SEC Should End Maker-Taker, Payment for Order Flow, Levin Says
The U.S. Securities and Exchange Commission should act immediately to eliminate two stock market pricing models that create conflicts of interest for brokers, Senator Carl Levin said in a letter to SEC Chair Mary Jo White.
Levin criticized systems used by exchanges such as Nasdaq OMX Group Inc. (NDAQ) and wholesalers such as Citadel Securities that pay brokers who send orders to be filled. Intercontinental Exchange Inc. (ICE) Chief Executive Officer Jeff Sprecher and IEX Group CEO Brad Katsuyama also have called for regulators to ban maker-taker, a system in which rebates are paid to brokers who provide exchanges with liquidity.
“Eliminating maker-taker pricing would improve confidence in U.S. equity markets,” Levin, a Michigan Democrat, wrote in the letter released yesterday. “Such action also would 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.”
The comments by Levin, who leads the Senate’s Permanent Subcommittee on Investigations, could add urgency to the SEC’s review of stock-market conflicts, which White described last month. Money managers such as T. Rowe Price Group Inc. (TROW) and Invesco Ltd. (IVZ), some academics and exchange executives such as Sprecher have called for an end to the maker-taker system.
SEC spokesman John Nester declined to comment about the letter.
Maker-taker is now the predominant way exchanges attract orders from brokers who have other options. Traders who stand ready to buy or sell shares, known as market makers, are paid rebates, while those on the other side of the transaction, known as takers, pay a fee. Exchanges profit off the difference between those payments.
“Rebates that were once used to encourage participants to quote have evolved and now add too much order complexity and add the potential for conflicts of interest in our market,” Sprecher told the Senate Banking Committee on July 8.
Although regulators have blessed such incentives over the years, there are indications the SEC is scrutinizing them more closely. In a speech last month, White questioned whether brokers can manage the conflicts of interest created by such payments.
White said the agency would address conflicts by requiring brokers to provide institutional investors such as mutual-fund managers with more information about where their orders are sent to be filled. Such a regulation would give investors enough information to hold their broker accountable for where they route orders, said Kevin McPartland, head of market structure for research firm Greenwich Associates in Stamford, Connecticut.
“If investors start to feel the broker they are using is routing orders based on their ability to gain a rebate, they can speak with their commission wallet and take it someplace else,” he said in a telephone interview.
Institutional investors have already become more outspoken about conflicts of interest, questioning how exchanges’ access fees encourage brokers to route orders to private, broker-owned venues such as dark pools, where pre-trade prices aren’t public and investors may not be treated equally.
“Our belief system around what’s broken is that brokers have a conflict of interest in how they route our orders,” Invesco global head of trading Invesco Senior Vice President Kevin Cronin told lawmakers on July 8. “They break them up into tiny pieces, as Mr. Sprecher describes, but they also send them to destinations which actually are serving to maximize their own economic best interest, but may not be serving our best-execution interest.”
Levin held a June 17 hearing that focused on payment for order flow, the practice of brokers selling their retail orders to stock-market wholesalers such as Citadel and Citi Global Markets. TD Ameritrade Holding Corp. (AMTD) disclosed to Levin’s committee that it “virtually” always sends orders to trading venues that provide it with the highest payment.
Brokers can manage conflicts that stem from incentives such as maker-taker, TD Ameritrade senior vice president Steven Quirk told Levin’s committee. Investors benefit from the system because they typically receive a better price than the national best bid or offer 91 percent of the time, Quirk told the lawmakers.
Citadel CEO Kenneth C. Griffin also pushed back against calls to ban maker-taker. Banning rebates would reduce competition between exchanges while resulting in fewer visible orders, he told the Senate Banking Committee on July 8.
“The SEC has wisely focused on disclosure and other mechanisms to manage any potential conflicts of interest that may arise as a result of these fee structures,” Griffin said.
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