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The three largest U.S. stock exchange operators said they will sue the Securities and Exchange Commission for overstepping its authority by ordering a pilot program to test banning lucrative payments exchanges make to brokers for resting stock orders.

“We disagree with the government overreach, and this really represents an unprecedented attempt by the SEC to distort the free-market mechanisms that govern the competition among trading venues,” Michael Blaugrund, head of transactions at NYSE, told reporters in New York on Friday.

Intercontinental Exchange Inc.’s NYSE, Nasdaq Inc., and Cboe Global Markets, which together operate 13 of the 14 U.S. stock exchanges, each filed separate notices that they intend to sue the SEC. At issue is a pilot program the regulator approved in December that will restrict the amount exchanges can charge for stock trade executions, as well as the rebates exchanges pay brokers for orders that others can trade against, for one to two years.

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The program aims to shed light on whether rebate payments, collectively around US$2.5-billion last year, create conflicts of interest by incentivizing brokers to send customer orders to the exchanges that pay the biggest rebates rather than to those that would obtain the best results for the clients.

The exchanges argue rebates are needed to compensate brokers for providing liquidity and that the SEC has not shown that they harm the market.

“The SEC is required by statute to determine there is a problem, not go on a fact-finding mission,” Ed Tilly, chief executive officer of Cboe, said in an interview on Feb. 8.

Cboe, Nasdaq, and NYSE vigorously opposed the pilot when it was proposed early last year.

They argued it would create winners and losers, as private stock trading venues, which execute about 40 per cent of U.S. stock transactions, would not be subject to the restrictions, giving them a competitive advantage. They also said bid-ask spreads would widen without rebates, creating hundreds of millions of dollars in new costs for investors.

The pilot was expected to begin later this year, but NYSE said it will request a delay while it pursues its lawsuit.

The SEC did not immediately respond to a request for comment.

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“It’s a very difficult decision to decide to take your primary regulator to court,” Mr. Blaugrund of the NYSE said. “That being said, we feel this is overreaching, and we need to draw a clear line in the sand.”

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