The new schedule replaces a mandatory, across-the-board marketing fee of $0.40 per contract that has been in place at the PCX for nearly a year. Under the flexible formula, the fee will vary from issue to issue, and range between $0.00 and $1.00 per contract (in 25-cent increments). Funds generated by the fee are used to pay brokerage firms for orders directed to the PCX.
"We have long argued that payment for order flow is antithetical to the interests of public investors. But in the absence of an SEC directive banning the practice or changing the structure of the market, or a universal refusal of payments by all firms, the practice will remain a central thread in the fabric of order flow competition, with or without exchange participation. Our proposal for flexible rates is intended to enhance our probability for success in this environment," said Philip D. DeFeo, PCX Chairman and CEO.
The proposal was first made public by the PCX on July 27, and has been furiously debated on its San Francisco trading floor, among its seat owners, and across the industry. "The Board received and considered extensive input from members on all sides of this issue," said DeFeo. "Many feared the new schedule would set the marketing fee at $1.00 in all issues. That didn't happen. Some argued that payment for order flow would fade away, if the PCX would simply end its administrative role in the collection and distribution of fees. We all wish that that were true, however, specialists and market making firms have indicated that they will continue to pay for order flow. As long as that is a fact, the Board believes that abandoning the Exchange's role creates significant risks to our business and will make our floor directionally less competitive.
"There is also value in the Exchange's oversight of payment for order flow," DeFeo added. "If we're involved, we can see who's paying how much to whom, and what they're receiving in return. If we're not involved, the practice will go underground and the deals will remain secret."
Under the new schedule, the marketing fee has been set at $0.00 per contract in 45 percent of the PCX issues; $0.25 for 12.4 percent; $0.50 for 41 percent; $0.75 for 1.6 percent; and $1.00 for 0.1 percent. The Exchange expects to charge floor traders 22 percent less each month under the new schedule than it did under the old, flat rate of $0.40 per contract. The new schedule will be filed with the SEC, and is expected to be effective in September.
