WASHINGTON—Judges for a federal appeals courtroom sharply questioned whether or not regulators involved about market equity can require stock exchanges to experiment with the charges they price.

The judges, hearing a lawsuit Friday added by means of the New York Stock Exchange and other trading venues, debated whether federal regulators justified a pilot application that would limit the buying and selling prices charged by way of exchanges. At issue is the dominant pricing device used by exchanges, which fees costs for a few trades even as giving brokers subsidies for sending sure other orders to their venues.

The Securities and Exchange Commission has stated the subsidies, which take the shape of rebates on trading costs, ought to distort the choice of where stockbrokers direction investors’ orders. But in its law requiring the charge experiment, the SEC stopped brief of claiming the rebate gadget causes damage.

“You are not even saying that,” U.S. Circuit Judge Harry Edwards stated. “You are announcing, ‘well we ought to possibly do it better if we had more facts, so now we are going to wreak havoc by setting a regulation into impact in an effort to value oldsters cash.’”

The SEC argued that the experiment is wanted to test longstanding issues that the exchanges’ “maker-taker” pricing gadget harms investors, due to the fact brokers seize the trading rebates and pay the charges.

Some asset managers and other critics say it poses a conflict of interest for brokers, because they may route orders based totally on their own financial hobby, no longer in which they could locate the great price or exchange execution for the purchaser.

The test could have an effect on about 1,460 shares and exchange-traded products—about 25% of all listed securities—by way of slashing expenses and rebates for trading them. It should close for up to two years.

“This pilot became necessary to decide if a regulatory response turned into needed for ability distortions,” stated Tracey A. Hardin, an assistant trendy counsel for the SEC who argued Friday for the agency.

“If that’s your quality shot, that there’s evidence on each side and we will make up our minds…you couldn’t base a rule on that, ought to you?” Judge David Sentelle stated.

A choice is anticipated in the coming months.

The exchanges say the SEC has no foundation to tinker with their pricing and didn’t grapple with how the test may want to hurt public groups and trade traded-price range by lowering the incentives that boost buying and selling of their stocks.

The SEC counters that it has extensive authority to adjust stock exchanges and their fees.

One of the three D.C. Circuit Court judges on Friday’s panel seemed to aid the SEC’s case for the pilot application.

“They are pronouncing, ‘we are not going to prejudge this,’” said Judge Cornelia Pillard. “It’s feasible…this may position to relaxation the concerns we had. It’s possible it’s going to substantiate those issues.”

The industry has battled for years over whether or not the price device is truthful, with one exchange operator, IEX Group Inc., choosing no longer to provide rebates if you want to appeal to traders who think the incentives harm them. IEX isn’t a plaintiff inside the lawsuit and helps the SEC’s pilot software.

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