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(Adds Aequitas comment, background)
By Euan Rocha
TORONTO, May 4 (Reuters) - TMX Group, owner of Canada's major stock exchanges, said on Monday it will gradually reduce its rebate and fee structure to address concerns about its incentives model and to tackle competitive threats.
The move by the operator of the Toronto Stock Exchange and other markets could push smaller rivals to lower their own fee structures and reduce the need for regulators to step in to cap fees.
Critics say the widely used fee and rebate system, called the "maker-taker" model, distorts stock-order routing practices as brokers are enticed to send orders to markets where they get the best incentives, instead of acting in clients' best interests.
The practice has come under renewed scrutiny as many have questioned offering incentives to brokers to entice liquidity. Canadian regulators began to investigate the issue a year ago.
Last year, Nasdaq Chief Executive Robert Greifeld joined the debate about fee-based incentives, urging U.S. regulators to reexamine the model.
The TMX contends a drastic reduction or outright removal of the maker-taker model could have a negative impact, causing an increase in volatility and loss of liquidity.
The company said it is instead introducing a program of phased reductions in maker-taker rates that is aimed at gradually lowering dealers' trading costs.
"This move is a response to customer feedback and industry influences," said Kevan Cowan, head of the TMX's markets group, adding that a tougher competitive landscape in Canada and the regulatory interest in fee structures also prompted the move.
Joacim Wiklander, trading head at rival Aequitas NEO Exchange, said now that TMX has brought its pricing down to the levels of its smaller Canadian rivals, smaller players are likely to adjust their models in turn.
TMX said the first phase of its fee and rebate reductions, effective June 1, will distinguish between fees for interlisted and noninterlisted securities to maintain the competitiveness of the Canadian market and prevent loss of order flow to U.S. markets.
TMX said its fees will be lowered by 26 percent on average across all securities and participants, while rebates will be reduced by 31 percent on average. Most do not see this hurting TMX results.
"I think this move pre-empts regulation, or a cap on fees as it were, I think this is also a nod toward brokers who are not very happy about having to pay high taker fees," said Andreas Park, a University of Toronto economics professor. (Reporting by Euan Rocha; Editing by Peter Galloway)