High-frequency trading fees need transparency

Online brokers rallied amid the hearings. TD Ameritrade Holding Corp. advanced 4.5 percent as of 12:25 p.m. New York time, while E*Trade Financial Corp. rose 6.7 percent and Charles Schwab Corp. climbed 4.8 percent. Exchange operators say tamer gains, with Intercontinental Exchange Inc. adding 0.9 percent and Nasdaq OMX Group Inc. increasing 1.1 percent.

Lawmakers and regulators have previously focused on whether high-frequency firms should register and if off-exchange trading platforms need better disclosure. By contrast, today’s hearing focused on the financial relationships between exchanges, brokers and traders.


Levin specifically questioned a system of incentives between exchanges and high-speed traders known in the industry as “maker-taker.” The system is the predominant way exchanges attract orders from brokers. Traders who are ready to buy or sell shares as needed, known as market makers, are paid rebates by an exchange. Traders on the other side, the “takers,” instead pay a fee.

Most stock exchanges charge about 30 cents per 100 shares to firms that trade against standing buy and sell requests. The exchanges pay less to brokers who supply them with liquidity, and profit off the difference between those fees.

Critics of maker-taker, including ICE Chief Executive Officer Jeffrey Sprecher, say it presents another conflict of interest for brokers who may shop for rebates instead of putting clients first. Other critics say it contributes to the race for speed because many high-frequency traders have employed strategies that involve capturing rebates.

Order flow

Levin also highlighted a separate system known as “payment for order flow” in which retail brokers such as TD Ameritrade and Charles Schwab Corp. are paid to send client orders to third-party specialists. Those firms, such as Citadel LLC and KCG Holdings Inc., which profit from taking the other side of the trades, are bound by rules meant to ensure they get the best price possible for investors.

Levin said the payment system creates a conflict because the wholesale broker who offers to pay the most for the order flow may not get the best prices for customers when executing the trades. In his book, Lewis criticized the practice for being designed to maximize the number of times an ordinary trader would collide with a high-speed trader.

Best execution

TD Ameritrade said in a June 12 statement that it received $236 million in revenue in 2013 for routing orders and said the practice was subject to regulation, oversight and proper disclosure and produces lower, not higher prices, for retail customers.

“The payments we receive from market participants do not interfere with our efforts to seek quality execution and optimize the value proposition for our clients. Best execution comes first,” Quirk told the committee.

Senator John McCain of Arizona, the top Republican on the panel, said there is a lack of publicly available data to determine the effect rebate models have on the market.

“A logical first step would be to have more transparency in the payments, allowing neutral researchers to study the issue in greater detail,” McCain said.

The rebate programs and payments for orders are “two concepts that are integral to the way business is done today and have gotten the most scrutiny,” Richard Repetto, exchange analyst at Sandler O’Neill & Partners LP in New York, said yesterday in a telephone interview. “But that doesn’t mean you change them without thought and analysis.”

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