Transaction Fee Pilot
The Transaction Fee Pilot was an SEC-proposed program, approved in December 2018 but subsequently vacated by a federal appeals court, that would have tested whether reducing or eliminating exchange access fees and rebates affected order routing behavior, execution quality, and market liquidity by randomly assigning a sample of U.S. equity securities into test buckets subject to different fee constraints.
The Transaction Fee Pilot was designed as a controlled experiment to generate causal evidence on a longstanding empirical question: do exchange access fees and the rebates they enable meaningfully distort broker order routing decisions to the detriment of investors? The proposed pilot would have divided NMS stocks into three test groups and a control group over a two-year period. Test Group 1 would have been subject to a reduced access fee cap of $0.0015 per share. Test Group 2 would have operated under a no-rebate constraint prohibiting exchanges from paying rebates on executions in those securities. Test Group 3 would have applied both restrictions simultaneously. The control group would have continued under existing fee rules.
The SEC argued that the pilot was necessary because the evidence on fee effects was observational rather than experimental. Market participants and academics had long debated whether maker-taker rebates cause brokers to route orders to rebate-paying venues regardless of execution quality, but without a controlled experiment, it was impossible to isolate the effect of fees from other routing determinants. The pilot design mirrored the methodology successfully employed in the Tick Size Pilot.
Exchanges opposed the pilot strenuously, arguing that the SEC lacked statutory authority to compel them to operate under artificially constrained fee structures during an experimental period and that the pilot would impose significant compliance costs while producing results that could not be cleanly interpreted due to cross-stock arbitrage and order routing spillovers. NYSE parent Intercontinental Exchange and Nasdaq filed a lawsuit challenging the rule.
In June 2020, the U.S. Court of Appeals for the District of Columbia Circuit vacated the Transaction Fee Pilot rule, finding that the SEC had acted arbitrarily in exempting exchange-listed options from the pilot and that the agency had failed to adequately justify this distinction. The court did not reach the broader statutory authority question. The vacatur halted the pilot before it was implemented, leaving the empirical question it was designed to answer unresolved and leaving the policy debate about rebates and routing conflicts without the controlled evidence that might have resolved it.