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.
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