After the U.S. Securities and Exchange Commission (SEC) adopted amendments to certain rules under Regulation NMS on September 18, the industry’s response was ambivalent at best.
The regulatory update came out on the first day of the Security Traders Association’s 91st Annual Market Structure Conference, and many of the panel discussions pivoted to this topic, including speculation about whether or not market infrastructure providers and/or market participants will sue the SEC.
Traders Magazine reached out to Andrew P. Blake, Partner, Sidley, about the likelihood that the industry takes the SEC to court. Blake advises a wide array of financial services clients on regulatory, transactional, compliance and enforcement matters arising under the jurisdiction of the SEC, U.S. Commodity Futures Trading Commission (CFTC) and Financial Industry Regulatory Authority (FINRA).
Do you think this might go to court?
Yes, it seems likely the equities exchanges will challenge the part of the rulemaking that reduced access fee caps. Those reductions will impact the pricing and fee structures that the exchanges use to incentivize market participants to trade on their platform.
What specifically about the equity market structure rule changes might the SEC have overreached on and not have basis to implement?
The SEC has a reasoned basis for the changes it adopted. But any time the government is involved in capping fees that market participants may charge for services, it is possible that action will be challenged as overreach. For greater context, the SEC previously adopted access fee caps under Reg NMS in 2005 – and so this most recent rulemaking is simply tightening the access fee caps.
What market group would most likely sue (Exchanges? Brokers? Investment managers?)
The exchanges that facilitate trading in equities are the most likely to sue because they are the ones most directly affected by the reduced fee caps. That said, in the comment phase of the proposal other industry participants also expressed a view that any changes to access fee caps should be tied to changes to tick sizes. Accordingly, if the exchanges are successful in advocating that the access fee cap changes should be overturned, other market participants may be of a view that there also should be no change to tick sizes.
What precedent is there for these types of cases?
A judicial challenge is likely to be in line with previous challenges of federal agency rulemaking on grounds that the revised access fee cap changes are arbitrary and capricious under the Administrative Procedure Act.
