Incentives between equity exchanges and brokers that may promote high-speed trading to the disadvantage of other investors will be scrutinized by a U.S. Senate investigative committee tomorrow.
Executives from Intercontinental Exchange Inc. (ICE), Bats Global Markets Inc. and TD Ameritrade Holding Co. (AMTD), among others, will be questioned by the Permanent Subcommittee on Investigations about rebate fees and payments for order flow, Senator Carl Levin, a Michigan Democrat and chairman of the panel, said in a statement.
The exchanges’ rebates and fees “create a potential conflict of interest between investors using nonmarketable orders and brokers hired to route those orders,” Robert Battalio, a finance professor at the University of Notre Dame, will tell the committee, according to his prepared remarks.
Lawmakers are increasing pressure on regulators and prosecutors to rein in computerized and algorithmic traders who account for about half of U.S. stock trades. Traders like those were highlighted by author Michael Lewis in his book “Flash Boys.”
Battalio and Brad Katsuyama, president and chief executive officer of IEX Group Inc. whose concerns that computerized trading was harming other investors were highlighted “Flash Boys,” will be the first witnesses questioned by the senators. They will be followed by a panel of executives from U.S. exchanges, including NYSE Group President Thomas Farley and Bats Global Markets Inc. CEO Joseph Ratterman.
“The conflicts of interest we have examined threaten to damage investors and to erode the trust and confidence on which our free markets depend,” Levin said in the statement.
Brokerages often put their own self-interest in front of their clients’ under rebates known as maker-taker, according to a study by Battalio, Shane Corwin of Notre Dame and Robert Jennings of Indiana University. In his testimony, Battalio recommended additional disclosures by brokers of their routing decisions and the exchanges’ fees and rebates.
“Wall Street continues to have a trust and confidence problem with the American people,” Senator John McCain, the ranking Republican on the subcommittee, said in the statement. “How well industry addresses the conflicts of interest and suspect high-frequency trading practices that are the subject of the subcommittee’s hearing will help determine whether Wall Street can finally overcome that problem.”
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