May 24, 2018

Via Electronic Mail ([email protected])

Mr. Brent J. Fields
Secretary
U.S. Securities & Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-1090

Re: File No. S7-05-18; Comments on Proposed Rule: Transaction Fee Pilot for NMS Stocks

Dear Mr. Fields:

The Securities Industry and Financial Markets Association (“SIFMA”) 1 submits this letter to the Securities and Exchange Commission (“Commission”) to comment on the Commission’s proposal to conduct a Transaction Fee Pilot for NMS Stocks. 2 SIFMA is a longtime supporter of reducing the current access fee cap, and we recognize that a pilot is one way to collect necessary empirical data to make this change. Accordingly, SIFMA broadly supports the concept of a pilot. However, we offer recommendations below to modify certain aspects of the proposal.

In addition, while SIFMA supports the Commission’s review of access fees, this pilot should not be the extent of the Commission’s review of Regulation National Market System (“NMS”). After this important first step in reviewing one aspect of equity market structure, the Commission should continue reviewing other aspects of Regulation NMS and make appropriate regulatory changes to reflect current market realities.3

I. Previous SIFMA Support to Reduce Access Fee Cap

The regulatory cap on access fees was adopted in Regulation NMS under the Securities Exchange Act of 1934 (“Exchange Act”) in conjunction with Rule 611 of Regulation NMS, also known as the “Order Protection Rule.” 4 The Order Protection Rule (“OPR”) generally requires that marketable orders be routed to the market displaying the best available automated quotation i.e., to protected quotations. However, the OPR considers only the quotation itself, not fees charged for accessing that quotation. In adopting the OPR, the Commission recognized that, “market participants will no longer have the option of bypassing the quotations of trading centers with access fees that [market participants] view as too high.” 5 Similarly, the Commission stated that some markets might take advantage of protected quotation status to charge excessive access fees, making what appeared to be the best quotation available actually inferior to another quotation—after access fees are taken into account.6 To address these issues, the Commission adopted Rule 610, capping fees to access protected quotations at 30 cents per 100 shares. The 30- cent figure was chosen because it was generally “consistent with current business practices” at the time.7

On several occasions, SIFMA has recommended that the Commission reduce the access fee cap to no more than five cents per 100 shares because the cap has not been adjusted to reflect market developments since Regulation NMS was adopted more than a decade ago. Depending on the exchange, access fees generally equal or approach the maximum 30 cents per hundred shares, and most of that fee is used to fund a payment either to the party that posted the quotation on the exchange, as an incentive for “making” liquidity, or to the party that executed against a quotation, as an incentive for “taking” liquidity. Over time, competitive pressures, increased efficiencies from automation, and electronic trading have each operated to reduce transaction costs throughout the markets – but not access fees, which have remained at or near 30 cents per hundred shares.

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1 The Securities Industry and Financial Markets Association (SIFMA) brings together the shared interests of hundreds of securities firms, banks and asset managers. SIFMA’s mission is to support a strong financial industry, investor opportunity, capital formation, job creation and economic growth, while building trust and confidence in the financial markets. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.

2 Securities Exchange Act Release No. 34-82873 (March 14, 2018). The Commission’s proposed pilot will study the effects that transaction-based fees and rebates may have on order routing behavior, execution quality, and market quality more generally and will be used to facilitate a data-driven evaluation of the need for regulatory action in this area.

3 See Letter from T.R. Lazo to Chair Mary Jo White providing Recommendations for Equity Market Structure Reforms (Oct. 24, 2014) available at https://www.sifma.org/wp content/uploads/2017/05/sifmasubmits-comments-to-the-sec-with-recommendations-for-equity-market-structure-reforms.pdf; and SIFMA Comment Letter on List of Rules to be Reviewed Pursuant to the Regulatory Flexibility Act; File No. S7-21-16 (March 29, 2017) (“SIFMA March 2017 Letter”) available at https://www.sifma.org/wpcontent/uploads/2017/05/SIFMA-Submits-Comments-to-the-SEC-on-the-EMSAC-Meeting-and-theRegulatory-Flexibility-Act.pdf.

4 Regulation NMS, Securities Exchange Act Release No. 51808 (June 9, 2005).

5 Regulation NMS at 182.

6 Id. at 182 – 183.

7 Id. at 189.