JPMorgan has weighed in on one of the biggest debates tearing apart Wall Street, and it's 'like an 800 pound gorilla wading in'

jamie dimon jpmorganREUTERS/Gary Cameron

  • JPMorgan recently submitted a letter to the SEC outlining its position on the so-called transaction fee pilot - a controversial proposal to shake up stock trading in the US.
  • The proposal is supported by startup stock exchange IEX but opposed by legacy exchanges like the New York Stock Exchange and Nasdaq.
  • It's the first time that a big bank is weighing in on one of the biggest fights tearing Wall Street apart.
  • JPMorgan, which is listed on NYSE, is surprisingly not taking the exchange's side in the debate.

A Wall Street giant is getting into the ring of one of the biggest fights tearing apart Wall Street - and it's picked a surprising side to support.

JPMorgan recently submitted a letter to the Securities and Exchange Commission outlining its position on the so-called transaction fee pilot, a controversial proposal to shake up stock trading in the US.

If implemented, the proposal would examine the impact of rebates, a type of incentive some stock exchanges pay to brokers to lure them to their venues, by eliminating them in certain circumstances.

Startup stock exchange IEX, a slew of pension funds, and some brokers have supported the proposal. Legacy stock exchanges, including the New York Stock Exchange and Nasdaq, are against it, with the NYSE saying in a letter to the SEC that it would put venues like theirs in economic jeopardy.

The exchange has urged its listed companies on several occasions to speak out against the pilot. Now, JPMorgan, a NYSE-listed firm, has spoken out. But not in the exchange's favor.

"We believe that the 'maker-taker' pricing model and the use of rebates within it by exchanges has reduced the accuracy and clarity of securities quotes," the financial services firm said in a letter dated September 14.

A representative for the New York Stock Exchange could not be immediately reached for comment.

Critics of the maker-taker model say it incentivizes brokers to route client orders to the venue from which they will get the largest rebate, not where those trades will be best executed.

Exchanges like NYSE argue rebates incentive traders to quote prices on public exchange venues.

JPMorgan, in its letter, argues the pilot would help the market figure out the degree to which they are harmful or beneficial.

The move by JPMorgan represents the first time a major bulge bracket firm has weighed in on the rebate debate. It also echoes remarks made by SEC Commissioner Robert Jackson on Wednesday.

"For example, an especially important aspect of our proposal was to include a "no-rebate" bucket that will allow us -and, more importantly, investors - to observe how markets respond to the absence of rebates," Jackson said in a speech at George Mason University in Virginia.

One market observer said JPMorgan's submission of a letter "is like an 800 pound gorilla wading in." "Plus they're a NYSE issuer breaking ranks," the person added.

Still, JPMorgan did offer suggestions to improve the pilot. For instance, the firm recommended the SEC shorten its duration from two years.

It also expressed concerned about the pilot exposing large brokers' proprietary information. As part of the pilot, brokers would be required to disclose information from the pilot.

"Should the SEC choose to proceed with public disclosure of Pilot data, we recommend that broker‐dealers not be identified, even on an anonymized basis, and that the SEC take responsibility for aggregating feeds from each exchange and centralizing the publication on its own site rather than requiring each exchange to do so on their websites," the bank wrote.

- Frank Chaparro is a senior correspondent at The Block, a community of blockchain technology and crypto assets enthusiasts built around information, education, and inclusion. He previously wrote about digital assets, market structure, and fintech for Business Insider.

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