In late August, the Boston Options Exchange (BOX) pulled the plug on its maker taker pricing on all Penny Pilot options classes a few weeks after bowing to convention — albeit in a non-conventional way — by creating a payment for order flow model in the form of a taker maker model. (In the maker taker model, an exchange will pay a credit to the provider of liquidity and charge the taker of liquidity.)
Maker taker, all the rage a few years ago, may have reached a plateau, according to Mark Long of the OptionsInsider. “Maker taker was the way to go. People were saying this is what was going to take over. BOX never really gained traction with it,” Longo says. “We have seen a lot of pushback on the maker taker model. A lot of order routing firms have decided to configure their order router so that maker taker exchanges get it last. Brokerage firms didn’t like taker fees. They were used to being paid, not paying [based on payment for order flow].”
Alan Grigoletto, SVP-business development & marketing at BOX, says, “It didn’t work because in the maker taker model you are giving the market maker a credit of 30¢ but he is giving up a dollar on the edge so you don’t have a whole lot of people willing to do that.”
Grigoletto says the practice of flashing orders (allowing an exchange’s market makers to match an order before routing it to another exchange) may have hurt the maker taker model. “If flash was eliminated, perhaps there would be a better chance for getting an order from an outbound linkage because the way exposure is set up on most exchanges is, if they don’t have the best price, they give the market a chance to match the away price. But if exposure was eliminated, if they weren’t there to begin with, they would have to route to the other market immediately.
“It just didn’t work for us. It appears to be working on Arca. But of course Arca also has a payment for order flow model. We thought market makers would be incented to make better prices and that customers would get better prices. In reality it didn’t happen as well as we though it would,” Grigoletto says.
Of the taker maker model, he says it is too early to tell after only one month.
“We have been fighting payment for order flow for years but it seems to have the tacit blessing of the SEC, so it stands,” Grigoletto says. “[Taker maker] is a form of payment for order flow. We would never try and hide that fact, [but] it is transparent in that it is available for everyone and it is instantaneous. There is not a collection process … there is no pool like the exchanges have set up, no star chamber deciding who gets paid.”
Of maker taker, Longo says, “I don’t think it is dead but I think it has plateaued for now. I don’t see it growing.”
Whether taker/maker will become the new maker/taker is unknown, but in the options world it is easy to know if something is successful — the other exchanges will copy it.