The elimination of maker-taker pricing for a subset of US equities may have adverse effects on the buy-side in the short term, but would benefit asset managers’ participation in the US equity market overall, participants have said as support grows in Washington for a pilot programme.
Last week, the concept of a test program barring maker-taker for certain securities was advanced with public support from two members of the Securities and Exchange Commission’s (SEC) leadership team.
SEC commissioners Kara Stein and Luis Aguilar were quoted in the press as backing a pilot program to eliminate maker-taker pricing. SEC chair Mary Jo White has indicated the fee structure would be investigated in a holistic market structure review.
Maker-taker rewards participants with rebates for posting liquidity, while charging firms for taking liquidity. First adopted by venues to aggressively grow market share, the pricing strategy has become a growing source of exchange revenue since the mid-2000s but has been criticised for incentivising high-frequency trading and creating conflicts of interest between brokers and their buy-side clients.
Anshuman Jaswal, senior analyst for research consultancy Celent, said SEC support for such a pilot was positive for the health of the US equity market, but warned some buy-side firms may struggle to adapt.
“A pilot program eliminating maker-taker pricing would require a period of adjustment for the market because participants – including larger asset managers – currently benefit from exchange rebates,” he said. “The program will have to be crafted very carefully to show the impact of maker-taker in order to have the desired effect of strengthening the equity market.”
Jaswal added that including maker-taker pricing in a wide-ranging market structure review was vital to avoid unforeseen outcomes that have marked US securities regulation, such as Regulation National Market System rules.
“Maker-taker pricing will be one of the core elements of the holistic market review the SEC has said it will conduct in the coming years. These issues cannot be regulated in isolation and must be addressed in sync with other changes to avoid unintended consequences,” Jaswal told theTRADEnews.com.
Rich Repetto, principal, equity research for investment bank and broker-dealer Sandler O’Neill and Partners, said the outcomes of any pilot would be difficult to predict.
Although the pilot is predicated on removing unnecessary intermediaries from the equity market, the end result may not benefit the buy-side as expected, he said, adding that regulators must be guided by data generated by a pilot and not underlying assumptions.
“Reducing exchange revenue is one way you can view [eliminating maker-taker] but also exchanges wouldn’t have to pay a rebate so that might balance out. Also, it could have an impact on [exchange] volumes, too,” he said.
|As well as maker-taker pricing, the SEC review is expected to consider the growth in off-exchange trading activity – which in September reached a record high of nearly 40% of US equities.
Seth Merrin, CEO of institutional block crossing platform Liquidnet, said although there were no clear links between maker-taker pricing and institutional investors’ ability to execute in size, it was a clear sign the regulator was looking to act.
“There are a number of market structure issues that currently distort pricing in the market and maker-taker is just one of them,” he told theTRADEnews.com. He said regulators must shift from the current paradigm of ‘regulation by default’ whereby market structure changes such as additional order types are given regulatory assent without adequately analysing long-term impacts. Instead, Merrin said the SEC and policymakers must transition to ‘regulation by design’.
He added any changes to the maker-taker model would not alter where asset managers execute large orders.
“A pilot program eliminating market-taker rebates would be beneficial, but it would have no impact on the buy-side’s ability to execute blocks on lit markets,” he said.
Speaking to theTRADE in March, Phil Krauss, head of equity trading for BMO Global Asset Management, which manages US$130 billion in assets, said maker-taker pricing was one factor in limiting the buy-side’s access to execution data. He said the natural conflict of interest this type of exchange pricing has created must be addressed in future regulation.
“Certain brokers are more willing to share this information with the buy-side than others,” he said. “It’s clear that many are protecting their dark pools and internal crossing engines, or protecting routing practices that deliver rebates from maker-taker venues, for instance. There is still a push back from the sell-side to deliver this data.”
Krauss added that exchange rebates were not extended to the asset managers by brokers, although the existence of such rebates were factors in sell-side routing decisions of buy-side orders.
“More action is required to deliver change for the end-client,” he said. “A buy-side firm acts on behalf of its investors, so ultimately they too should have a stake in any rebates gained from the execution of their orders.”