What a difference a year makes.
What looked unlikely at the start of this year — that the Securities and Exchange Commission would propose a pilot program to measure the effects of maker-taker rebates on equity trade execution — is now quite possible as the year draws to a close, sources said.
"I said before, 'Not so fast, this (pilot) might not happen,'" said Richard Johnson, vice president, market structure and technology, at Greenwich Associates LLC, Stamford, Conn. "But then the tides kind of changed on me. There seem to be a lot of tailwinds in favor of this. … I think (the pilot) will go through."
Since the start of 2017, supporters of a maker-taker pilot include SEC Chairman Jay Clayton, who said in July the SEC would announce the plans for such a test, and the Treasury Department, which in a wide-ranging study of the capital markets released in early October called for a review of the maker-taker rebate model.
Also, David Swensen, chief investment officer of the $27 billion endowment at Yale University, New Haven, Conn., co-wrote a July 18 opinion article in the New York Times that blasted the maker-taker model, in which brokers and other market participants pay access fees to stock exchanges to take liquidity or receive access-fee rebates from exchanges for providing liquidity. Mr. Swensen called the rebates "kickbacks" to attract business to exchanges. And in Massachusetts, Secretary of the Commonwealth William Galvin in August said he was investigating whether brokers were routing stock orders based on maker-taker rebates instead of choosing the venue with the best price.
Such actions have highlighted the opposition among buy-side market participants — asset owners like Mr. Swensen as well as institutional money managers — to the maker-taker model, sources said. In a survey of 52 traders at money managers and institutional investors conducted from July to September by Greenwich Associates, 65% said rebates distort the equity markets and 62% said the SEC should institute a maker-taker pilot. This is possibly forcing the hand of the SEC into creating a pilot, sources said.
The SEC pilot most likely will be proposed before the end of this year, but with the required 60-day opening for public comments and industry preparations to conduct the pilot, it will be late 2018 before the pilot would be underway, they said.
"There are two elements at work, access fees and rebates," said Mehmet Kinak, vice president and head of global equity market structure and electronic trading at T. Rowe Price Group Inc., Baltimore. "Access fees create a conflict of interest in the market. Brokers are paid commissions and to try and mitigate their costs, they avoid the most expensive venues to trade. So, flows go to dark pools, which circumvents the high access fees of lit markets but may not get good quality executions. If you bring the access fees down, brokers are more apt to go for best execution and ... look at more lit venues."
Rebates create "a different dilemma," Mr. Kinak said. "Trading is one of the few areas where you can buy or sell something at the same price and come away with a profit, through the rebate from a venue for doing a transaction there. That rebate creates excessive remediation. There ends up being market participants out there that are just there to collect the rebate. Some people call them the 'grease' to smooth the market. But most of the time, they're in places where they aren't needed, like when you're trading in highly liquid stocks. If they provide liquidity in places where liquidity is needed, that's one thing. But in a highly liquid market, that's not the case."