November 7, 2018

Michael Lewis’ Flash Boys may get credit for highlighting the maker-taker debate but Aquis Exchange was already way ahead of the curve with its subscription based pricing model when it launched five years ago. It is only now that others seem to be catching up with the US regulators looking into this controversial trading style and Turquoise recently scrapping rebates for certain of its members.

Not surprisingly perhaps, the conventional exchanges are rebutting these moves while the buyside community is cheering. Major operators such as Nasdaq and Cboe Global Markets have been vocal against the Securities and Exchange Commission’s proposed two year pilot to limit payments for up to 3,000 stocks, to assess the impact of rebates on order routing behaviour and execution quality. They have described the plan as a “discredited vestige of intrusive, Depression-era legislation”.

Fund managers, on the other hand, have been supportive, claiming that rebates are akin to kickbacks that have distorted order routing, price, transparency and market quality.  T. Rowe Price summed it up for many in its letter to the SEC stating that it had “long been an advocate for changes to the maker-taker model because we believe that the avoidance of access fees generates an inherent conflict of interest for brokers, while rebates create unnecessary market complexity and fragmentation.”

In Europe, MiFID II has played a significant role with its greater emphasis on proving Best Execution. Fund managers are now much more accountable and they cannot rely on brokers who are only looking to execute orders on exchanges with the largest rebates and not the best price and execution quality.

According to a recent report by Tim Cave, an analyst at TABB Group, “if brokers stop sending orders to collect rebates and focus instead on Best Execution, this should improve the overall quality of the market. A more simplified fee structure also levels the playing field for everyone’s benefit. A concern is that brokers may make up for the lost rebate by widening spreads, which investors may end up paying for. “

The debate and discussions will surely play out for the foreseeable future but there is hope in asset management circles that other exchanges will follow the Aquis paradigm and all rebates will one day be a thing of the past. Even Turquoise which is co-owned by the LSE and a number of banks is not abolishing them all – firms that trade for their own account, such as high frequency traders who are part of its liquidity provision scheme, are still eligible for refunds.

In the meantime, traders should not miss out on Aquis’ benefits of greater transparency, liquidity and quality of execution inherent to its subscription pricing model and ban on aggressive non-client proprietary trading.