Are Flat Fees the Solution to Maker-Taker?

While most exchanges have a maker-taker pricing model, one that pays rebates to market makers for adding liquidity, or charges a modest fee for taking liquidity, IEX offers a fresh approach to an alternative by offering one flat fee rather than incentives and rebates.  

IEX Flat Rate Fee Schedule

IEX, the newest stock exchange, does not charge for connectivity or data fees, and they also do not encourage a Maker-Taker environment.  IEX prefers to implement flat rate fees based on order visibility.  For non-displayed liquidity brokers will pay a flat rate of $.0009/share, whether they are making or taking liquidity.

For displayed liquidity, there is NO fee whether making or taking liquidity.  Here, the choice for the customer is whether to take the discount for making their order visible, and thus part of the NBBO, or pay extra to hide it.

The flat fee schedule utilized by IEX puts the incentive where it should be, on displaying your liquidity and aiding price discovery in the market.

Maker Taker Pilot

There was talk of a pilot program to measure the impact that reduced fees would have on market quality and behavior.  In 2016. the Securities and Exchange Commission’s Equity Market Structure Advisory Committee recommended the pilot program.   SEC Chairwoman at the time, Mary Jo White, stated that the pilot would be voted on by the commission in 2017.  Since then, new developments such as President Trump in the White House and turnover at the SEC have put the pilot on hold.   

Prior to Trump’s inauguration, Mary Jo White resigned as SEC Chair. According to Trump’s advisors, incoming SEC officials are looking at broader reform rather than piecemeal reform with Maker-Taker.   Paul Atkins is the former SEC commissioner, who now advises President Trump on financial regulation matters.  Mr. Atkins is actually an opponent of Reg NMS, and a proponent for a holistic overall review of the market.  

It will be interesting to see what the coming months have in store from the new administration, and new SEC leaders.  While exchanges need a compensation for providing a valuable service, a flat fee would result in revenue for the exchange, without creating a conflict of interest with rebates.   

There is no easy answer for such a complex situation.  Most traders and brokers agree, however, that Maker-Taker needs to go!  (and we do not need a pilot program to tell us that).  

Great Point Capital has the in-depth knowledge of the market structure and order types, including the available order types that allow you to go directly to dark pools, to place orders at the midpoint of the NBBO, and capture rebates by adding liquidity.  We combine this knowledge with valuable tools like the Takion software platform, to let you direct orders to the venue giving the best outcome.

Great Point Capital has been serving the trading community since 2001 and our 100+ prop traders actively trade the firm’s capital, specializing in equities and equity options.  We are headquartered in Chicago with a location in Austin, TX.  Contact Great Point Capital LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results.  We are one of the very few firms able to offer access to Takion Software Platform, enhancing your online trading broker performance.

Maker-Taker Influences Order Types

Each exchange has their own type of orders, with each order type carrying their own fee schedule.  Nasdaq recently developed a Retail Post Only Order, which was designed for the sole purpose of assisting retail brokers in avoiding access fees.  This particular order type would have allowed for it to cancel for any reason, rather that fill with an adjusted price.

For instance, if a retail broker receives your order to buy at 10.25, and the market is 10.25x10.26, they send it to the exchange to add liquidity, earning a rebate.  Now suppose that just as it sends the order, the market changes to 10.24x10.25.  Your order just became marketable, so instead of earning a rebate for adding liquidity, your broker will now have to pay to remove liquidity!

The Retail Post Only Order protects this from happening by canceling the order if it becomes marketable and would remove liquidity. That order would then likely be re-routed back to the third party that pays for the broker’s order flow to be filled, instead of to the exchange.

Proponents argue that this choice is good for competition that is good for markets.  Opposition to these types of orders claim that these are one- sided order types benefit only the select few while distorting market pricing, which is never good for investors.

Nasdaq withdrew their request for this order type in January of this year, under much scrutiny.  

Add-Liquidity Orders (ALO)

An ALO order is an Add Liquidity Only order, and is executed only if it adds liquidity as a market maker.  The goal behind these order types is once again to assist the user in controlling their costs, and reducing fees.   

They are used, however, to game the system, as entering a marketable ALO order forces the other side, which should have gotten a liquidity rebate, to now be a Taker and incur a cost.  This happens with non-display orders that fall between the NBBO.  If the market is at 10.14x10.16, and I have a hidden order to sell at 10.15 on ARCA, if an ALO order comes in to buy at 10.15, I would become the taker, even though I was there first.  

If my order was visible (NBBO at 10.14x10.15), the ALO order wouldn’t cross at all, it would just sit on that bid at 10.14, meaning a trade that would otherwise occur and aid price discovery doesn’t happen simply due to the maker-taker pricing model.

Great Point Capital has vast knowledge of the market structure and order types, including  available order types to go directly to dark pools, to place orders at the midpoint of the NBBO, or to capture rebates by adding liquidity.  We combine this knowledge with valuable tools like the Takion software platform, to let you direct orders to the venue giving the best outcome.

Great Point Capital has over 100+ prop traders actively trading the firm’s capital, specializing in equities and equity options.  We are headquartered in Chicago with a location in Austin, TX.  Contact Great Point Capital LLC today, in either our Chicago Office, or Austin Office, to learn  how we can successfully trade together generating high performance results.  We are one of the elite few able to offer access to Takion Software, enhancing your online trading performance.

Maker-Taker Influences Order Routing and Price Discovery

Reputable online brokers and traders all agree, the Maker-Taker pricing model distorts the market and alters the way stock orders are transacted by market participants.  Maker-Taker is a pricing model existing on most exchanges, encouraging liquidity in their venue.  

Most stock exchanges, although not all, and all are not the same, will give a small rebate to traders and investors upon execution of their limit order when they are providing liquidity to the market, which is the maker part of Maker-Taker.   These liquidity rebates drive the Maker-Taker model.  

Conversely, exchanges will charge a modest fee to the market takers, those that take liquidity by entering either market orders or marketable limit orders.  Maker-Taker is a hot topic among traders and brokers, many oppose the practice as brokers will use the exchanges that give the most advantageous rebates instead of committing to the best execution, which createis a conflict of interest.

A rebate reward system combined with an already predatory environment including high frequency trading algorithms overtaking online equity trading in all venues across the market.  High frequency trading (HFT) firms use very sophisticated and specific algorithms designed to seize as many liquidity rebates as possible, regardless of the impact this may have on the market or the National Best Bid Offer (NBBO).

Maker-Taker And Price Discovery

Traders and brokers have been calling for an end to the Maker-Taker system, claiming that it  most certainly influences order-routing decisions, and distorts price discovery.  While different exchanges having different fee schedules, this gives brokers incentive to route their orders so that it is most advantageous to them, instead of giving ‘best execution’ to their client.

An example of the Maker-Taker model occurs when an exchange pays a market maker .002 per share to provide liquidity, and charges the market taker .003 per share, leaving the exchange to keep .001.  With millions of shares traded on a daily basis by HFT firms, even the small rebates given to market makers add up significantly to billions of dollars simply by utilizing computerized algorithms based on their trading strategies and buildt to elicit the most rebates.

Exchanges use maker-taker like marketing, drawing executions to their marketplace. If you can lure liquidity-adding orders with big rebates for that liquidity, the other side of the trade has to come to you, which increases volume, and profits, for the exchange. Of course, the opposite is also true - those taking liquidity have price sensitivity as well, and try to go to the exchange with the lowest cost to remove liquidity.

This is why we have seen nearly all exchanges create separate exchanges that differ only in the pricing model.  Nasdaq owns PSX and BSX exchanges, which have “inverted” pricing models that pay rebates to remove liquidity, while those adding liquidity pay small fees. EDGE does the same with EDGA, BATS the same with BATY.

Those that oppose the Maker-Taker system believe that the public view of the current bid/offer price is not accurate due to the rebates and discounts.  HFT firms will buy and sell at the same price, just to exploit the rebates.  This activity can mask the true price discovery of stock assets.  

Great Point Capital has over 100+ prop traders actively trading the firm’s capital, specializing in equities and equity options.  We are headquartered in Chicago with a location in Austin, TX.  Contact Great Point Capital LLC today, in either our Chicago Office, or Austin Office, to learn  how we can successfully trade together generating high performance results.  We are one of the elite few able to offer access to Takion Software, enhancing your online trading performance.