maker-taker Archives | BrokerDealer Blog

Exchange rebates paid to brokers for routing orders to their respective venues and the general issue with regard to the now ubiquitous “payment-for-order-flow” model that extends throughout the electronic trading ecosystem has been a topic of discussion for many years now. It may be confusing, but is certainly not an unknown concern to the universe of informed buy-side investors. For those who may be still be uninformed as to how/where/why/when (and how much?!) broker-dealers are on the receiving end of rebates, suffice to suggest its time you get yourself up to speed; your bottom-line can depend on it.

exchange-rebates-maker-taker-payment-for-order-flow

Image Courtesy of April 2014 Wall Street Journal

Courtesy of financial industry media outlet MarketsMedia’s all-star journalist Terry Flanagan most recent dissertation “Got Transparency?” it is one that deserves an accolade from altruists within the industry, if not a check under the hood or bottom of Terry’s car before he starts the engine.

“One aggravating factor is a lack of transparency. Many market participants do not know either the amount of the rebate or where it ends up.”

As Flanagan points out, “..In institutional equity trading, rebates have been a point of contention since the late 1990s, when Bill Clinton was U.S. President and the Dow Jones Industrial Average scaled 10,000 for the first time.

Supporters say exchanges paying rebates on order flow is a perfectly legitimate practice of rewarding customers and offering volume discounts. Helped by rebates, trading commissions have dropped substantially over the years; the biggest decline from 2005 to 2017 was 68% for the lowest-touch direct market access / algorithmic trades, according to Tabb Group research.

“Most buy-side firms operate with ‘all-in’ pricing models and aren’t provided granularity into fees by order, but the decisions on when and how to route to particular venues significantly impact execution performance…” according to Stino Milito, Co-Chief Operating Officer at Dash Financial Technologies.

On the other hand, critics say rebates create conflicts of interest, and shortchange end investors if brokers route in ways that disadvantages clients……Helped by rebates, trading commissions have dropped substantially over the years; the biggest decline from 2005 to 2017 was 68% for the lowest-touch direct market access / algorithmic trades, according to Tabb Group research.

“There is absolutely crap disclosure about broker-dealer routing strategies,” according to Dave Weisberger of ViableMkts. “If you can’t get a high-level view of how brokers route and what the outcomes are, then how can you be talking about a transaction fee pilot, or making claims about what rebates do to destroy the market?

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To read the entirety of Terry Flanagan’s piece in the latest edition of MarketsMedia, click here

The Great Rebate Debate..Broker Disclosure IS Front-Burner Topic

BrokerDealer.com blog reporting courtesy of this a.m. story from securities industry blog MarketsMuse

Bowing to increasing pressure from regulators, law makers and law enforcement officials, Finra, the securities industry “watchdog” has launched its own probe into how retail brokers route customer orders to exchanges, according to recent reporting by the Wall Street Journal’s Scott Patterson. In particular, through the use of “sweep letters” targeting various broker-dealers, Finra is purportedly focused on whether rebates associated with schemes that brokers receive when directing their orders to specific venues is a violation of conflict of interest rules, given that customers presume they are receiving best price execution when in fact, they often do not.

MarketsMuse, the securities industry blog that has long reported about payment-for-order-flow and the unsavory practice in which customer orders are “sold” by custodians and prime brokers to “preferenced liquidity providers,” who then trade against those customers and profit from price aberrations between multiple exchange venues and dark pools, takes pride in pioneering the coverage of this topic.

Now that main stream media journalists are beginning to “get it”, a growing number of those following this story hope that WSJ’s Patterson and other journalists will shine light on the even more unsavory practice in which these same brokers imposing egregious fees on customers who wish to “step out” aka “trade away” and direct their orders to agency-only execution firms, whose role as agent is to objectively canvass the assortment of marketplaces and market-makers in order to secure truly better price executions for their institutional and investment advisory clients.

In a further sign that the current market structure could be cracking, one that has morphed away from a model based on centralization and transparency to disjointed fragmentation [a shift that has ironically been continuously supported Finra-sponsored government lobbies on behalf of that "regulatory authority's" senior constituents], Jeffrey Sprecher, the CEO of IntercontinentalExchange and owner of the New York Stock Exchange appeared before a U.S. Senate hearing yesterday and called for the end of the now scrutinized fee and rebate system known as “maker-taker.” In what would seem like a walk-back given the NYSE’s own rebate scheme for brokerdealers as a means to attract order flow to that venue, Sprecher stated “Maker-Taker adds to the complexity and the appearance of conflicts of interest.”