Wall Street brokers are in rebellion against a plan to test ways of encouraging more trading of the smallest U.S. stocks, saying the effort was hijacked by exchanges seeking an edge over their rivals.
The Securities and Exchange Commission’s pilot program is meant to spur trades in about 30 percent of publicly traded U.S. companies. One of its provisions -- called a trade-at rule -- is really a stealth attempt to hurt brokers that run private trading systems that compete with the likes of the New York Stock Exchange, representatives from JPMorgan Chase & Co. and Citigroup Inc. said yesterday at an industry conference.
“The exchanges who have a hand in this and seek to benefit from the onerous version of a trade-at basically put the screws to us,” Michael Masone, legal counsel for equities at Citigroup, said at an event sponsored by the Securities Industry and Financial Markets Association.
Supporters of the one-year pilot program, including lawmakers in Congress, say it will encourage market makers to buy and sell shares by making each transaction potentially more profitable. This, the theory goes, could stimulate initial public offerings because investment banks would have more money to bankroll research departments to tout newly public companies.
The SEC started seeking public comment on the proposals on Nov. 3. The securities regulator must approve the program’s final design. The experiment, which could start next year, will widen the minimum price, or tick, at which shares are quoted on exchanges. For many companies, the tick size is now 1 cent.
Stephen Luparello, the SEC’s director of trading and markets, said at the same industry event yesterday that brokerage firms have read too much into the regulator’s plans. The SEC is open to feedback and hasn’t sided with the goals of exchanges, he said. If the SEC’s primary goal was really to test ways of discouraging trading on private trading platforms, the regulator wouldn’t target the smallest companies, he said.
“If you were going to do a trade-at pilot, that is not the segment of the market you do it in,” Luparello said.
Eric Ryan, a NYSE spokesman, said the exchange operator supports the SEC’s efforts to improve trading in small and mid-size companies. Bats spokesman Randy Williams said the company remains opposed to the trade-at rule. Nasdaq OMX Group Inc. spokesman Joe Christinat declined to comment.
The plan as proposed would create four groups of companies with market values of less than $5 billion. One segment will require quotes in increments of 5 cents or more, and another will require both quotes and trades to be in 5-cent steps. In a third group, trading will be discouraged on private venues that compete with public exchanges. A fourth group will trade normally.
“It almost feels a little bit like, ‘Is this a tick pilot or a trade-at pilot?’” said Brett Redfearn, Americas head of market-structure strategy at JPMorgan, speaking at the same event as Masone and Luparello.
Opposition to the program isn’t new. The SEC’s Investor Advisory Committee voted 13-3 in January to urge the agency not to conduct the pilot program. The SEC went ahead anyway. Opponents including Fidelity Investments say investors will have to pay more to buy and sell shares of small companies.
“Getting it done this year would be pretty complicated,” SEC Commissioner Daniel Gallagher, a Republican, said last month at a conference in Washington. “My guess is we’ll get some pretty heavy comment on this thing, and it might buckle under its own weight.”