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Reports US

US stock market daily report (July 28, 2014, Monday)

July 29, 2014, Tuesday, 03:32 GMT | 22:32 EST | 07:02 IST | 09:32 SGT
Contributed by Millennium Traders


During a round-table discussion on Monday, led by chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, Representative Scott Garrett (R-NJ), several of Wall Street's biggest players are calling for reforms to the maker-taker fee model.

Trading fees are known for distorting markets and the increased use of dark pools. The call is being hailed by major Wall Street executives and when the big wigs talk, its time for a change. Maker-taker fees are driving more trading action into unregulated dark pools so takers can avoid the costs. Some of the markets largest dark pools operators, such as Barclays, are seeing sharp declines in trading volumes. At the current pace, dark pools may eventually cease to exist.

When exchanges pay market makers for providing liquidity - bids and offers - and they charge for taking liquidity - hitting bids and offers - maker-taker fees occur. The maker-taker fees have been known as perverse incentives for traders to sell on exchanges where they can receive the largest maker-taker payments, without guaranteeing the best price for their clients. The exchanges reap financial benefits by taking a cut of the fees as well.

During the discussion in Washington, Matt Andresen, head of Headlands Technologies said, "The reasons we came out with maker-taker pricing do no longer exist, and it is worth readdressing those fundamental assumptions for how we stimulate competition between exchanges, and between exchanges and off-market venues." Andresen, while in charge at Island ECN, assisted in the creation of the maker-taker model.

Jeff Sprecher, CEO of Intercontinental Exchange, Inc. (ICE-NYSE) noted that nearly 6% of the exchanges revenues are from maker-taker fees. Sprecher went on to say that he too would like to see changes occur in the context of broader reforms against dark pools. Sprecher said, "Well it sounds like there's unanimity that Nasdaq OMX Group, Inc. (NDAQ-Nasdaq) CEO Robert Greifeld and I should just lower our fees. We can make it cheaper to trade on the lit regulated markets, but we still then need people to actually take advantage of trading on lit and regulated markets, and so for that reason we really couple it with giving deference to trading on our markets where we have larger order sizes now than the dark pools. And so I don't think you can just in the absolute lower fees without addressing the rest of the market issues."

In defense of the existence of the maker-taker fees and agreeing that regulators may need to reform the model if traders are abusing the payments, Greifeld said, "there is a positive aspect of providing an incentive for somebody to reveal their hand first." Greifeld said, "If that fee is so large, which you could argue it is today, that it creates its own end in and of itself...then that's not right. And I think we have to be prepared to examine what are the unintended consequences."