US law, the exchanges have quasi-governmental status and are charged with ensuring that markets are clean and fair.

“Rules are not adopted in search of regulatory problems to solve; they are adopted to correct problems with existing regulatory requirements that an agency has delegated authority to address. That is not the situation that we see in this case,” wrote Judge Harry Edwards.

Earlier this month, another appeals court panel in Washington DC ruled against the SEC in a related case. The agency in 2018 had challenged certain data fee increases imposed by NYSE and Nasdaq after it came under pressure from a trade group. The court said the agency’s move had been unlawful.

“For the second time in as many weeks, a federal court has found the SEC to have exceeded its authority,” said the Equity Markets Association, a body which represents the three exchanges. The pilot “was a mistake that if put into place would have brought many unknown consequences for the investing public and the companies that list on the exchanges.”

In a tweet, Stacey Cunningham, president of the NYSE, said: “I’m pleased to see the Court remind the SEC they too need to follow the law . . . This is a resounding victory for free markets.”

The rulings are a blow to the SEC under Jay Clayton, who was appointed chair by Donald Trump in 2017. Under his tenure, the major stock exchanges have been a key target of SEC scrutiny even as he has cut regulation elsewhere.

Mr Clayton, and his head of trading and markets, Brett Redfearn, have taken a more aggressive approach in examining how exchanges make money. This has included the system of rebates and the sale of market data to brokers and investors.

Mr Clayton said in a statement that the SEC accepted the decision and expected to move forward with plans to “improve and modernise” US equities trading “to ensure that it best serves the interests of our long-term Main Street investors”.

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