Ontario Teachers’, CalPERS support SEC proposal to study transaction fees

The Ontario Teachers’ Pension Plan and the California Public Employees’ Retirement System are expressing their support for the U.S. Security and Exchange Commission’s proposal for a transaction fee pilot.

In a letter to the SEC indicating their support, along with the support of several other Canadian and U.S. public plans, the funds argued that technical advancements and regulatory changes have attempted to increase market competition and lower trading costs, resulting in increased complexity and unintended consequences for long-term investors.

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One element of that structure is the practice of exchanges paying rebates to broker members for order flow, referred to as maker-taker or taker-maker pricing, the letter noted. “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,” stated the letter.

The group of pension funds supports the overall structure of the pilot, which would test three different fee scenarios that could have varying affects on market liquidity. They include a group where traders get a 15-cent trade fee per 100 shares, one with a five-cent cap and a third that bans rebates as well as a 30-cent cap per 100 shares on fees for removing liquidity. A control group with no cap on rebates would also be part of the study. Further to those categories, the letter also recommended that the pilot test the elimination of exchanges rebates entirely.

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“It is critical to include a test group that prohibits the payment of rebates to create a data set that demonstrates the effect of rebates, of any size, on order routing and executing quality,” the letter stated, noting without that data, the project would be of limited use in distinguishing how such rebates affect overall market quality.

The SEC will vote on whether to take on the two-year pilot later this year.

Apart from CalPERS and Ontario Teachers’, the pensions supporting the letter include:

  • The California State Teachers’ Retirement System;
  • The New York City Retirement Systems;
  • The State of Wisconsin Investment Board;
  • The Alberta Investment Management Corp.;
  • The Healthcare of Ontario Pension Plan;
  • The Alaska Permanent Fund Corp.;
  • The Arizona State Retirement System;
  • The San Francisco City & County Employees’ Retirement System;
  • The Wyoming Retirement System; and
  • The San Diego City Employees’ Retirement System.

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