A pilot programme exploring the impact of rebates on broker order routing could improve buy-side execution, but participants must be wary of unintended consequences, such as sending more flow off-exchange.
Speaking at a panel session on order routing at a conference run by US buy-side trade body the Investment Company Institute, Andy Brooks, head of US equity trading for asset manager T Rowe Price, said greater experimentation would lead to buy-side benefits.
Pilot programmes that show buy-side execution is improved when brokers route orders based on best execution principles rather than access fees, could help identify and reduce conflicts of interest, he said.
“Any inducements to order flow routing insert a conflict of interest,” Brooks said. “Payments for order flow, internalisation, maker-taker [pricing models] – all of those things seem to be impediments to bringing people together more naturally [in the market].
“I’d love to see this issue experimented with and challenged.”
Panel moderation Ari Burstein, senior counsel for ICI, said the Institute, and a number of buy-side firms he has talked to, would support pilot programmes around liquidity rebates.
Eliminating the maker-taker pricing model for certain securities or on certain venues would give asset managers greater visibility around the effect of rebates and access fees on order routing, leading to improvements in execution quality.
However, such programmes could also lead to greater flow being directed to dark pools if such venues were not involved in some way, suggested fellow panelist Joe Gawronski, president and COO for research brokerage Rosenblatt Securities.
“Unless you combine maker-taker elimination, for instance, in pilot form with adjusting access fees, you’re still going to leave brokers with a wide range of options,” he said, adding that they would likely still route orders to internal dark pools, then free and lower-fee venues, before larger liquidity pools with higher fees.
“The amount of off-exchange trading will be exacerbated if we have some kind of maker-taker elimination pilot [programme] on-exchange [only] because more activity will move off-exchange,” Gawronski said.