The End Of Maker Taker Is Near
For years now, we have been vocal opponents of the exchange maker-taker model and retail payment for order flow. We have done everything we can to raise awareness of these price distorting features of our market. We spoke at industry conferences, testified before the SEC, wrote articles and SEC comment letters, wrote a book and appeared on various financial media. Back in 2010, we wrote a comment letter to the SEC on their Concept Release and stated:
“We believe that the maker/taker model needs to be reevaluated. With the help of broker/dealer algos and exchanges, the maker/taker model is being used to assist high speed traders in their daily pilfering of millions of dollars from long-term investors. The maker/taker model is a clear example of long-term investors being fleeced by short-term traders.”
Lately, we have been encouraged that our voice has been heard. Back in April of this year, SEC Commissioner Luis Aguilar said the SEC should seriously consider implementing a pilot program that would temporarily ban maker-taker rebates for certain securities. And last week, Senator Carl Levin (D-MI) wrote a letter to SEC Chair White calling for the elimination of the payment for order flow to retail brokers and the elimination of the exchange maker-taker model. Senator Levin wrote:
“At the hearing, the Subcommittee heard witness testimony relating to two conflicts of interest in the U.S. equity markets: the so-called “maker-taker” system and payments for order by wholesale brokers to retail brokers. Conflicts of interest erode public confidence in the markets and have the potential to harm investors and believe the SEC should take prompt action to eliminate these conflicts of interest.
Clearly, eliminating maker-taker pricing would improve confidence in U.S. equity markets. Such action would also reassure investors that they can rely on their brokers to provide best execution of their trades, without having to question whether a broker might instead be seeking to maximize its own profits at the customer’s expense.
U.S. equity markets may be the best in the world, but permitting conflicts of interest to persist undermines investors’ confidence that they are getting a fair deal. Evidence, such as that presented at the Subcommittee’s hearing, shows one reason why. The SEC has had more than four and a half years to examine the results of the holistic market structure review that it launched in 20 I0. Further study will not change the fact that conflicts of interest are inherent in the maker-taker system and payments for order flow. The SEC should immediately initiate action to eliminate them.”
Senator Levin has focused on what we think is the easiest and quickest fix for our market structure. Eliminating payment for order flow and the maker-taker model takes care of many of the routing conflicts that currently exist. While some folks like SIFMA are calling for a reduction in access fees, we think Senator Levin’s approach is a better solution. Eliminating artificial price arbitrages will clean up a lot of the noise that currently exists in the market.
We are sure that those in favor of the maker-taker model will claim that more data driven studies are needed before the SEC can propose eliminating the maker-taker model. They will claim that surgically attacking this one issue will result in other market structure problems. They will call for a more holistic approach to market structure reform. But Senator Levin has heard this line before and is not falling for it this time. He notes in his letter that the SEC has already undertaken a holistic review of the equity market with this 2010 Concept Release and he doesn’t think further study is necessary. The wheels are now in motion and the end of maker-taker and payment for order flow is near. It might be a good time for some exchanges and market makers to start to reexamine their business models.