03.04.2016
By Rob Daly

Maker-Taker Pilot Advances — Slowly

A controversial pilot program that would ban so-called maker-taker rebates in the U.S. equity market is moving one step closer to reality, according a U.S. Securities and Exchange Commission official who testified before a subcommittee of the Senate Committee on Banking, Housing, and Urban Affairs.

Stephen Luparello, director, Division of Trading and Markets at the SEC told the subcommittee’s chairman Senator Michael Carpo (R-ID) and ranking member Senator Mark Warner (D-VA) that the SEC’s Equity Market Structure Advisory Committee will be presented with a maker-taker pilot proposal the next time the full committee convenes in late April.

Richard Johnson,<br> Greenwich Associates

Richard Johnson, Greenwich Associates

Warner, who has been critical over the SEC’s pace of post-Flash Crash market reforms, greeted the news positively.

In his opening statement, he cited a graphic produced by RBC Capital Markets that showed 839 different exchange fee schedules that are composed of of 3,729 separate fee variables.

“When one examines these variables in detail, it appears that exchanges are using their fee engineers to put together bespoke pricing terms for one or a small handful of customers in order to attract and retrain order flow,” said Warner. “Given this incredible complexity, it likely very difficult for market participants to know whether they are getting the best execution and the benefit of a fair and orderly market.”

Richard Johnson, vice president of market structure and technology at consultancy Greenwich Associates, suggested that the subcommittee is underestimating the amount of work such a pilot would entail. “What disturbed me is when Senator Warner described such a pilot as ‘easy as flipping a switch’,” said Johnson. “It’s definitely not easy. We still don’t have the tick pilot yet.”

Johnson is unsure whether a maker-taker pilot would overlap with the two-year tick pilot, which starts on October 3.

The proposed maker-taker and tick pilot would not have any symbols that would overlap both pilots. The tick pilot consists of 400 symbols of companies with market capitalization of $5 billion and less, an average daily trading volume of a million share less, and a closing price of $2 or more. The maker-taker pilot, as being discussed currently, would consist of 50 of the 100 liquid stocks.

Still, Johnson is uneasy about the danger of operating two pilots simultaneously. “The equity market is a very tangled and interconnected web,” he said. “A change in one thing will have a ripple effects on other portions of the market structure.”

One alternative Johnson proposed seeing how the equity market accepts an IEX exchange, which plans only to have flat market access fees. “I think an approved IEX exchange would get some sort of maker-taker pilot out there sooner,” he said.

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