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Is the Maker-Taker Pilot DOA?

Traders Magazine Online News, March 17, 2017

Ivy Schmerken

After more than a decade of debate, regulators are poised to act on a pilot for maker-or-taker pricing, a practice whereby market makers are paid a rebate to add liquidity and are charged a fee to remove liquidity by electronic trading venues.

The SEC’s Equity Market Structure Advisory Committee (EMSAC) has recommended to move forward with a pilot on reducing access fees to gain an understanding into how rebates and access fees influence order routing decisions.

The SEC could open the maker-taker pilot for public comment in 2017.

But, now analysts are suggesting that a maker-taker pilot is in limbo, or at the very least, could be postponed under the incoming Trump administration.

Ivy Schmerken

In a Jan. 9 article, Larry Tabb, founder and research chairman of TABB Group, told Pensions & Investments that a potential maker-taker pilot could be ‘dead’ before it starts. The incoming administration would prefer to conduct a holistic review of Reg NMS market structure, Tabb told P&I. With the SEC transitioning to a new chairman under President Trump, Tabb said there is uncertainty as to what will be on the market structure agenda. Trump’s nominee to head the agency, Jay Clayton, an attorney with Sullivan Cromwell,  is due to go through confirmation hearings and has not yet had a chance to air his views in public.

Paul Atkins, a former Republican SEC Commissioner, who reportedly has served as President Trump’s regulation advisor, could give Regulation NMS “a second look,” reported Reuters in “A Post- Post Trump SEC.“ Atkins has critiqued SEC rules that require “best price” execution as causing fragmentation and harming price discovery by causing orders to go away from traditional exchanges to dark pools.

But Republican Commissioner Michael Piwowar, who was named acting chairman of the SEC in January, could revisit the rules sooner than later.

Too Much Complexity?

One of the concerns is that a maker-taker pilot would add complexity to the equity market structure. The industry is already conducting the tick-size pilot for small cap stock by widening spreads to a nickel and testing a Trade-At rule, which some industry folks contend has been expensive in terms of programming and too complex to implement.

However, supporters of the maker-taker pilot are speaking up. In a blog posted to their own site, Themis Trading partners Joe Saluzzi and Sal Arnuk, maintain that a maker-taker pilot will be proposed this year.  Furthermore, they would like the pilot to include a flat-fee similar to what IEX charges.

In their blog, “Maker Taker Needs to Happen,” Messrs. Saluzzi and Arnuk illustrate how rebates can create a conflict of interest for algorithms executing a VWAP slice.

Running the pilot will be important to institutional investors who worry that their brokers are focusing on strategies to gain rebates more than seeking best execution.

Opposition to Maker-Taker

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