The Beginning of The End for the Maker/Taker Model
Somebody please pinch us. This has been quite an eventful week in market structure land that has left us feeling exhausted and somewhat vindicated. While we didn’t think it could get much better than watching an HFT-enabling stock exchange executive self-implode before a live national television audience, we just got some more fantastic news.
If we could only do two things to try to fix our market structure right now, one would be the elimination of maker/taker and the second would be to eliminate the speed differential between private data feeds and the SIP. Well, yesterday, we received news that one of these wishes may come true.
SEC Commissioner Luis Aguilar said the SEC should seriously consider implementing a pilot program that would temporarily ban maker-taker rebates for certain securities. Yes, you read that right, after years of us and a few other market participants pleading with them, the SEC has finally directed their attention to the maker/taker model. Specifically, Commissioner Aguilar stated :
“However, 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. 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. Some have argued that in order to mitigate this conflict, broker-dealers should be required to pass the maker-taker rebates they receive to their customers. Another criticism of maker-taker is that it produces quoted spreads that do not represent actual trading costs, thereby decreasing transparency, and could potentially confuse investors about the true costs of trading. Others 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.”
“As I said recently, the Commission needs to consider seriously whether the current equity market structure is working for all investors. Of course, any comprehensive market structure review would require a close examination of the maker-taker model and any resulting conflicts between broker-dealers and their customers. To that end, one idea that the commenters have recommended is a pilot program in which maker-taker rebates would be temporarily prohibited for certain securities. The idea is that 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.”
We were happy to see that Commissioner Aguilar footnoted some of our comments from “Broken Markets” in his speech and are thrilled that the SEC has read the book and is considering our recommendations. Of course, this proposal by Commissioner Aguilar will likely be met with fierce resistance from some stock exchanges, the HFT community and retail brokers that sell their order flow. However, we do think that one exchange, the NYSE, will embrace Aguilar’s suggestion considering that their new boss, Jeff Sprecher, has already gone on record criticizing the maker/taker model. We also think that institutional and retail investors will embrace his proposal. But it will be up to all of you to make sure that your voices are heard.
The tsunami of bad news that has hit the HFT community over the past few weeks must be starting to get tough to hold back. Big players like Goldman have already jumped ship and more are likely to follow. How long can the pro-HFT enablers fight the market forces that are breaking through their unsustainable business models?