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December 1, 2012

Getting With The Program

By Mary Schroeder

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  • Getting With The Program

Andy Brooks is concerned about what he sees as inequities in stock markets. And as head of U.S. equity trading at T. Rowe Price Associates in Baltimore, he's doing something about it.

The 33-year veteran of the T. Rowe trading desk has, for instance, taken on order routing practices, co-location of servers in the same facilities as exchanges' matching engines, and "inaccessible" quotes and high cancellation rates in the halls of Congress, as recently as September.

T. Rowe Price Trading Desk

"There is a growing distrust of the casino-like environment the marketplace has developed over the past decade," he said in testimony before the Senate Committee on Banking's Subcommittee on Securities, Insurance and Investment.

Brooks expressed concern to the subcommittee about the maker-taker model, payment for order flow and internalization of orders, as well as the widespread use of co-location, which he believes creates an uneven playing field between short-term traders and long-term investors. He also warned about the blurring of the lines between broker-dealers, which now match their own customers' orders against each other's, and exchanges, which match what orders are, in effect, left over.

In an interview with Traders Magazine, Brooks talked about the challenges market participants face, as well as his history at T. Rowe Price and the U.S. equities trading desk there.

"We're concerned about the erosion of investor confidence, as well as the fact that the market seems to be out of balance in terms of its orientation toward investors-geared more toward those with very short time horizons, and less toward those whom the market was originally intended to serve," he said. "We think it's a very good time to bring the industry together and try and experiment with some ways that might make investors feel better about the marketplace and its commitment to everyone, in terms of transparency and disclosure, and equal opportunity."

Brooks proposes creating a number of pilot programs to address issues as they are identified, which would then provide data and results that could be analyzed and assessed.

For instance, stock markets now operate on penny spreads, so-called decimalization. That can make it unprofitable to trade in companies whose shares are not widely traded. So one pilot program could test spreads of more than penny-three cents, five cents and 10 cents, for example. Many small companies need their stories told, and wider spreads might incent brokers to do that.

Another pilot program could eliminate inducements to order routing such as the maker-taker model, which rewards "makers" of liquidity with rebates on commissions and charges "takers" of same. This pilot would track the results of applying standard fees to both sides of a transaction.