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The Bionic Trading Desk

20 June 2014

Can the Markets Function Without Maker-Taker?

Rebates and maker-taker pricing do distort the price-discovery process. But they’re not necessarily bad for the equities markets.

Exchange rebates are in the news. Jeffrey Sprecher, the CEO of ICE, the new owner of the New York Stock Exchange, wants them banned. A new research paper titled, “Can Brokers Have It All?” by Robert H. Battalio, Shane A. Corwin and Robert H. Jennings, points to the notion that high take/rebate markets have worse execution quality than those with low take/rebate fees. There is also an increasing chorus of buy-side firms that seems to want them gone. So what’s the story on rebates? Is this more than a tempest in a teacup?

Just discussing rebates and maker-taker pricing is interesting, but it misses the broader picture of pricing distortions, or non-transparent payment mechanisms that create artificial ripples in the price discovery process. These mechanisms attract flow to venues where it may not necessarily belong and that may not have the best execution history. While rebate pricing schemes are the most notorious distortion, there are other distortive practices, including exchange pricing tiers; the development of internalization and ATS platforms; payment for order flow relationships in which wholesalers buy order flow from retail brokers; and soft-dollar relationships in which commission dollars are used to pay for brokerage services, typically including trading tools, research, and corporate access. Each of these mechanisms leverages discrete payment channels to influence the routing of order flow.

[To learn more about the impact of incentives and exchange pricing structures on best execution,  please contact TABB Group for details on our latest research, “Rebates and Market Distortions: The Cost of Liquidity?”]

Our markets are not distortion-free. Liquidity and its immediacy have a price and a value. This price and value is harvested through a series of payment channels, including exchange pricing and tiers, retail payment for order flow, and soft-dollar payments between clients and brokers. Each of these payment channels bundles/trades off execution commissions for some value (market share, cash, or research). The question is: Do these tradeoffs impact execution quality? In some cases, researchers have clearly stated “yes”; in other cases, the answers are more nuanced.

Where investors can understand these trade-offs and easily apply pressure on their agents to improve execution, these conflicts can be managed simply through good management, focus, analytics and the reapportioning of order flow. To the extent that order flow is not easily portable, then we need to ask ourselves: Is execution quality suffering, and is the tradeoff between execution quality and these payments appropriate? If not, when is the right time for regulators to step in?

Clearly, understanding all of the various perverse incentives and value propositions is difficult, and harvesting/leveraging them can be incredibly complex and expensive. But just because things are complex and expensive, do they need to be banned or artificially “simplified” by regulators? What would simplification look like? If we banned maker-taker, would we also need to ban exchange pricing tiers, payment for order flow, and soft dollars as well? And even if we did ban these practices, would they make the market fairer, less volatile, less electronic or less risky? Or just simpler?

[Related: “Take the Time to Understand the Complexities of the Markets”]

Incentive programs, while complex, benefit many. Eliminating maker-taker runs the risk of reducing exchange competition while eliminating the incentive for providing liquidity. With the loss of liquidity, wider spreads and lower volumes are likely, and off-exchange trading likely would drop as the declining cost of taking liquidity changes the internalization incentives.

The question is: Should simplifying complexity for complexity’s sake be our goal, especially since most of this complexity is abstracted away by fast computers, smart order routers, and high-speed networking? While TABB Group is a proponent of simplicity, the industry’s and regulators’ target shouldn’t be simplicity alone; it should be a market that enables efficient, effective and trustworthy re-allocation of capital in a measurable way. The goal should be not just be fairness, but an easy way to measure, understand, and quantify execution quality and any tradeoffs. If the tradeoffs do not benefit you, your firm and your clients, then change should be just a click away.

Spotlight-white-trans For more stories in the The Bionic Trading Desk Spotlight Series click here.

Comments | Post a Comment

25 Comments to "Can the Markets Function Without Maker-Taker?":
  • Comment_230146_210851315613283_100000652474653_678322_2285980_n
    crammond1964

    23 June 2014

    it becomes a serious issue when folks think it is real volume where in reality its only an "arbitrage " order and therefore more liquidity draining than creating . Sadly exchanging have wrapped this up and promoted it wrongly .

  • Missing
    kurtkujawa

    23 June 2014

    Larry,

    Please quit insulting us.  The maker taker model does not increase liquidity.  So sad to bad if it eliminates exchanges.  One of the biggest problems is all the different exchanges and fragmentation.  Fragmentation is what has hurt execution quality.  I am also sick and tired of hearing that spreads would widen and volumes would would shrink.  That is just blatently wrong.  Again you cleverly exchange volume for liquidity in your phrase, because you know you couldnt say it would reduce liquidity!. So you try and confuse people with switching the words.  Also, just because spreads would widen, does not mean executions would widen.  Why does every 100 share bid or ask need to be displayed? spreads should be widened and bids/askd should be agregated to create a larger book.  That is not to say you couldnt trade inbetween, it just wouldnt be displayed.  does it really make sense to try and price a block off of a 100 share market?   

  • Comment_tabb_-_larry_tabb_hi-res_wo
    ltabb

    23 June 2014

    Kurt - I didn't mean to insult you.

    That said, the market is for all folks not just professionals. The challenge is, the SEC went down the path of saying that retail investors (mom and  pop - not the aggregated centrally managed assets of mom-and pop) are as if not more important than your liquidity. And headed down the liquidity segmentation route. And when you begin to segment liquidity you can do all sorts of things...

    Now, I know many folks would like to get the ability to segment flow changed. And that is your bone to pick. And you are not wrong. But the industry has completely re-jiggered itself to fit million share orders into 100share lots. And that isn't right. That said, the SEC is moving toward fixing that with the nickel pilot which I assume will come with some sort of trade at rule.

    The thoughts above come from a research piece on rebates and liquidity distortions. Which you should buy (shameless plug) and read. The main point wasn't about liquidity or tighter spreads, but more about how to think about maker taker and the cost of trading vs. reversion and how to leverage the cost structure to think about what kind of return you want out of your order vs. how much do you want to pay for it.

    I also looked at if you are going to pick on liquidity distortions - you really need to also look at dark pools and their economics, soft dollars/CSAs, payment for order flow, and price tier discounts. all of these things change the economics of trading.

    Now, I am not married to 11 exchanges and 40odd dark pools and how many internalizers - but all this stuff is related. you can't fix one without impacting a dozen other things. and what you impact may not be initially obvious

  • Missing
    kurtkujawa

    23 June 2014

    Larry,

    A couple things, 1st the .05 spread piolet is stupid and will do nothing.  The entire premiss of the argument was faulted from the get go.  Spreads is not the issue, displayed size and fragmentation is the issue.  What difference will .05 spreads with 100 share markeys make? nothing.  There are less small cap IPO's because there are more venture and angle funds that are staying with the companies longer and taking them public when they are more mature.  >05 spreads are not going to get more traditional market makers to commit more capitool, the vast majority of buy side firms do not use capitol anymore because they have more tools and options then before.  So you see its not just widening the spread for the sake of widening the spread.  once again the argument is mis guided.  Spreads should be determined naturally by size not price.  I do not believe in payment for oder flow or recapture, since they go comletely against best execution.  I am all for CSA's because they allow you to go where you NEED to go and still pay firms for research or traditional soft.  One of the other problems with maker taker and other payment for order flow, is that the payments are NOT going back to the customer.  they go right into the pocket of the brokerage firm, so there motives are not always in line with the clients.  Payment for order flow has always been a shadey thing, laced with shaddy players, does bernie madoff come to mind, or any of the other neferious HFT firms?

  • Comment_tabb_-_larry_tabb_hi-res_wo
    ltabb

    23 June 2014

    As for spreads, I think the assumption is that if you reduce the number of ticks then more liquidity will aggregate on each tick as well as the market will slow down (because intra penny volatility would decline). That said, I am not sure it will work either - which is why there is a pilot.

    Ok you want a price size market, or some sort of pro rata market. Well - NYSE had or still does have a pro rata market - that hasn't been a huge success, given that they have lost a ton of share since NMS. Also PSX tried to do a size priority market and they eventually killed that one too.

    But that said - a price size market, puts little guys (be they real individuals or HFT) at a disadvantage to guys that want to display size. I may be able to get behind that. But will spreads remain at penny? if so I am not sure folks will display much size. They would need to widen the tick and slow down the market for that to occur.

    The other issue would be, who would quote in size? Not sure it would be banks because of Volcker and Basel III. Maybe smaller guys would fill in, maybe hedge funds or prop shops... Not sure that traditional LO will display in size. That would give away too much info.

    I am a fan of defragmentation too. But how do you determine which venues to defrag? Lower liquidity ones? - maybe with a caveat for start ups, maybe by reducing access fees (or creating pricing tiers - lower for less expensive stocks and higher for more expensive stocks). But not sure I want some random guy (even the SEC) saying that venue A can stay but venue B - you lose your business. The most fair way to drfrag would be to determine your market rules and the winners do well and the losers either change or go bust.

    As for PFOF - I am conflicted on this as well. Sounds pretty squishy but if we killed it then the issue would be that a)either these firms would need to invest to build out a trading floor to compete with the likes of the larger players - (which would be expensive), or b) they would have to give their flow to the same guys they sell it to now - but for free.

    So what would happen if you are the person that is in charge of routing that flow to a wholesaler for free? Who would you pick? Altruistically you would pick the guy with the best routing, but do you guys always pick the folks that give you the best ex? Not always. Sometimes that flow goes to pay research bills, folks you have a CSA with, folks that have a calendar... That said - if all of a sudden, a wholesaler had the opportunity to get a precious asset for free, there would be pressure to ensure that the wholesaler won the business, with maybe a trip to Hawaii, or some other perk. At least with PFOF - there are some standards and reporting.

    What would happen if you (all buy-side firms) all of a sudden would have to build out an execution desk just the same a an HFT or the best brokers? Not sure that your management would like it. They would say - hey I manage money, I am not in the brokerage business. Same is true for retail. They are in the retail brokerage business not in the execution business. Its just that their orderflow is more valuable / less problematic (smaller and less informed) than yours.

    What would happen if all of a sudden, a bunch of brokers wanted to buy your flow? My first response would be - cool, then exactly one second later, I would think - crap, are my trading decisions that bad - that uninformed?

    Its not that easy.

  • Missing
    kurtkujawa

    23 June 2014

    Larry,

    How a Price/size market would work is by a CLOB.  look at it like a Dutch auction.  All orders are aggregated untill a determined size is displayed, lets say 10% ADV.  Some spreads would still be a penny, while some would be much wider.  As for retail brokerage firms selling orders to wholesalers, why would they need to do that, why would they have to give it away for free? why would they just route it right to the exchange and skip the wholesaler, oh yea, the kickback they get, they pocket! So they really are getting 2 commisions, the one from there customer and then they sell there customers order to the higest bidder, not the safest or best x place, boy that makes sense.  As for CSA's, the reason they work is because it takes the payment for services away.  If I have to pay a broker for research, but they dont have a good trading desk or dont have the merchandise, I am free to go wherever i need to in order to have best x and nothing else.  I dont get your part about building out an execution desk for the buy side, i can already go direct to an exchange and not use a broker per say. 

  • Missing
    sambirnbaum

    23 June 2014

    @kurtkujawa, Why? Why wait until a predetermined size is met ? and who will determine that size ?

    Why should a investor who is willing to pay market price right now? be penalized and wait and potentially be negatively impacted if the price goes up? There is such a thing as opportunity costs. Are you going to make that up for that investor/trader. The buying and selling of pairs whether single stocks or in lists would produce problems for those that are trying to remain dollar neutral and would become a much large issue for institutions (i.e. pension funds) as they adjust their holdings either at predetermined re-balancing intervals or when there are  inflows and/or outflows.

    Market making is arbitrage. It is the same ting whether you are a registered market maker for that stock or a day trader. All the comments that blame the HFT firms for what ails the market, they all imply , either implicitly or explicitly that  they don't provide liquidity and are only in it for the rebates. Warren Buffet made the same comment on MSNBC. Well, you can't have it both ways. They are either providing liquidity and are getting the rebates or they are not providing liquidity and therefore they would not be receiving any rebates.

    It was the SEC and the political class who gave us the penny spread in the first place. Do we want more unintended consequences to befall the market? 

    Lets get real about this. If someone is willing to pay for collocation, they will have an advantage. It would be the same if they are willing to pay more for faster CPU's and more of them, better and more proficient developers and more Phd's to analyze real time data and produce better algorithms. Are you suggesting that the SEC should control those elements as well ?

    Mom and Pop trade through a broker and that broker is/should be using the very best available technology to produce the best execution for Mom and Pop and if that broker is failing Mom and Pop, Mom and Pop have every reason to find another broker.

  • Missing
    kurtkujawa

    23 June 2014

    You miss my point entirely.  No where did i say anyone would have to wait or be forced to pay the spread.  I simply said that all limit orders should be agrigated until a sizable B/A is created.  Size is what gives true price discovery, not 100 share markets that are manipulated by HFT masking as market makers.  So between the larger spread, market and limit orders would be free to match, the spread would just move, but at least u would have a better institutional market.   HFT, Day Trdaers, call them what you want, they do not add liquidity, just volume, flipping the same 100 shares over and over for rebates does not make liquidity, just volume, so please quite spouting that old, debunked argument..  I just love when all the HFT scumbags try and argue " it is only a game of speed and that they are willing to pay for the speed so its OK" .  Well its not ok to ping an order, flash your quotes, take offers ahead of the real buyer, claiming its arbotroge, sell it higher and somehow claim they are adding liquidity? LOL  Dont piss on my leg and tell me its raining.  You might be able to pull the wool over some stupid congressman or SEC lacky, but not someone who has been doing this for 25 years..  Why do you think HFT doesnt want a CLOB, because they couldn't "arbitrage"  the exchanges anymore.  Oh I am sure they or a new group would find another way to exploit the system, just as the SOES bandits did before them. 

  • Missing
    sambirnbaum

    23 June 2014

    I don't think I missed your point at all. A successful market maker tries to flip the same number of shares all day long. They want to start with zero inventory and end up with zero inventory. Whether it is with 100 shares at a time or 500 shares at a time. The idea is the same. The more often they flip that inventory, assuming they are correct, the greater the profit. They are not portfolio managers and as you correctly state they are not investors. They never were. What used to be a relatively slow (compared to today) process 10 years ago, is now done much much faster, but the business model is the same, only the time factor has changed. The irony of this entire debate is the fact that dark pools, if they are truly dark and that is something else, actually do level the playing field by hiding the book from the market makers (registered or otherwise). That is the one point that I may actually be on your side of the debate.   
    If you claim to be a dark pool,  then you should be a dark pool 100% of the time to 100% of the clients.

    As to aggregating limit orders, again I ask why ? It brings forth all the problems that I mentioned in my previous comment with regards to opportunity missed, opportunity costs and dollar neutral trades.

  • Missing
    kurtkujawa

    23 June 2014

    2 things, first if what you say is true, that a successfull maket maker tries to flip the same number of shares all day long and go home with no inventory, then you just proved my point that they do not add any liquidity to the market place, just volume.  I have know idea why you think aggregating lmt orders brings about your orders.  let me try and describe it again.  If you have a seller of 1000 shares at 20.1 and a seller of 1000 shares at 20.11 and a seller of 1000 shares at 20.12 and 1000 at 20.13 and 1000 at 20.14, the offer would show 5000 at 20.14, now if the bid had limit orders of 1000 at 20.09 1000 at 20.08, 1000 at 20.07, 1000 at 20.06, 1000 at 20.05 the displayed market would read 20.5/5000 x 20.14/5000.  now lets say a buyer comes in to buy 500 at the mkt, he would buy his 500 at 20.1, since there was 1000 in the system at .1.  if someone wanted instead to buy 1500 at the market, the buyer would pay 20.11 in order to fill his buy order, then the offerr would be what ever the next price is that would support 5k shares.  Now lets use the same examole but with limits.  lets say a new buyer shows up with 500 to buy at 20.1, he would buy his 500m the offer would now change again to reach the 5k size.  if instead a buyer came in and wanted to buy 1500 at 20.1, he would buy the 1000 at 20.1 and now the bid and ask would change based on the book.  but as you can see, nobody would need to wait, yet the market would have a deeper posted book, which is a more true price discovery.  I hope that helped.

  • Missing
    sambirnbaum

    23 June 2014

    First the operative word is "tries". Are you now saying that we should do away with market makers completely ?

    Remember what I said about opportunity. Suppose you did put in a limit order for what ever, and in the mean time you discover a better opportunity, should you be prohibited from canceling that order and placing a different order? and why would I as an investor place a large limit order in lit market ? Do you think that Warren Buffet advertises his intentions on investing and/or divesting in any company? He would be foolish as any other investor/fund mgr would be to advertise such intention in any shape or form. The old saying "loose lips sink ships" is a very good analogy in todays trading environment with regards to information leakage.

  • Comment_230146_210851315613283_100000652474653_678322_2285980_n
    crammond1964

    24 June 2014

    Perhaps the question should be "would volume increase without the maker - taker ?"

       Given time  I believe so 

  • Missing
    kurtkujawa

    24 June 2014

    sambirnbaum,

    Actually, I dont see any reason for market makers in your definition.  Once again, if a market makers goal is to go home flat and just flip shares, he is adding no service nor liquidity to the market.  He is just getting between two naturals.  As for your better oportunity?  I cant answer that because I have no idea Who needs to constantly chase their tail looking for "better Oportunities"   As for why would an invester place a large limit order in a lit market?  I am not sure how old youare or how long you have traded, but apparently you have not been doing this for very long.  Before we had penny spreads and 100 share markets, you could go to the floor of the NYSE and get quotes of 100,000 share markets, and they were actaully good for them.  Size begets size.  the reason it seems so foreign to you is you have only ever traded in fragmented markets.  In a situation like a CLOB or the old NYSE auction market, where all the players were together with all the orders in one place, you had large deep markets. 

     

     

  • Missing
    sambirnbaum

    24 June 2014

    @kurtkujawa - I believe I am older than you are and have been involved in the business since 1993. The phrase is actually "volume begets volume" and trades of 100k shares of 1 stock would normally go to the block desk and they would try to find a natural on the other side. Sometimes the sell side would put up their own capital and take on the risk for a fixed fee and then parcel it out in the hope that the fee charged would be enough to offset any adverse price movement during the time it took to liquidate that position. In either case, those involved were very careful about information leakage because of the possibility of others taking advantage of the situation.

  • Missing
    kurtkujawa

    24 June 2014

    Sambirnbaum,

     

    Well your not older then me and I have been in the business since 1987 as both a sales trader covering some of the biggest MF's and pension co's in NY.   I was also a Market Maker in the traditional sense, when we actually took positions and risk for customers, which actually did supply liquidity.  Now I am currently on the buy side trading small cap stocks.  So I do have a pretty good understanding of what works in a market place and whaat doesnt.  Also, it is size begets size, since real traders like to trade SIZE BLOCKS, not odd lots!  but I degress. Yes it has always been a fight about info leakage, and the easiest way to avoid leakage is to trade a block and minimize your footsteps.  Having a central book and reducing fragmentation will bring back a deeper book and better price discovery. 

  • Comment_ceo
    mai

    24 June 2014

    I have read this exchange and have a couple of questions for Mr Kujawa (and anyone else I guess) ...but for the moment Mr Kujawa who appears to have some very forthright views on what constitutes an optimal market design. Whose job is it to ensure that the market design we have is optimal for people like yourself and to decide whether your views or someones else should be followed? .Putting it another way - Is there an independent arbitrator for such decisions? And a follow on question if I may...does that party have a mandate by which it is required to make these types of decisions? Because it seems to me that given your views on what is optimal you would have to argue either there is no independent arbitrator or they are not following their mandate.  I want to put the point forward for consideration that perhaps if we addressed these very fundamental questions we would be in a better position to determine why we don't seem to have the market design you seem to be so adamant about.

  • Missing
    kurtkujawa

    24 June 2014

    Mai,

    unfortunately, i would say the "arbitrator" would be the SEC and congress, since they are the ones that put the regulations in place.  The problem with that is 1. the vast majority do not have any idea how or markets work.  2. because they have know idea, they can be easily manipulated and mislead into creating regulations that have very huge unintentional consequences.  SOES, REG NMS etc.... Yes it is true that I have my own agenda, but that agenda is not for my own pocket.  I am an instituitional buy side trader representing 1000's of individuals thru IRA's Pension Plans, MF's etc.  So when day traders and HFT firms hide behind the "individual investor" argument, all theyu are doing is manipulating what the rule was supposed to stop, the unitended consequences, of regulation something you have know idea about.  The problem with the current market structure is that it went from an institutional based structure to a retail based.  That is why in the real world you have wholesale markets and retail stores.  Yes there are a few like SAMS and COSCO that try and bridge the gap,  but they still arent really that good for the individuale, how many 5 gallon jars of mayo do you need?  So my point is that it is the institutions representing the individuals that is the vast majority of money represnted in the markelace, the market place should be designed for them and not day traders.  Should the 100 suffer for the 1? I don't see it that way.  The reason I am a big proponrnt of 1 exchange and CLOB is that if all orders are resting in 1 place, the markets will be deeper and more transparent.  I find it funny that the big catch phrase now is transparity, LOL, let me tell you, 20 years ago you could get a look from the specialist and know what the market was, how many shares you could buy/sell.  Now i am not saying there wasn't problems with the old NYSE, but when has it ever been a good thing to throw out the baby with the bathwash?  The second part of having a CLOB is that it should be run as a utility NOT a for profit exchange.  Exchanges should not be profit centers, the exchange should be there simply to act as a clearing agent.  Brokerage houses are in the business of competing for order flow.  Then it all gets put into 1 place where everybody can see the same thing and act.  The only people that disagree with that seem to be HFT and day traders, that really ought to say something, true?

  • Comment_ceo
    mai

    24 June 2014

    I agree with your statement that SEC (more generally a country regulator) is the nominated arbiter under a mandate from congress (more generally some legislative assembly). Bear with me one more time please with my next question. What is that mandate of the typical regulator in virtually every jurisdiction of the world including the US?.

    It is only when we understand this mandate and how the regulator is living up to it that we can appreciate whether they have considered your views against others and decided in favour of the others...or whether in fact they haven't done this at all and your views still have a chance of winning the day.

    By the way, you do ocassionally find the word transparency in regulatory mandates but in fact transparency is a means to an end, not and end in itself which takes me back to the central question...What is that end or mandate.of the arbiters? I will be interested in your view.

    I will get to your most interesting point about one CLOB once I hear your views on the regulatory mandate. I will also address you other interesting questions as to whether regulators need to know the market in all its intimate detail (and don't) and whether that matters, whether the market should be designed primarily for the institutional rather than the retail sector and finally, whether exchanges should be utilities.

  • Missing
    kurtkujawa

    24 June 2014

    Mai,

    I have no idea what the mandate is here in the US, much less the rest of the world.  One problem is that in the US, is that as the political winds change, so do the mandates!  Which gets back to the problem of having people and agencies that know very little about what they are regulating doing the regulations.  What happens is what we have now, a hodgepodge of various mandatesthat have changed throught the years based on who was in power, what group complained and influenced the most, etc... The road to hell was paved with good intentions.  I am not sure if that helps, but that is the best I can do about mandates and how they come about.  

  • Comment_ceo
    mai

    25 June 2014

    You may then be surprised by the fact that the mandates of securities regulators is surprisingly consistent around the globe, and hasn't changed for a decade or more, so much so that it is ensconced into the principles and objectives of IOSCO, the peak body for world securities regulators. That mandate is to ensure that markets, and changes thereto, are fair and efficient. Happy to provide a list of published mandates to demonstrate my point here.

    Now consider this for a moment. If that is regulators' mandate what do you expect is the first thing they would try to do in order to meet this mandate. Can I suggest to you that it should be to define the terms fair and efficient...and from those definitions to determine a series of measurement proxies that they poll (or ask proponents of change) to poll for them, pre and post every market design change. Question? Has any securities regulator actually done this? Answer. No!

    So might that not give you a hint as to the real problem we are currently facing...namely the inability of the arbiter to live up to their very public and published mandate....putting this another way the failure to embrace evidence based policy making where evidence rather than authority rules the day.

    It is one thing to stand on the side-lines and criticise, quite another to venture a solution. Let me try.

    If I define an efficient market as one in which it is cheap to trade (the cheaper the better) and in which the price at which one is trading reflects all available information then in order to measure efficiency pre and post market design changes I need to measure transactions cost and price discovery.

    If I define a fair market as one in which prohibited trading behaviours are minimised (you might define it differently and so to might the SEC but have they defined it at all? I suggest not!) then I need to measure the change in prohibited trading behaviours pre and post every market design change. Given there are three broad classes of such behaviour, in order to measure fairness pre and post market design changes I need to measure insider trading, market manipulation and broker -client conflict pre and post every design change.

    Now in order to measure elements like insider trading and market manipulation accurately, I need to know who is trading. Do regulators know this. No they don't because the information is not contained in trading records that they have regular access to. So if they can't measure fairness, how can they possibly live up to their mandate? The short answer is they can't.

    So is it any wonder we are in one wholly mess. Market design changes have been coming thick and fast in the last decade and the arbiter is largely basing its decisions on authority rather than evidence. If that ain't a recipe for disaster I don't not what is.

    Fortunately, its not all doom and gloom. Three world regulators are leading the pack. Australia, Canada and the FCA(UK)....in October of this year in Australia for example, all trading data will be required to have client identifiers on each order and conditions codes to identify when brokers are trading as principal and agent and when trading as principal, when the are punting or facilitating. Finally...how long has it taken...one regulator will be in a position to actually live up to their mandate in about six months from now.

    Why has it taken so long? In the meantime Mr Kujawa you and many others are likely to be continually frustrated. But then in lies the heart of the problem!

    While the US regulator has made a useful start in this direction with systems like Midas it is a long way behind its contemporaries in part because it is not interested in the design of markets other than the US.

    I am the first to admit that not every market is the same but regulators need to start cooperating in order to meet their universal mandate. This starts with operationalising their mandate and opening their eyes to the market design in other parts of the world and the evidence that change makes to those markets. Has the SEC done that? You folks will be a better judge than I.

    Take the trade-through rule for example. Tried and proven successful (with evidence) in both Australia and Canada. Minimum Price Improvement to go to the Dark. Again tried and proven successful in both Canada and Australia.  Why is HFT less of an issue in other parts of the world than it is in the US. Perhaps that’s worth a look and reflection. That may suggest a move in the direction of your 1 CLOB...but how do you do that when you have already opened Pandora Box and have no way of closing it? That is the real problem in the US right now in my opinion.

    My apologies for how long this has got! And by the way while I live in Aus I don't hail from it or the other two jurisdictions (Canada and the UK) where I think regulators are getting on top of these issues.

  • Comment_230146_210851315613283_100000652474653_678322_2285980_n
    crammond1964

    25 June 2014

    mai ; i agree that for over a decade we have failed ; however not helped by exchanges /  regulators constantly denying we had a problem  !

    The offer of client identifiers was offered back in 2003 but declined by most exchanges ; we now know why ; I think  this abusive decade will have to answer these issues .

    I totally agree that finally FCA  are getting on top BUT question what they were doing before  and where they sought their advice ?

  • Missing
    sambirnbaum

    25 June 2014

    @mai - I agree with you regarding the conditions and mindset under which the regulators have been operating in the past. Where I may have a different view is in regards to what should be included in the order record when the order record is first sent to the exchange. Here in the US,  we already have indicators as to the type of order it is, i.e. principle or agency. Where I disagree is the inclusion of the original client ID. That information should not be sent to the exchange, but should be available only to the regulators in an efficient manner (preferably in real time if needed)  when and if the regulators need it.

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    kurtkujawa

    25 June 2014

    Like I said, its a mess, and unfortunately I don't see any light at the end of the tunnel.  You can't just keep putting bandaids on, eventually, you need to sweep up all the debris from the playground, retire the broken jungle gym and start fresh. 

  • Anon_avatar
    Anonymous

    27 June 2014

    good discussion.  you mention a few different payment chnnels such as "exchange pricing and tiers, retail payment for order flow, and soft-dollar payments between clients and brokers."   I would argue that all of these should be eliminated to promote a more level playing field.  Exchange Tiers have always put the non bulge brackets at a disadvantage.  Penson and Wedbush made a fortune by aggregating volumes and offering better tiers to anyone willing to join the club.  This whole game can be avoided by eliminating tiers.  Retail Payment for order flow is also a scam and should be eliminated.  The 4 major players who are paying for this order flow know full well what they are doing -- that is, paying for valuable "intelligence" from the herd mentality and picking off these "dumb" orders and making profit.  There's a reason why these market makers who pay for order flow hiire the best and brightest PHDs in mathematics, etc.  They are using this flow to profit based on all sorts of statistics and probablilities that can only be derived by getting such enormous direct flows from the retail masses.  And of course the argument that the retail investor now only has to pay $5.95 for a trade whereas he used to pay well over $100 25 years ago, is just not a good enough reason to justify this.  Frankly, there is way too much speculation in the market by everyone's mother, grandmother, taxi driver, dentist, mailman, etc. that making the cost of trading HIGHER would actually be a good thing.  Finally, "soft dollars" is yet another scam and I'm surprised people still do this today.  Every time I saw some type of soft dollar relationship, it was always accompanied by shady clients and trader relationships.  Not to mention, the overhead to account for soft dollars is just wasteful and inefficient.  In conclusion, let's level the playing field as best as we can and simplify things by eliminating some of these old school tricks that are completely unnecessary.

  • Comment_l
    lkovach

    30 June 2014

    Haim Bodek takes on maker-taker http://tabbforum.com/opinions/deconstructing-maker-taker-part-1-a-gordian-knot-for-market-structure

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