NYSE owner says outlawing exchange rebates would simplify market

Wed Feb 12, 2014 11:48am EST

* ICE CEO says rebates create conflicts for brokers

* "Maker-taker" system has led to market fragmentation -CEO

* Most order types designed to facilitate rebates

By John McCrank

NEW YORK, Feb 12 (Reuters) - Banning the practice of U.S. equity exchanges paying brokers in return for order flow would go a long way toward reducing the complexity and risks in the market, the head of the new owner of the New York Stock Exchange said on Wednesday.

Eliminating this type of payment for order flow would help tackle an array of problems in the market including fragmentation, the proliferation of order types and high-frequency trading, Jeffrey Sprecher, chief executive of IntercontinentalExchange Group Inc, said at a Credit Suisse financial services forum.

"The pricing structure that has been created by exchanges, including my exchange, has really had a corrosive impact on cash trading in U.S. equities in particular," Sprecher said. ICE closed its $11 billion acquisition of NYSE Euronext in November.

The most prevalent type of pricing structure in the U.S. equity markets is called "maker-taker," in which a firm that makes liquidity by posting resting orders, receives a rebate, often around 30 cents per 100 shares. The taker, who is buying the shares, pays a fee, offsetting cost of the rebates.

Sprecher said the maker-taker system puts brokers in an awkward position, as they have to shop for rebates in order to compete, and that can get in the way of the brokers' obligation of finding the best price for their end customers.

It has also made the markets more complex, as many exchange operators have opened multiple exchanges and use a wide variety of order types so that they can offer customized rebate structures aimed at different segments of the market, he said.

If maker-taker were eliminated, NYSE, for instance, could theoretically go from operating five different exchanges down to just one, Sprecher said. He added that NYSE has as many as 80 different order types, most of which exist to make sure that somebody gets the right rebate.

"We increasingly hear calls for a holistic review of the U.S. equities markets, the fragmentation, the risk that's in it, and the increased demand for high-speed networks in order to be first to receive those rebates," Sprecher said.

"I think you could really simplify the market with just a simple change of outlawing maker taker pricing and allowing us to compete on technology and service and being low-cost providers as exchanges."

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