Conflict of Interest is Of Interest to Senate Panel Members “just learning about” industry-rampant Payment For Order Flow Schemes . Market Structure To Be Re-Structured?
Excerpts below courtesy of The Wall Street Letter’s on the spot coverage of the U.S. Senate investigation of Wall Street’s affection for high-frequency trading aka HFT, and with specific focus on order routing and execution practices, particularly with regard to kick-back inspired payment for order flow schemes, “maker-taker” rebate schemes and likely conflict-of-interest issues within the context of brokers such as Charles Schwab and TD Ameritrade (among others) failing to ensure so-called “best execution,” a role that necessarily precludes receiving payment for directing customer orders to any counter-party other than the one offering the best available price for that sized order at that point in time.
Here’s the WSL story as of 8 pm EST on the first day of testimony from members of the securities industry; no surprise to note certain executives take the ‘walk backwards’ and no longer defending the practices that have enriched their business models:
Market participants commenting in front of Senate’s Permanent Subcommittee on Investigations hearing into ‘Conflicts of Interest, Investor Loss of Confidence, and High Speed Trading in U.S. Stock Markets’ noted that the SEC needs to re-examine or dismiss the maker taker rule and subsequent rebates as they’ve harmed consumer confidence and efforts to provide best execution.
Tom Farley, president of NYSE, noted to Senators Carl Levin, John McCain, and Ron Johnson that the maker taker model has led to a proliferation of sell-side broker dealers executing orders on exchanges that are offering induced rebates to create liquidity, rather than sending orders that offer the best execution.
Farley explained that doing away with maker taker models will curb the need for multiple trading venues, reduce the amount of complicated order types, and remove the need to house multiple equity trading venues that exist solely for maker taker rebates.
“There are two areas that we are most concerned with, the first one is the appearance of conflict, as it undermines consumer confidence and second is underlying cost and complexity that we’ve heard a lot about today when it comes to maker taker,” said Farley. Maker taker gets to heart many of issues we are seeing and for those reasons we’ve advocated removing maker taker in entirety in this country.”
Joe Ratterman, CEO of BATS exchange, noted that there is a need to reexamine SEC regulation NMS and the maker taker model, but pointed out that completely removing the process without conducting a pilot program could lead to unintended consequences when it comes to commissions paid to brokers.
Ratterman is standing strong with Chairman Mary Jo White of the SEC, noting that there has to be an organic re-examination of the market structure in relation to Regulation NMS.
“Dark Pool operators like IEX and Credit Suisse and Goldman Sachs now release their form ATS and these are short term steps in the right direction,” said Ratterman. In the medium term, what I believe is the best course of action is to let SEC do the holistic review that Chairman White articulated to industry. The review will be comprehensive and will change optimize and improve good attributes for market.”
For the full story from WSL (subscription required, free trial available):