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Maker-taker rebate pilot could die before it starts

Trump administration not likely to go ahead with SEC test program

Larry Tabb
Larry Tabb expects a maker-taker test despite changes in Washington.

An SEC pilot program that would measure the effects of maker-taker rebates on equity trade execution could be in jeopardy because of uncertainty over who will lead the agency — and how he will lead it.

“I would reckon it won't happen now,” said Richard Johnson, vice president, market structure and technology at Greenwich Associates, Stamford, Conn. “The incoming administration will change everything.”

The issue of maker-taker — a process in which brokers are given rebates for providing liquidity to certain trading venues — is a major one for money managers who oppose the practice because, they say, brokers could use exchanges based on rebates as opposed to best execution.

A pilot program to test the impact of reduced access fees to exchanges was recommended last year by the Securities and Exchange Commission's Equity Market Structure Advisory Committee. In statements made after the recommendation, SEC Chairwoman Mary Jo White said the pilot would be voted on by the commission this year.

However, Ms. White is resigning from the agency before President-elect Donald Trump is inaugurated Jan. 20, and based on comments from Mr. Trump's advisers last month, any incoming SEC officials will be looking at broader reforms, not piecemeal ones like maker-taker.

Larry Tabb, founder and CEO of Tabb Group, New York, said Paul Atkins, the former SEC commissioner who now advises Mr. Trump on financial regulation, “is very involved with the administration and his input will be taken seriously. Paul's been a significant advocate of deregulation and regulatory overreach. He's actually an opponent of Regulation NMS (National Market Structure) and very much for a holistic review of market structure. If he continues to play in the corridors of power, you can assume there'll be a holistic overall review of market structure.”

Maker-taker “adds more rules,” Mr. Tabb added. “I'm not sure Paul Atkins would be aligned with that. And Congress is now pressing agencies not to pass anything until the Trump administration takes over. I'm not sure (the SEC) can do anything until then, and not sure they can even get a maker-taker pilot proposal there by then. There might be a pause on some of this stuff.”

Peter Weiler, president, Abel Noser Solutions LLC, New York, called the uncertainty of the new SEC leadership “kind of a wild card, considering the rhetoric coming out of Washington. In general, so many factors will affect what they do. The spirit of the new administration appears to be less government interference with business, and not disrupting commercial models would run center to that view, therefore it's less likely they'll eliminate rebates.”

Specifics on how Jay Clayton, Mr. Trump's nominee for SEC chariman, would run the agency had not yet been disclosed by press time. But over the past few months, Mr. Johnson said, “We've heard the administration say that there's a need for overall, fundamental changes, that the equity market structure needs surgery and not just Band-Aids. Maker-taker would be categorized as a Band-Aid. The SEC has already said they're seeking comments about a review of Regulation NMS. New SEC leadership also will open Reg NMS to a much broader, holistic review.”

Cap changes

In the market structure advisory committee proposal for a maker-taker pilot, fees and rebates per 100 shares would be capped for separate stock groups at 20 cents, 10 cents and 2 cents. The current cap is 30 cents per 100 shares.

The program would measure the impact on such things as bid/ask spreads, and order routing and quoting behaviors. It would also gauge the impact of lower fees on the ratio of trading on exchanges vs. over the counter.

Structurally, such a pilot would be similar in structure to the current tick-size pilot program the SEC began in October to measure ways to improve trading in small-cap securities. That program has stocks being traded under three categories — shares of companies with $3 billion or less in market capitalization, an average daily trading volume of 1 million shares or less, and a volume-weighted average price of at least $2 for every trading day.

Sources said they don't believe the incoming SEC leadership would end the tick-size pilot, which is scheduled to run for two years.

And not everyone agrees a proposed maker-taker pilot won't happen. “This is an easy one” for the incoming SEC leadership, said Joseph Saluzzi, partner, co-founder and co-head of equity trading at brokerage Themis Trading LLC, Chatham Township, N.J. “It's an easy one for the SEC to get there. (The new SEC leadership) won't meet any resistance. They won't know anything about maker-taker; they'll see something that SEC staff has recommended and they'll follow through.”

Mr. Saluzzi said he expects to see an official SEC pilot proposal in the first half of 2017. However, he said he's not enamored with the proposed three-segment structure, saying that while such a format works for tick size measurement, it doesn't for rebates. “The tests are similar but what's being measured is different. Tick size measures spreads and liquidity; the maker-taker pilot measures how they charge fees. One is visible, one is done behind the scenes.”

The SEC should go ahead with a maker-taker pilot, as well as continue the tick-size pilot, for the data both will provide, said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management (U.S.) Inc., Chicago. “Enhancements to Reg NMS may very well be needed,” Mr. Larson said, “but it seems data from two important pilots might be needed first to mitigate the potential for unintended consequences down the road.”

Mr. Saluzzi also thinks a pilot should include a test category that would measure the effects of an outright ban on rebates on liquidity. “They need to test a flat, zero fee, or maybe nine mils (nine-100ths of a penny fee) whether you make the trade or take the trade. You'll make a serious mistake if you don't include that as an option.”

Greenwich's Mr. Johnson agreed the proposed pilot won't measure what many money managers and others on the buy side want. “There's a strong call for abolishing rebates altogether,” Mr. Johnson said. “The pilot doesn't address that.”

Only 5% satisfied

According to Greenwich's November 2016 Trading Desk Optimization Study, a survey of 46 buy-side equity traders conducted July through September, only 5% of respondents said they were satisfied with maker-taker as now used, 55% said maker-taker should be replaced by a flat make-take fee, 7% called for reduced access fees and another 7% wanted an SEC pilot to determine the best pricing model. Thirty-one percent did not answer, recommended no changes to maker-taker or answered “other.”

Messrs. Johnson and Tabb said that any reduction or elimination of access fees will mean an increase in other fees charged by exchanges — either in higher fees for data or in wider spreads. “If you eliminate maker-taker, there's very little incentive to provide liquidity,” said Mr. Tabb. “Most investors want to get in and get out. Exchanges fear that without rebates, liquidity dries up. Investors may not like the rebates, but they like liquidity.”

Mr. Tabb thinks that although the Trump administration will take a broader view of regulatory reform, “one way or another” some kind of maker-taker test will happen. “The access fee has been around since Reg NMS. Will they ban rebates? No. I do think there will eventually be a different fee structure, if not with a maker-taker pilot then with a market structure review. They'll look at fees, order protection rules, dark-pool carve-outs. The SEC will have a lot to do.”

This article originally appeared in the January 9, 2017 print issue as, "Maker-taker rebate pilot could die before it starts".