SEC Considering Curbs After Quote Surge in U.S. Stock Market

The Securities and Exchange Commission may ask stock markets to impose fees on trading firms that submit a high number of quotations in relation to executed transactions, an executive at the regulator said.

The SEC is considering whether to urge exchanges to impose a fee for exceeding a certain order-to-execution ratio or for sending messages, which include quotes, updates, cancellations and executions, said David Shillman, associate director at the regulator’s division of trading and markets. That’s because they impose a cost on brokerages who must buy that data, said Shillman, who spoke in an interview at a Securities Industry and Financial Markets Association conference in New York.

Computers are replacing humans as market makers in U.S. equities, and one way they try to entice investors is by sending quotes to exchanges and rapidly updating them. Ashok Krishnan, head of execution services for Europe, Middle East and Africa at Bank of America Corp., said at a Bloomberg Link event in London on May 19 that some firms send more than 500 orders for every execution they receive.

“The idea is to make them bear some of the costs of the infrastructure exchanges build” to attract them, Shillman said today, referring to high-frequency traders, who often update or cancel and resubmit bids and offers at different prices. The SEC could tap rules that require exchanges to “equitably allocate fees” to address the issue of increasing data and technology costs for market participants, he said.

Higher Proportion

Firms that produce many messages should shoulder a greater proportion of the resulting costs, Matthew Lavicka, a managing director at New York-based Goldman Sachs Group Inc., said during a panel discussion at the conference. Currently, those expenses are distributed industrywide, he said.

There should be a “realigning of incentives and disincentives,” Lavicka said. He suggested limits on the number of quotations trading firms can submit to exchanges.

Any rule should apply consistently across all exchanges, Joseph Mecane, executive vice president and chief administrative officer for U.S. markets at NYSE Euronext, said during the panel discussion. His company runs the New York Stock Exchange.

The commission recognizes the difficulty exchanges face in imposing fees on brokers and trading firms that “could divert flow elsewhere,” Shillman said during the panel. If the SEC pursues the idea of fees, it may issue a statement or guidance to exchanges suggesting they impose charges for excessive quotations, he said.

‘Too Much’

“There is something that can be viewed as too much messaging,” Elizabeth King, a former SEC executive who’s head of regulatory affairs at Chicago-based Getco LLC, said today at the conference.

If exchanges impose fees for quote traffic, the threshold should vary for different products and across market conditions, allowing for more flexibility, she said. Getco is an automated trading firm that makes markets in equities, bonds, currencies and commodities.

“I don’t think there has to be uniformity to address some of the extreme situations around message rates,” she said.

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