Massachusetts to Probe Exchange Rebate Pricing

Maker-taker, taker-maker, or whatever one chooses to call the way exchanges pay brokers to attract order flow is now coming under state regulator review.

According to a report on Reuters, Massachusetts’ top securities regulator said on Tuesday that his office is examining whether brokerages route orders to stock exchanges that pay them additional fees regardless of whether investor clients are getting the best price.

William Galvin, the secretary of the Commonwealth of Massachusetts, reportedly has sent inquiry letters to affiliates of several retail and institutional brokers such as Charles Schwab Corp, TD Ameritrade Holdings Corp, Fidelity Investments, E-Trade Financial Corp, Edward Jones and Morgan Stanley, to examine their financial relationships with the exchanges.

At issue is just how the exchanges lure the stock orders from the brokers – with the contention being that broker send orders where their payments or rebates are highest – and not where investors can get the best execution or price.

“If financial rebates or kickbacks create a conflict that results in less than the best deal for the investors, this practice must stop,” Galvin said in a statement announcing the probe.

The action by Massachusetts follows the U.S. Securities and Exchange Commission’s own announcement that it too is planning a proposal to test how lower fees and rebates would affect market behavior. This pilot, SEC Chairman Clayton said in remarks, could decide whether or not maker-taker of other pricing schema should be abolished, regulated or limited.

Galvin in his statement cited an essay by Yale Law School Professor Jonathan Macey and Yale University’s chief investment officer, David Swensen, who argued that brokers choose exchanges at a price disadvantage to investors.

According to Reuters, Fidelity and Schwab are reviewing the matter, representatives said. Edward Jones has not yet received a letter from Galvin’s office.

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