MIAMI (Reuters) - Stock market regulators should take a hard look at the ‘maker-taker’ form of trading that now dominates share transactions in the United States, Jeffrey Sprecher, CEO of the IntercontinentalExchange (ICE.N) and new chief of the New York Stock Exchange, said on Sunday.
“Unfortunately it’s spread throughout the equities markets in the U.S. and we can’t unilaterally change it alone. But it’s certainly something we want to raise the profile and start a conversation around because I think it hurts everybody in the market,” Sprecher told Reuters in an interview on the sidelines of the Commodity Markets Council industry meeting in Miami.
‘Maker-taker’ refers to an organized system of “rebates” that large traders and brokers receive to channel their stock transactions through the NYSE or other established exchanges.
As trading volumes have grown with electronic matching and other automated trading, the largest traders have tended to use such arrangements more, saying exchange fees on transactions were too high and demanding such rebates for large volumes.
In addition, private deals usually between big broker-dealers, including private traders known as “dark pools,” have added huge volumes.
Sprecher said the Securities and Exchange Commission as well as self-regulatory bodies like the Financial Industry Regulatory Authority (FINRA) need to look harder at the issue. The Royal Bank of Canada Capital Markets unit in November wrote to the SEC that ‘maker-taker’ arrangements disadvantaged investors, created conflicts of interest at brokers and banning the practice should be considered.
“I think maker-taker pricing or payment for order flow is bad for markets,” Sprecher said. “It creates false liquidity by attracting people who are there solely to try to make rebates and not actually trade and hold risk. That liquidity leaves quickly and is not subject to any contractual obligation like a market-maker would be.”
He said such arrangements distort pricing as well.
“The price that we see as a bid/offer price in the market is really not the price because there are rebates and other discounts that are applied,” Sprecher said. “So we don’t have a view of the actual price which I think is to a certain degree false advertising when you have a public ticker.
“Lastly, it changes the relationships and incentives between a customer and its broker depending on whether the broker internalizes the rebate for the customer order. The relationship between a broker and a customer should be one of a broker having their interest aligned with their customers.”
All of which, Sprecher said, points to the need for regulators like SEC or FINRA to take a closer look.
“I don’t know if it’s something that bothers regulators,” Sprecher said. “This current SEC has said they are definitely taking a look at market structure. FINRA has said it is taking a look at dark pools and the way customer orders are being handled. Whether that prompts more government action I don’t know. But there’s nothing wrong with being candid about the problems in an industry in order to help change the debate.”
Sprecher stunned the financial industry last year when he bought NYSE Euronext for $10.9 billion, capping a decade long expansion that put the IntercontinentalExchange at the forefront of world equity markets. ICE, founded in 2000 with a focus on energy futures, had previously acquired commodities exchanges in New York, London and other locations, building up core users for its round-the-clock electronic trading of commodities and financial futures, options and swaps.
Sprecher declined to comment on the plan to spin off the European equities markets in Euronext as an IPO this year. Beyond the NYSE, the London International Financial Futures Exchange (LIFFE) was widely seen as the jewel in the transaction that Sprecher was seeking to complement the ICE portfolio of derivatives contracts.
“We’re doing well. We are in a quiet period on Euronext which I guess in and of itself suggests we’re making progress,” Sprecher said, declining to comment on the timing or nature of the transaction which has been expected by this summer. But he said integration issues between ICE and LIFFE are on schedule.
Analysts have speculated that for the Euronext IPO Sprecher may do the same thing he did for the ICE IPO and engineer private placements of shares to key market users. Sources have said up to 30 percent of Euronext equity could be distributed this way. Sprecher declined to comment.
“It is important to us that the company as a public company have a stable shareholder base,” Sprecher said.
Editing by Matt Driskill