Pensions, Asset Managers Broadly Support Tick-Size, Access Fee Updates

An industry survey conducted by IEX Group Inc. found that most institutional investors support reducing price increments for tick-constrained symbols to half-penny increments, as well as reducing the exchange access fee cap.

The Securities and Exchange Commission proposed an update to Rule 612 of Reg NMS in December 2022. It proposed reducing price increments from whole-penny to half-penny, fifth-of-a-penny or 10th-of-a-penny. The IEX survey found that 74% of institutional investors would support half-penny increments for tick-constrained symbols, while 68% and 77% opposed fifth-penny and 10th-penny increments, respectively.

The IEX survey contained responses from 217 institutional investors out of 1,200 who were contacted, according to Ronan Ryan, the president of IEX Group.

For more stories like this, sign up for the CIO Alert newsletter. 

This proposal was one of four SEC proposals from December 2022. The Rule 605 updates, which would require monthly quality-of-execution reports from broker/dealers, and the Rule 612 update on pricing increments are the most popularly accepted in the financial industry, while Regulation Best Execution and the Order Competition Rule have been widely criticized.

Incremental Change

IEX also aggregated the comment letters sent to the SEC for Reg NMS Rule 612 and found that 21 of the 22 asset managers and all 13 pension funds that submitted letters supported half-penny increments.

The 13 supportive pension funds included CalPERS, CalSTRS and the Ontario Teachers’ Pension Plan.

Among the supportive asset managers were BlackRock, the Vanguard Group and Invesco. T. Rowe Price did not offer specific feedback to the half-penny proposal, writing, “We do not know the correct size for varying securities.”

T. Rowe Price’s letter did object to narrower ticks, stating, “We have seen overly narrow ticks contribute to behaviors that are not in the best interests of long-term institutional investors such as sub-penny jumping of trading queues, less incentive to quote, and more flickering and fading of quotes.”

IEX’s Ryan notes that $.002 and $.001 pricing increments “likely takes it too far” for many in the financial industry, on both the buy and sell sides. He explains that reducing increments too far could overwhelm exchanges and managers with more quotes and messages. Bundling large numbers of shares into single orders would also be more difficult.

There is also some apprehension about changing too much too quickly. Ryan explains that many firms have an attitude of “let’s do half a penny and see where this goes.” Increments of $.005 are something of a “Goldilocks” solution that allows some symbols more pricing flexibility without fragmenting pricing by too much.

Exchange Fees

The Rule 612 proposal would also reduce the cap on exchange access fees. Currently, exchanges cannot charge more than $.30 per 100 shares to access their quotes. Ryan explains that this rule was created to protect investors from monopolistic exchanges.

The fee cap was set in 2005 and was based on market pricing at that time, but most trading volume is still near that cap today, despite gains in efficiency and technology in the meantime, according to Ryan. The new SEC proposal would reduce this cap to $.10 per 100 shares. Ryan says this a relatively simple change that exchanges could handle and implement quickly.

According to the IEX survey, 83% of institutional investors either agree (46%) or strongly agree (37%) with reducing access fees, with only 5% opposing a reduction.

Of the 22 asset managers, 20 support this element of the proposal. Dimensional Fund Management did not address the issue in its letter, and State Street Global Advisers wrote that further research was needed on this issue: “We recommend conducting empirical tests to examine whether a reduction in the access fee cap is beneficial to competition and liquidity in the market.” This response was listed as “mixed” by IEX.

The 13 pension funds listed were, again, unanimous and in favor of reducing access fees.

Tags: BlackRock, CalPERS, CalSTRS, SEC, State Street Global Advisors, T. Rowe Price, Vanguard

Touting corporate ESG bona fides used to be the “in” thing during earnings calls. But following powerful backlash from Republican politicians, mentions of companies’ environmental, social and governance efforts has dwindled.

What’s the new favorite? Artificial intelligence.

That was the conclusion from FactSet Research Systems Inc., drawn from scanned transcripts of the earnings calls of all S&P 500 corporations that conducted them from March 15 through June 9. ESG mentions peaked in 2021’s fourth quarter, at 156, and have dwindled through four of the past five quarters, per FactSet. In calls for the just-completed Q1 2023, the count dipped to 74, its lowest level since Q2 2020 (57), which was before trumpeting ESG gained popularity—and before the GOP in red-led states cracked down on it.

Artificial intelligence has been a staple of mainly tech-company calls for years. That has accelerated with advances in the area, according to FactSet. For S&P 500 companies in earnings calls going back to 2010, AI mentions hit a record in Q1 2023, totaling 110. The previous record was 78, in the prior quarter. That tally far eclipses the five-year average of 57 and the 10-year average of 34.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

AI does not face the political problems ESG does. ESG principles are under fire in GOP-controlled states (where the party runs the legislature and holds the governor’s office), and companies have found that proclaiming dedication to climate control is a liability.

In May, Florida’s Republican governor, Ron DeSantis, who is running for president, signed a bill that forbids ESG factors in the state’s investment decisions. He reasons that an ESG focus, particularly on environmental issues, comes at the expense of managements’ fiduciary duties, as that focus could slight money-making opportunities in favor of green ideology.

It is a common notion among Republican politicians, as seen by 25 states joining in a January suit, Utah v. Walsh, against the Department of Labor’s new rule permitting ESG analysis in retirement plans. Many Democrats strongly disagree. Senate Majority Leader Chuck Schumer, D-New York, for instance, has defended the DOL rule, saying, “It’s about looking at the biggest picture possible for investors to minimize risk and maximize returns.”

Although there is scant evidence that companies are reversing their ESG efforts, the downshift on mentioning the concept at annual shareholder meetings is noticeable. The reticence is known as “green hushing,” which the Corporate Governance Institute defines as “steps to stay quiet about … climate strategies.” A report on the subject by the organization added: “If somebody asks about their climate goals, they decline to answer. If nobody asks, they don’t do anything.”

The iShares Global Clean Energy exchange-traded fund is down 5.2% this year, while the S&P 500 is up 13.8%.

Investments in AI, on the other hand, have not upset anybody (although controversy bubbles about the possibility of AI applications endangering humanity). The Wall Street consensus is that will turbocharge the economy and stocks. Small wonder that more and more earnings calls feature mentions of AI. The Global X Robotics & Artificial Intelligence ETF is ahead 42.6% in 2023.