Marketplace rebates create conflicts of interest, distort routing practices and impact quality of execution. Together we can change that.
Guest post by Chief Business Officer Joacim Wiklander
February 1st, 2017
On March 1st, 2017 NEO intends to significantly lower the cost of trading and reduce the rebates we offer on the maker-taker fees in its LIT Book (subject to regulatory approval). We are doing this because we fundamentally believe that payment for order flow by marketplaces generates a conflict of interest between the investment dealer and its clients. This conflict of interest can induce investment dealers to select trading venues based on who pays the best rebate, not on who offers the best execution for the client. To learn more about the impact of rebates, I encourage you to watch this presentation by Prof. Robert Battalio:
What we ultimately strive for is a Canadian market where marketplace rebates do not exist. This will best meet the needs and interests of long term investors. While not fully eliminating rebates, for the reasons we will discuss below, this NEO fee change is an important and meaningful step in the right direction. We hope that other marketplaces will follow our lead.
The Elimination of Marketplace Rebates We are convinced that the full elimination of rebates is the ideal outcome because it would eradicate conflicts of interest, reduce market segmentation, put an end to numerous predatory trading strategies, simplify market structure, reduce the cost burden on genuine dealers and encourage competition based on innovation, not fees. Our challenge to drive a comprehensive elimination of rebates through is the fact that we are in a multi-marketplace environment, not only in Canada but across Canada and the US when it comes to inter-listed securities: if only one single marketplace continues to offer rebates it distorts market prices and, under a regime of price protection, the ability for other marketplaces to compete. We are in a prisoner’s dilemma situation and cannot make this change happen on our own.
It is an industry problem that cannot be addressed by a marketplace on its own. We need your help to make this change happen to the benefit of all industry stakeholders and to improve the quality of our markets.
Pilot Program: Call to Action For these reasons, NEO is pleased to announce the set-up of an industry stakeholder working group to design and propose to the Canadian regulators the implementation of a pilot program that seeks to trade, in Canada’s multi-marketplace environment, a number of securities without rebates. Such pilot program would allow all industry stakeholders to truly assess and understand the benefits and potential shortcomings of trading without rebates and help drive any future regulatory policies in respect to the matter. We are looking for individuals to participate in this working group to ensure a proper representation of all industry stakeholders.
Objective: Develop industry proposal to the Canadian Securities Administrators for a pilot program that enables trading without rebates across all Canadian marketplaces for a defined set of listed securities.
Time Commitment: 4-6 meetings during the first half of 2017
2-4 institutional buy-side participants
2-4 sell-side participants, institutional client focused (bank-owned and independent)
2-4 retail brokers (bank-owned and independent)
2-4 liquidity providers (with and without market making obligations)
We would also be happy to welcome the participation of 1 or 2 other Canadian marketplaces.
No firm can have more than one representative on the working group across all categories to ensure the broadest possible industry participation.
If you are interested in joining this working group, please contact me by February 15, 2017: Joacim Wiklander Chief Business Officer firstname.lastname@example.org or 416.933.5908
Maker-taker fees offer a rebate to market participants resting orders on a marketplace (those that display their orders on a venue) when those orders trade, and charge a fee to market participants that trade against these resting orders.
Rebates cause conflicts of interest, market segmentation, predatory trading, complexity and costs for genuine dealers without generating any benefits for long-term investors and capital-raising companies, the cornerstones of our economy.
Although we are reducing our rebate by almost 50% (in the Lit Book), a marketplace cannot eliminate rebates on its own. As long as rebates are available on other venues, they will continue to distort market prices and routing behaviours. The change, and our long-term goal – the elimination of rebates from the Canadian market – is one that must come through regulation. This is why we are forming a working group to advocate for a pilot program in Canada that would apply to all venues.
We believe that a lot of the volume we see today is not liquidity but unnecessary intermediation resulting from market fragmentation driven by fee structures. We believe that without rebates, liquidity will be provided by long-term investors seeking to trade, liquidity providers with obligations (Designated Market Makers) and liquidity providers without obligations (proprietary trading firms, including High Frequency Trading, leveraging genuine market opportunities). The pilot program will help us confirm this point of view.
This is where the pilot program should also give us some answers. We maybe need to consider a phased approach, excluding inter-listed first, and then based on the results include some of them. We may want to consider some joint initiatives with the US. This will be up to the Working Group to define.