Reuters: Regulatory News: U.S. senator seeks reform of 'maker-taker' pricing model

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U.S. senator seeks reform of 'maker-taker' pricing model May 10th 2012, 16:21 Thu May 10, 2012 12:21pm EDT * Schumer says brokers may choose best rebate, not best price * Schumer fears pricing model creates a conflict of interest * Schumer responds to new study that looks at order routing * Schumer says if SEC does not act, he will draft a bill By Sarah N. Lynch WASHINGTON, May 10 (Reuters) - U.S. Senator Charles Schumer is asking the top securities regulator to reform the so-called "maker-taker" pricing system, saying it is creating a conflict of interest that is causing investors to lose money because of poor order routing. In a letter to Securities and Exchange Commission Chairman Mary Schapiro, Schumer said that brokerage customers may be paying "billions of dollars a year in hidden costs" because brokers often route transactions to venues that provide the largest rebates. "These models create a conflict of interest, as brokers may be incentivized to execute trades on a particular venue even if that venue is not offering the best price," Schumer wrote. "Brokers are, of course, required to ensure clients receive 'best execution,' but there is flexibility in how that mandate is interpreted, leaving room for brokers to arguably put their own interests ahead of their clients by maximizing the rebates they receive from exchanges," he added. Most U.S. exchanges use a complex pricing model in which traders are either "makers" or "takers" of liquidity. Makers, who earn a rebate, are those whose order was already at the exchange; takers, who pay a fee, execute against that standing order. Schumer's letter to the SEC comes in response to a recent study released by consulting firm Woodbine Associates that concluded that poor routing decisions cost traders and investors as much as $4.5 billion per year. That stems from various order types each exchange offers, which can lead to costs differences and potentially large losses over the course of time. The study was released as the SEC continues its scrutiny of market structure issues generally, including high-frequency trading and whether certain practices may give certain investors an unfair edge over others. The SEC several years ago sought comments from the public about order routing practices, but it has not yet taken any action to change them. Schumer said he wants the SEC to require that all payments are disclosed. He also wants brokers to pass any payments they get on to their customers to reduce any possible conflicts of interest. "Some disclosure is currently required, but it is not sufficient to ensure that customers are fully informed about the payments received, and routing decisions made, by their brokers," he said. "If the commission does not act, I will consider introducing legislation to address this problem." Link this Share this Digg this Email Reprints

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