(Adds details on exchange between TD Ameritrade, Carl Levin)
By Sarah N. Lynch
WASHINGTON, June 17 The pricing model used by
U.S. stock exchanges to attract liquidity came under fire on
Tuesday, as a top Wall Street executive called for ending the
practice and two U.S. senators raised concerns about the
potential conflicts it creates.
In a Senate hearing, an official from Intercontinental
Exchange's New York Stock Exchange expressed support for
ending the "maker-taker" model used to reward brokers who make
offers to buy or sell stocks on exchanges.
"We are seeking support for the elimination of maker-taker
pricing," said NYSE President Thomas Farley. "Broad adoption of
this policy would reduce the conflicts inherent in such pricing
A top official at Vanguard also called for revisiting the
practice, saying it has become too conflict-ridden.
Tuesday's hearing before the Senate Permanent Subcommittee
on Investigations comes shortly after author Michael Lewis
released a book that raised questions about payment for order
flow and accused high-speed traders of rigging markets.
Earlier this month, Securities and Exchange Commission Chair
Mary Jo White announced a series of proposed reforms to address
high-speed trading, trading in anonymous "dark pool" venues and
potential conflicts that may influence how brokerages route
White also asked exchanges to review order types, an issue
Farley said his exchange will address in part through a
six-month moratorium on permitting any "new or novel" order
But while White outlined a proposal to enhance disclosures
surrounding how brokerages route institutional orders, she did
not explicitly propose maker-taker reforms.
STUDY RAISES QUESTIONS
In the maker-taker model, brokerages earn rebates by sending
in resting orders to bring more liquidity, but must pay fees if
they take away liquidity through orders that can be executed
In addition, large market makers like KCG Holdings,
Citadel LLC, Citigroup and UBS AG, typically pay
cash fees in the neighborhood of 30 cents per hundred shares for
The maker-taker model came under scrutiny last year after
researchers from the University of Notre Dame and Indiana
University released a study suggesting that
payment-for-order-flow practices may create conflicts and
prevent customers from receiving the best price in the shortest
possible time frame.
The study looked at four discount brokerages that accept
payments for order flow: TD Ameritrade, E*Trade,
Scottrade and Fidelity Investments.
It found the firms tend to route "limit orders" to the
exchanges that pay the highest rebate fees - a conflict that may
prevent orders from being filled and violate best execution
The Senate panel's chairman, Democrat Carl Levin of
Michigan, and its ranking member, Republican John McCain of
Arizona, both said they were troubled by the findings, and
McCain called for more transparency on the payments to brokers.
McCain also called for changes to rules which he claimed
force firms to take the "bait" of high-speed traders who dangle
great prices in front of investors, and then rush ahead to buy
it first and sell it higher.
On Wednesday, a U.S. Senate Banking Committee panel will
also be holding a hearing on high-frequency trading. Virginia
Democrat Mark Warner, the panel's new chairman, told Reuters in
an interview Tuesday he plans to focus mostly on how high-speed
trading could be impacting smaller companies.
Not all experts on Tuesday were enthused about eliminating
maker-taker pricing, showing how it could be difficult to pursue
changes to the model.
BATS Global Markets exchange CEO Joe Ratterman said
maker-taker pricing encourages liquidity makers to "post tighter
bid-offer spreads" that benefit all investors and urged
regulators to focus on enhancing disclosures to manage
Steven Quirk, a senior vice president at TD Ameritrade,
whose firm was highlighted in the study, questioned the study's
findings, and stressed that his brokerage follows best execution
But Levin pressed Quirk on why TD Ameritrade disclosures
often showed it had sent most of its non-marketable orders to
the exchanges with the highest rebates.
"Your subjective judgment as to which market provided best
execution contends that millions of customer orders virtually
always led you to route orders to the markets that paid you the
most?" Levin asked.
When Quirk interjected that it wasn't "always," Levin
quipped: "I said virtually always."
"Virtually, yeah," Quirk replied.
Republican Senator Ron Johnson of Wisconsin expressed
skepticism about the gravity of the conflict problem, and
questioned the research of Robert Battalio, an author of the
"If I am doing a $2,000 trade, you're concerned about a
conflict of interest where I might have to pay an additional 40
cents? Is that what this is about?" Johnson asked.
"No, it's about the fact that you didn't get to trade,"
Battalio shot back. "Your assumption that you trade is wrong."
(Reporting by Sarah N. Lynch; Editing by Eric Beech, Jonathan
Oatis and Chizu Nomiyama)