Maker-Taker Needs To Go
Congratulations to our friends at IEX for reaching the 2% market share milestone yesterday. As you all know by now, we are big fans (and participants) of IEX and continue to root for their success. While their speed bump is usually what folks talk about when they mention IEX, we think that their pricing structure is one of their most important features. IEX has no membership, connectivity or market data fees. But more importantly, they have an unconflicted, flat rate fee schedule . For non-displayed liquidity, the transaction fee for brokers is $0.0009/share regardless if you make or take liquidity. For displayed liquidity, it is currently FREE to make or take liquidity.
We like the IEX fee schedule because it takes the conflict of interest out of routing. Flat fees, regardless of whether you make or take liquidity, remove the conflicts that are inherent in many broker algorithms. Of course, IEX does not operate in a vacuum but rather quotes alongside eleven other exchanges that all have their own versions of fees. These fees range from an enhanced rebate of $0.0034/share for retail limit orders posted on EDGX to a fee of $0.0018/share for adding liquidity to the inverted venue BATY.
Different exchange transaction fee schedules incentivize brokers to route orders in a way that sometimes is not in the best interest of their client. For example, suppose you are using a VWAP algo and are scheduling small slices of orders to execute throughout the day. Some of these VWAP algos will first try to post liquidity at the near touch on a high rebate venue. They will wait there for a set amount of time before then checking other low cost dark venues. If they still don’t find a fill, they will then search for an inverted venue that pays them to take liquidity. Finally, if all else fails, they will cross the spread and pay the take fee at a lit venue. While this process minimizes the brokers cost, what does it do to your execution price?
This week, Pensions & Investments (P&I) tackled the subject of these exchange fees in an article written by Rick Baert titled “Maker-taker rebate pilot could die before it starts” . The article points out that a maker-taker pilot, which has long been talked about, might not happen now since there is a new SEC Chairman about to be appointed. Some folks are skeptical about the pilot and think that the new administration would rather do a holistic review of equity market structure rather than a band-aid fix like a maker-taker pilot. We disagree and strongly believe that a maker taker pilot will be proposed this year by the SEC but unfortunately we think it will not include a flat make-take fee (similar to IEX) in the pilot. We were quoted in the P&I article as saying:
And not everyone agrees a proposed maker-taker pilot won’t happen. “This is an easy one” for the incoming SEC leadership, said Joseph Saluzzi, partner, co-founder and co-head of equity trading at brokerage Themis Trading LLC, Chatham Township, N.J. “It’s an easy one for the SEC to get there. (The new SEC leadership) won’t meet any resistance. They won’t know anything about maker-taker; they’ll see something that SEC staff has recommended and they’ll follow through.”
Mr. Saluzzi said he expects to see an official SEC pilot proposal in the first half of 2017. However, he said he’s not enamored with the proposed three-segment structure, saying that while such a format works for tick size measurement, it doesn’t for rebates. “The tests are similar but what’s being measured is different. Tick size measures spreads and liquidity; the maker-taker pilot measures how they charge fees. One is visible, one is done behind the scenes.”
We think the best way to discourage routing practices that are based on venue fees is to change the way transaction fees are calculated. The maker-taker fee schedule is a relic of the past and should be discontinued. With that said, we do believe that exchanges provide a valuable service by helping to match buyers and sellers and deserve to be compensated for this function. However, we believe this function is more like a utility and the rates that are charged should be regulated like a utility.