Lynch Introduces Legislation to Examine the Risks of the Maker-Taker Pricing Model
WASHINGTON, D.C. – Today, Congressman Stephen F. Lynch (MA-08) introduced H.R. 1216, the Maker-Taker Conflict of Interest Reform Act of 2015. This legislation requires the Securities and Exchange Commission (SEC) to carry out a pilot program to assess the impact of an alternative to the maker-taker pricing model. The maker-taker system provides rebates or payments to brokers in order to attract trades to particular stock exchanges. The maker-taker system adds unnecessary complexity to trades and creates a conflict of interest for brokers because they have an incentive to maximize rebates, rather than focus on the best interest of their clients.
Due to the increased competition among exchanges, the maker-taker model has become popular in recent years as brokers, who ‘make’ the orders, are offered payments in order to draw trades to a particular venue. Firms, who ‘take’ the orders by buying shares, are charged a fee by the exchange. Overall, the exchange profits and the market is driven by fees rather than available stock. The issue of conflict of interest arises as the payment system incentivizes brokers to choose the route most cost-effective for them, instead of what is best for their clients. This has a strong impact on order routing and can benefit high frequency traders, who often have first access on the exchanges, at the expense of average investors. In addition, the maker-taker model reduces transparency by distorting prices, as rebates are not made available to all of the participants in the market.
“Reforming the maker-taker system ought to be a high priority for the SEC. Under H.R. 1216, the pilot study would provide crucial insight into the adverse effect of maker-taker pricing on our market structure. I believe that the dynamics introduced by this model are inconsistent with the SEC’s goals of transparency, efficiency, liquidity, and fairness and that maker-taker creates a dangerous conflict of interest for stock brokers,” said Congressman Lynch. “There have been numerous calls from SEC officials and institutional investors to take on equity market structure reform. H.R. 1216 is an important step towards significant reform of the maker-taker pricing model, as we seek to eliminate a system based on complex order routing and unfair advantages for certain participants on our exchanges,” added Lynch.
Specifically, H.R 1216, the Maker-Taker Conflict of Interest Reform Act of 2015, would require the SEC to identify a random sample of 50 of the 100 most heavily traded U.S. stocks, and for those 50 stocks, prohibit the payment of rebates for a six-month period. Additionally, it would mandate that all venues where those stocks are traded be required to implement a rebate-free pricing structure. The data from the pilot study would be a crucial tool to evaluate the pressing need for maker-taker reform.
Market participants, including senior executives at the New York Stock Exchange, major institutional investors, and large broker-dealers, have indicated that the maker-taker pilot study would be feasible and a productive step towards reform. Sal Arnuk and Joe Saluzzi, co-founders of Themis Trading LLC and experts on equity trading, stated “If we could only do one thing to fix our market structure right now, it would be the elimination of the maker-taker pricing model. This model has distorted asset prices and is the primary reason why broker smart order routers are so conflicted.”
H.R. 1216 is co-sponsored by Congressman Michael Capuano (MA-07), Congressman Keith Ellison (MN-05), and Congressman Rubén Hinojosa (TX-15).