End maker taker, PFOF!

Senate committee wants to end PFOF/maker taker

The U.S. Securities and Exchange Commission should act immediately to eliminate two stock market pricing models that create conflicts of interest for brokers, Senator Carl Levin said in a letter to SEC Chair Mary Jo White.

Levin criticized systems used by exchanges such as Nasdaq OMX Group Inc. and wholesalers such as Citadel Securities that pay brokers who send orders to be filled. Intercontinental Exchange Inc. Chief Executive Officer Jeff Sprecher and IEX Group CEO Brad Katsuyama also have called for regulators to ban maker-taker, a system in which rebates are paid to brokers who provide exchanges with liquidity.

“Eliminating maker-taker pricing would improve confidence in U.S. equity markets,” Levin, a Michigan Democrat, wrote in the letter released yesterday. “Such action also would reassure investors that they can rely on their brokers to provide best execution of their trades, without having to question whether a broker might instead be seeking to maximize its own profits at the customer’s expense.”

The comments by Levin, who leads the Senate’s Permanent Subcommittee on Investigations, could add urgency to the SEC’s review of stock-market conflicts, which White described last month. Money managers such as T. Rowe Price Group Inc. and Invesco Ltd., some academics and exchange executives such as Sprecher have called for an end to the maker-taker system.

SEC spokesman John Nester declined to comment about the letter.

Maker-Taker Predominance

Maker-taker is now the predominant way exchanges attract orders from brokers who have other options. Traders who stand ready to buy or sell shares, known as market makers, are paid rebates, while those on the other side of the transaction, known as takers, pay a fee. Exchanges profit off the difference between those payments.

“Rebates that were once used to encourage participants to quote have evolved and now add too much order complexity and add the potential for conflicts of interest in our market,” Sprecher told the Senate Banking Committee on July 8.

Although regulators have blessed such incentives over the years, there are indications the SEC is scrutinizing them more closely. In a speech last month, White questioned whether brokers can manage the conflicts of interest created by such payments.


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