“Maker-Taker Conflict of Interest Reform Act of 2015”


A bill  (H.R. 1216) was introduced yesterday by Congressman Stephen Lynch of Massachusetts which directly addresses the conflicts of interests of the maker-taker exchange pricing model.  As most of you know, the elimination of the maker-taker model has long been one of Themis Trading’s key proposals for market structure reform.  In addition to our calls , others like Jeff Sprecher of the NYSE and SEC Commissioner Kara Stein have ​also called for a review of the maker-taker model.

In his press release announcing the bill, which is titled the “Maker-Taker Conflict of Interest Reform Act of 2015”  Congressman Lynch calls on the SEC to carry out a pilot program to assess the impact of an alternative to the maker-taker pricing model.  He states:

“The maker-taker system adds unnecessary complexity to trades and creates a conflict of interest for brokers because they have an incentive to maximize rebates, rather than focus on the best interest of their clients…The issue of conflict of interest arises as the payment system incentivizes brokers to choose the route most cost-effective for them, instead of what is best for their clients.

Specifically, H.R 1216, the Maker-Taker Conflict of Interest Reform Act of 2015, would require the SEC to identify a random sample of 50 of the 100 most heavily traded U.S. stocks, and for those 50 stocks, prohibit the payment of rebates for a six-month period. Additionally, it would mandate that all venues where those stocks are traded be required to implement a rebate-free pricing structure. The data from the pilot study would be a crucial tool to evaluate the pressing need for maker-taker reform.

We agree that the maker-taker model is responsible for many of the order routing conflicts that brokers face yet regulators have refused to address this pricing model.  Brokers have been able to lower their costs but what cost has this had on the institutional investor?  Many institutional investors have become frustrated with their lack of fills on lit venues and have looked to off-exchange venues for help in their trading only to find many of these venues are littered with other parlor games like conditional orders and tiering of client order flow.

We think that a pilot program to eliminate the maker-taker model will give institutions as well as retail investors an opportunity to compete fairly on lit exchanges.  These public bids and offers will make for a more robust limit order book which should hold up much better in times of stress than the current public quote that is filled with high-speed, fleeting liquidity.

Ever since Senator Ted Kaufman left office in 2010, we have been looking for a champion in DC to push for market structure reform and we are thrilled to see Congressman Lynch step up and take the reins.  Unfortunately, the market structure debate in DC over the past few years has been dominated by high paid lobbyists and special interests that run around the halls of Congress with their cherry-picked research which often tells only part of the story and is usually substantiated by flimsy data. Some in Congress have bought into this message while others seem to think that market structure reform is too complicated of an issue to tackle.

We have met with Congressman Lynch and his staff and can confidently tell you that they understand the market structure issues that we face and are determined to get regulators to act.  We were happy to talk through several sides this issue with Congressman Lynch and we’re honored that he referred to us in his press release:

“Market participants, including senior executives at the New York Stock Exchange, major institutional investors, and large broker-dealers, have indicated that the maker-taker pilot study would be feasible and a productive step towards reform. Sal Arnuk and Joe Saluzzi, co-founders of Themis Trading LLC and experts on equity trading, stated “If we could only do one thing to fix our market structure right now, it would be the elimination of the maker-taker pricing model. This model has distorted asset prices and is the primary reason why broker smart order routers are so conflicted.””

We’re sure that some folks in the industry are already lining up to attack this bill and its supporters. That is why if you agree with us and support H.R. 1216, we urge you to call your representatives and have them support this bill as well.