Following the London Stock Exchange’s
decision to start paying rebates to those posting liquidity on its order book from today, and Börse Berlin Equiduct Trading’s decision to ditch its original plan of charging flat fees in favour of charges and rebates, maker-taker pricing is establishing itself firmly in the post-MiFID European equities market. Indeed, all Europe’s new multilateral trading facilities have adopted the model.
Although the maker-taker structure can potentially offer greatly reduced trading costs compared with traditional fee models, particularly for those who post a lot of orders on trading venues’ order books, not all are convinced that it has a positive effect on the markets where it is used.
“The whole competitive nature of the market and the market structure has changed, which is causing interest in experimenting with alternative business models,” says Kim Bang, president and CEO of agency broker Bloomberg Tradebook, on maker-taker pricing. “The question is: are those business models aligned with good market practices and good market structure? Are they are aligned to – and in the best interests of – investors? I think that is highly questionable.”
The maker-taker pricing structure has its origins in the US equities market in the late 1990s. Fledgling electronic communications networks (ECNs) charged fees for both passive and aggressive trades (with a lower fee for passive), but competition gave way first to free passive trades and eventually rebates.
“Markets have moved to offering an active rebate and charging an access fee, and I think there is a risk of distorting the marketplace when we allow payment for order flow and charging for investors’ displayed liquidity,” says Bang.
The taker fees in particular can affect brokers’ behaviour when seeking liquidity, claims Bang. Part of the problem lies in the fact that the taker fee is not included in the stock price quoted on the order book; the broker absorbs the taker fee rather than passing it back to the client. “With variable access fees the quoted price becomes distorted – the price on the order book doesn’t tell you the true cost of accessing a bid or an offer.”
This in turn makes brokers reluctant to take liquidity from venues with maker-taker models. “Brokers that are looking to avoid access fees will invariably try and internalise that flow rather than trade against displayed liquidity in the public domain,” he says. “It is a distorted and unhealthy market structure.”
Bang points out that in the US, the Securities and Exchange Commission stepped in to help brokers who on the one hand were faced with high fees on some venues, but on the other were unable to ignore quotes on those venues because of best execution obligations.
“The SEC chose to offer partial relief by capping access fees: they basically said the most you can charge for access to liquidity in the national market place is $0.0030 a share,” he says.
Recent events suggest that maker-taker pricing is here to stay, in Europe as well as the US. Bang thinks changes will be needed to make sure it does not distort the market too greatly. “If we are going to embrace this maker-taker equation, then either the true cost should be reflected in the quote or passed on to the end investor, or the regulatory bodies should cap access fees,” he says.