Money managers want the Securities and Exchange Commission to examine maker-taker rebates — to limit or eliminate them for all stock trades — claiming that the rebates spur broker-dealers to find trading venues based on revenue, rather than on best execution for clients.
And while maker-taker — a process in which brokers are given rebates for providing liquidity to certain trading venues — isn't being seen as the direct cause of the July 8 outage at the New York Stock Exchange, sources said the complexity of the pricing system has added to equity market fragmentation. That's because brokers will search a variety of venues to find rebates, adding another layer to an already cumbersome trading process, they said.
“The fact that the markets are as fragmented as they are, one could argue that fragmentation might have actually played a part in (the NYSE) problem,” said Ryan Larson, head of equity trading, U.S., at RBC Global Asset Management (U.S.) Inc., Chicago. “With the multiple order types that exist in today's environment, the constant need for speed, abnormally excessive messaging traffic and the demand on exchanges to constantly upgrade and update their systems to keep up, it's no surprise that software glitches occur and will continue to occur. In my opinion, the next step following (the outage) should be the need to finally address maker-taker and the complexities that pricing model imposes on the current environment.”
Such concerns are why managers, along with many agency broker-dealers, want the SEC to conduct a pilot program on maker- taker rebates that could contain multiple options — a control group with current maker-taker rebates, one with limits on rebates and one that bans maker-taker on selected stocks.
Other ways to spur the SEC to address changes in the maker-taker system, traders and brokers said, include recommendations from the SEC's Equity Market Structure Advisory Committee, founded this year and charged with discussing a variety of broad market-structure issues, and legislation, such as a bill introduced in March by U.S. Rep. Stephen Lynch, D-Mass., to require the SEC to conduct a maker-taker pilot. (That bill has languished in committee and industry observers said there's little appetite in a Republican-led House to pass it.)
Along with conflict-of-interest issues with rebates, other concerns like increased transaction costs and lack of transparency have “added to the complexity of today's market structure,” said Mr. Larson. “Whether it's SEC mandated, or better yet, driven from market participants themselves, I think it's time to finally address the elephant in the room and start thinking about possible alternatives to the maker-taker model. ... It's not just the buy side that has been calling for a pilot on maker-taker. It's the sell side, some of the exchanges, Congress, even members of the (SEC) as well. When you see that diverse of a group calling for change, I think it suggests something very important — whether maker-taker is the right approach. This could be one of the most impactful tests ever taken up in market structure.”