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Pragma's Mechner Comments on Access Fee Pilot

Traders Magazine Online News, May 30, 2018

John D'Antona Jr.

David Mechner, CEO of Pragma Securites has plenty to say about the access fee pilot.

Mechner said in a note to Traders Magazine that his firm views the SECís current pilot measurement methodology risks missing out on the key benefits of the fee cap for pension funds and asset managers because the proposed pilot doesnít track execution quality (the cost of a trade) but only market quality.

Capping fees will likely lead to wider bid-offer spreads as the incentives for market makers to provide liquidity decrease. Counterintuitively, this could actually reduce overall execution costs for asset managers and pension funds, he said.

This is because institutions which use patient passive (price making) algorithmic strategies (a significant proportion of asset managers trade this way) see more of their orders filled as their passive order will now be higher up the queue for execution. This would reduce the number of times orders would need to be Ďre-peggedí in order to be filled and as a result could actually lead to better execution costs for these passive strategies and overall benefit asset managers and pension funds.

The current proposal risks concluding that capping fees is not in the interests of buy-side institutions if it results in wider spreads, when in fact these institutions are seeing better overall execution quality as more of their passive orders get filled. Pragma has called on the SEC to introduce further measures to better understand the effects of their pilot on execution quality for asset managers and pension funds.

The full comment letter to the SEC is below:

May 14, 2018
Mr. Brent J. Fields
Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Re: Release No. 34-82873; File No. S7-05-18


Dear Mr. Fields:


Pragma Securities appreciates the opportunity to comment on the Commissionís proposed rule concerning a transaction fee pilot for NMS stocks.


Pragma is an algorithmic trading technology provider. Our customers - mostly banks and brokers - use our software services to execute directional trades efficiently and with minimal shortfall. We donít act as an executing broker, but rather provide trading software which our customers use to control the moment to moment pricing and routing decisions when executing orders. We have a strong quantitative research focus, and have published a series of research notes since 2012 explaining and providing data illustrating various market structure issues, including the conflict brokers face as a result of the exchange fee structure. All are available for download from our website at www.pragmatrading.com/research.


Though our customers are strictly institutional, our focus when looking at market structure issues is always the perspective of how market structure affects investors Ė the individuals whom our customers are ultimately (if indirectly) serving.


In general we are pleased to see the Commission moving to act on this issue, and support the Commissionís proposal. However:


1) The pilot should directly measure execution quality

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