13 December 2013

IOSCO issues final report on the impact of trading fee models on trading behaviour

To gain an understanding of the fee models currently in use and the approaches taken by various regulators to regulate them in this competitive context, IOSCO distributed a short questionnaire among regulators and trading venues in different jurisdictions.

The questionnaire included questions regarding the types of fee models currently being used; the way in which fees and fee models are being regulated; and the work done to identify the potential or actual impacts of trading fee models. The final report offers a number of key findings with respect to competition and the regulatory environment.

Competition

There is competition among markets trading the same securities in a number of jurisdictions, including Europe, Australia, Japan, the US, and Canada.

Views on the impact of competition on trading fees and trading fee models indicate that in jurisdictions where competition exists, it has resulted in a lowering of fees charged, changes in fee models (e.g. move away from symmetrical pricing), and/or differentiation between or within trading venues of: (i) fees that create incentives for liquidity provision, and/or (ii) fees for different types of securities or types of trades.

Regulatory environment

Two jurisdictions where there is competition have rules preventing the execution of orders that are inferior to other displayed orders (i.e. Order Protection Rules), but most have best execution requirements that require at a minimum, consideration of some of the venues displaying best price.

Some regulators have direct and specific authority over trading fees and fee models of trading venues. Amongst them, some approve the fees of trading venues, but few are involved in the setting of fees or fee models. However, many do review fees on either a pre- or post-implementation basis in the context of other requirements such as those pertaining to fair access or orderly markets – the most common consideration being whether the fees are unreasonably or unduly discriminatory.

Transparency of the trading fees and trading fee models is generally the norm, whether as a result of requirements for transparency or industry practice.

Restrictions imposed by regulators on fees do not generally prohibit the provision of discounts, tailored or negotiated fees / fee models, or the differentiation of fees between members and non-members (or between types or classes of members – for example, market makers or supplemental liquidity providers), but any instances of these would generally be subject to overarching principles of fairness.

Full Report

© IOSCO