Concerns about the potential for maker-taker pricing to distort market activity should be widened to consider a broader range of pricing issues, said industry experts following a report by the International Organization of Securities Commissions (IOSCO).
IOSCO said that maker-taker pricing, where liquidity providers to a trading venue are rewarded with rebates while liquidity takers are charged, had the potential to distort trading activity and create conflicts of interest.
While the IOSCO report falls short of calling on regulators to curb the use of maker-taker pricing, a ban is among the proposals by MEPs for MiFID II, though it is currently unknown whether it has survived the trialogue process scheduled for completion in Brussels by Christmas.
The potential for conflicts of interest was also a key concern of MEPs, who said the practice could lead brokers to route client orders to a particular venue in order to receive a rebate, rather than to get the best price for clients.
Rob Boardman, CEO of agency broker ITG Europe, said that while it was important for regulators to examine the impact of pricing models, it would be wrong to single out any one to be banned.
“This report didn’t find there were any great abuses happening with maker-taker pricing. Market reforms have led to new pricing models which have led to innovation and competition, which is ultimately good for the market,” he said.
Alasdair Haynes, CEO of the recently launched Aquis Exchange, a pan-European venue that has adopted a subscription-based pricing model similar to those common in the telecoms industry, said maker-taker pricing has a role to play but could also be abused.
He explained: “Using fees to attract genuine market makers and liquidity providers is a good thing, but if someone is routing to a venue purely to get a rebate then that can be problematic.”
Buy-side losing out
While Haynes believes it is important to have choice in the market, he said that maker-taker was not always good for the buy-side, which doesn’t receive the benefits of rebates as they are given to brokers.
Richard Balarkas, independent consultant and former Instinet Europe CEO, said the buy-side has significant reservations about the maker-taker pricing model.
“If a venue has to effectively buy-in liquidity, then someone has to pay for that in order to subsidise it,” said Balarkas. “However, if you go down the path of banning payments for liquidity then that could be problematic for when a broker fulfills a client’s order on principal as this could also be viewed as buying liquidity.”
The IOSCO report also looked into the symmetric and asymmetric pricing models favoured by many national exchanges, recommending greater transparency. However, Haynes believes the complexity of exchange pricing should be investigated.
“There’s a lot of talk about transparency but little talk about things being simple. The pricing models of some exchanges are so complicated that often the brokers themselves don’t entirely understand what they are paying for,” he added.
The IOSCO report does not tackle exchange data feeds, but ITG’s Boardman believes this is likely to become a much bigger issue in the future.
“The big elephant in the room is whether trading fees will be the main source of revenue for exchanges in the future. The cost of data is rising significantly, to the point that transactions fees may become irrelevant.”