Buy Side Takes Issue With Maker-Taker Pricing

Terry Flanagan

Maker-taker pricing is a sore point for some buy-side market participants, who believe it distorts market behavior to their detriment. The system, by which liquidity providers are paid a rebate by exchange and liquidity takers pay a fee, has historically been justified by exchanges as a way to attract more liquidity, but in the era of high-frequency trading that argument has come under scrutiny.

“There’s a big difference between liquidity and volume: if you start flat and go home flat, you’re not really providing liquidity,” said Joseph Scafidi, director of trading at Brandes Investment Partners, which manages $27 billion. “It’s recently been announced that the SEC may take a look at some pilot programs for removing maker-taker. I am in strong support of such a program. There are a lot of incentives with the maker-taker model that many guys on my side of the fence have issues with.”

The maker-taker model was first used by electronic communication networks in the 1990s as a way to attract more liquidity to their systems, and large, well-established exchanges began using this model during the mid- to late-2000s.

SEC commissioner Luis Aguilar, in an April 2 speech, recommended a pilot program in which maker-taker rebates would be temporarily prohibited for certain securities. Such a pilot program would allow the Commission and others to study the effects of the maker-taker model on order routing practices, transparency, and other metrics, and would help inform the discussion on whether the maker-taker model needs to be changed or eliminated.

“As broader concerns about our market structure have recently come to the fore, questions about the maker-taker model have emerged from various sectors of the capital markets,” Aguilar said. “Many have observed that the maker-taker model may present a conflict of interest between brokers and their customers because broker-dealers are incentivized to send customer orders to the venue that pays the best maker-taker rebate, and not necessarily the venue that provides best execution.”

Aguilar noted that some claim that maker-taker has contributed to a market structure in which order execution is too fragmented among exchanges, dark pools, and broker-dealers that execute orders internally, and that it has incentivized some market participants, including high-frequency traders, to trade primarily, if not solely, to profit from collecting maker-taker rebates.

These concerns should also be taken seriously by the mutual fund industry, since these entities are some of the largest buyers and sellers of equities, Aguilar said.

Clive Williams, head of global equity trading, at T.Rowe Price said in a Jan. 30, 2014 comment letter: “Additional pilot programs eliminating the maker/taker model and placing limitations on payment for order flow and internalization would aid in examining the deficiencies of our current market structure. We also believe that dark pools are no longer being utilized for their originally intended purpose of anonymity in exchange for size and would suggest pilot programs to set significantly larger minimum trade sizes in such pools.”

Another commenter, Richard Steiner, global equities liaison to regulatory & government affairs at RBC Capital Markets, said that maker/taker pricing reduces transparency by distorting the price-discovery process. “It does so by spawning a proliferation of rebates and fees that are opaque to many market participants, and that are not disseminated in displayed quotes,” he said. “In so doing, maker/taker artificially narrows and widens displayed spreads but not actual spreads, because displayed spreads don’t include access fees and rebates.”

Featured image via Dollar Photo Club

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