Several major public pension
plans, including the California Public Employees’ Retirement System and the
Ontario Teachers’ Pension Plan, have banded together in support of a new
regulatory proposal that addresses a controversial practice they say benefits brokers
at their expense.
The proposal, aimed at
allowing pensions and other investors to assess the impact of stock exchanges
paying rebates to brokers for order flow, grew out of years of controversy over
the practice. Critics say these rebates undermine pensions and others’ ability
to get the best price on securities transactions. The proposal caps fees and
the size of rebates for market makers.
In a letter to the
Securities and Exchange Commission co-written by OTPP and CalPERS and endorsed
by other pensions — including the California State Teachers’ Retirement System,
the State of Wisconsin Investment Board, all of New York City’s public
pensions, and other institutions — the plans said they are in favor of the
SEC’s transaction fee pilot program, which will test three different fee models
over two years.
The SEC proposal also
requires exchanges to publicly post the results and generate data to inform the
industry’s debate on the subject.
“In recent history,
technical advancements and regulatory rulemaking have attempted to increase
market competition and lower trading costs. Unfortunately, this has resulted in
increased market complexity and various unintended consequences, and long term
investors have borne the cost of this change in market structure,” wrote Kevin
Duggan, head of execution and Treasury in the capital markets group at Ontario
Teachers, and Don Pontes, investment director of financial markets at
The authors specifically
pointed to the practice of exchanges paying rebates to broker members for order
flow, “otherwise referred to as maker-taker or taker-maker pricing,” adding,
“These pricing schemes as well as other fee incentives, have been generally
criticized by a wide spectrum of asset managers, pension funds, endowments,
members of Congress, academics and policy makers, including SEC economists,
based on the potential conflict of interest it creates between brokers and
their investor clients.”
The letter also highlighted
some of the critical aspects of the proposal, including testing the elimination
of rebates altogether.
“Without this test group,
the Pilot will be of limited use to long-term investors who question the
importance of rebates to overall market quality,” wrote Duggan and Pontes, who
said they were writing on behalf of plans representing seven million members
and $1.4 trillion in assets collectively. “Also, this will allow exchanges to
compete on pricing and execution quality without imposing further price
controls on the market.”
IEX Group — whose founders
were at the center of Michael Lewis’s book Flash Boys, which
chronicled how high-frequency traders used advanced technology and changes in
regulations to skim off profits from long-term investors — supports the SEC’s
proposal. IEX does not offer rebates.
“It’s extremely rare for so
many asset owners and managers to speak as one on a markets issue — their
support for the transaction fee pilot shows there’s a very real conflict that
needs to be addressed,” said John Ramsay, chief market policy officer at
here for the original article from Institutional Investor.