Buy-side agree maker-taker pricing is bad for markets

Latest research from Greenwich Associates finds majority of buy-side agree maker-taker pricing creates distortion and that rebates should be banned.

Two-thirds of buy-side equity traders have said they believe maker-taker pricing creates distortions and is bad for market structure, according to research.

A report authored by Greenwich Associates explained maker-taker pricing typically provides a rebate to traders adding liquidity to an order book, and then an access fee is charged when liquidity is removed.

However, many traders believe some brokers route orders based on where they can get the highest rebate, rather than where they can get best execution.

A survey in the report found 65% of buy-siders believe the maker-taker method can create pricing distortion, while only 10% view it as beneficial to market structure.

Greenwich added the SEC’s proposed Access Fee Pilot Program aims to address this by reducing the maximum fee that can be charged by exchanges on various pilot groups of securities.

However as the exchange rebate is always less than the access fee, the rationale is a reduction in access fees will lead to a proportionate reduction in rebates.

The survey found 62% of buy-side traders believe the Pilot Program should be approved and implemented, although with a modification to ban rebates altogether.

“While the buy side is reasonably clear that rebates are bad for market structure, other market participants contend that rebates provide a vital incentive to display liquidity in lit markets - which already have a reputation for being venues of last resort,” Greenwich said.

“We feel that the possible negative effects of rebates on execution quality are being overstated, the only way to determine whether they are a net benefit or a net detriment is to conduct a pilot study.”