Interest by money managers to eliminate exchange rebates is meeting resistance from exchanges, brokers and regulators.
At an industry conference last week, industry representatives balked at the idea of a pilot program that could drastically reduce rebates or replace maker-taker pricing altogether with a charge on both sides of a trade.
“It would be difficult to change that dynamic,” Joe Mecane, head of U.S. equities at NYSE Euronext, said at the Investment Company Institute’s annual market structure conference. “You can’t really talk about rebates without talking about segmentation. The rebate helps to equalize the economics for liquidity providers on and off the exchanges. So, it’s hard to deal with that issue in isolation.”
One of the New York Stock Exchange’s largest market makers agreed, arguing that elimination of the rebate would kill his business. “If a flat rate were to go across that business, then that business would be very compromised,” Bill White, Barclay’s head of equities electronic trading, said at the conference. “We couldn’t operate that business without the maker model.”
For the past couple of years, buyside traders have been lobbying their brokers and the regulators behind the scenes to green light a pilot program that would either lower exchange rebates for certain stocks or replace the maker-taker regime with a fee-say, three mils-on both sides of the trade.
The money managers’ concern is that brokers may be routing their orders to venues that pay the highest rebates rather than those that offer the best execution. In such a case, the broker pockets the rebate and the buyside gets an inferior fill.
“Any inducements to order flow routing insert a conflict of interest,” Andy Brooks, head of equity trading at fund managers T. Rowe Price Associates, said at the ICI confab. “It is an issue. I want to see it addressed and experimented with and challenged.”
Ari Burstein, senior counsel at the Investment Company Institute, a lobbying organization for mutual fund companies, told conference-goers the issue was on the minds of ICI members. “People are telling us that we’ve gotten away from price being the focal point when it comes to order routing and execution,” Burstein said last week. “Economics play too big a role.”
Brokers argue the best response to any perception by the buyside that they are mishandling their orders is to provide the routing data to the clients so they can see for themselves.
“We give full transparency on our routing decisions in real-time,” White said. “If you’re not getting that transparency, then you need to get a new broker.”
Joe Gawronski, president and chief operating officer of agency brokerage Rosenblatt Securities, argues brokers have stepped up their game in recent years and are providing the buyside with routing data. “A few years back, brokers would say ‘we can’t disclose that.’ I don’t hear that very much anymore.”
Despite the buyside’s concern over their agent’s routing practices, no evidence has surfaced of any wrongdoing. That fact has made the Securities and Exchange Commission leery about green lighting any pilot. Gregg Berman, an associate director in the SEC’s office of analytics and research in the division of trading and markets, was at the ICI conference.
Berman said his group had been discussing the issue, but had not come to any conclusion. “At the Commission, we make the distinction between potential and actual conflicts of interest,” he told conference-goers. “We need to better understand where the actual conflicts are arising. Not the potential conflicts.”
