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September 20, 2019

Going to Court to Defend Critical SEC Program Against Baseless Industry Attacks

Better Markets filed an amicus brief urging the D.C. Circuit Court of Appeals to uphold the SEC’s critical Transaction Fee Pilot program, which it initiated last year to study the effects of the legalized kickbacks large exchanges offer to brokers to attract orders. As we explained in our brief, these kickbacks hurt both large and small investors, who lose money when conflicted brokers route orders to maximize kickbacks from exchanges rather than seeking best execution for investors. Moreover, the exchanges use the order flow they receive from brokers to sell information to predatory high-frequency traders, who use that information to pick off and front-run retail investors’ orders. The Pilot, which will last one- to two-years, will enable the SEC to gather perhaps definitive information on the impact of these legalized kickbacks that would hopefully serve as the basis for informed and optimal policymaking.

As we have repeatedly said over the years, fundamental market structure problems, particularly deeply rooted conflicts of interest, will not be solved by those who benefit from the system. Legalized kickbacks by the exchanges that incentivize and induce routing decisions by brokers at the expense of best execution and market quality is one of those most entrenched and insidious market practices today, and it requires forceful and independent intervention by the SEC. This test pilot will enable the SEC to do just that.


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