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Wall Street elite call for maker-taker changes

Key Wall Street executives called for reform to trading fees that could be distorting markets and increasing use of dark pools, and even one of the men behind the fees agreed it's time for a change.

In a Monday round-table discussion headed by Rep. Scott Garrett (R-NJ), chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, several of Wall Street's biggest players called for reforms to the maker-taker fee model.

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Traders work on the floor of the New York Stock Exchange in New York.
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Traders work on the floor of the New York Stock Exchange in New York.

Maker-taker fees happen when exchanges pay market makers for providing liquidity (bids and offers) and charge for taking liquidity (for hitting those bids and offers). The exchanges will also take a fractional cut of the fees for themselves. Some have decried the fees as creating perverse incentives for traders to sell on exchanges where they can receive the largest maker payments, without necessarily guaranteeing their clients the best prices.

The fees also drive more trading into unregulated dark pools so "takers" can avoid the costs, Daniel Coleman, CEO of Knight Capital Group, explained at Monday's round-table. He suggested that dark pools may even begin to disappear if maker-taker and other fees were sufficiently reformed.

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Even Matt Andresen, who helped create the maker-taker model when he headed Island ECN, said at the Washington hearing that it may need some re-examination.

"The reasons we came out with maker-taker pricing do no longer exist, and it is worth readdressing those fundamental assumptions for how we stimulate competition between exchanges, and between exchanges and off-market venues," Andresen, who now heads Headlands Technologies, said. He explained that the idea arose from a financial world where there were no immediately accessible electronic prices, unlike today's marketplace.

Intercontinental Exchange CEO Jeff Sprecher, who has spoken out against maker-taker before, noted that he does not have an immediate financial incentive for his opinion—almost 6 percent of ICE's revenues are from maker-taker fees—but said that he would like to see changes occur in the context of broader reforms against dark pools.

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"Well it sounds like there's unanimity that (NASDAQ OMX CEO Robert) Greifeld and I should just lower our fees," Sprecher said. "We can make it cheaper to trade on the lit regulated markets, but we still then need people to actually take advantage of trading on lit and regulated markets, and so for that reason we really couple it with giving deference to trading on our markets where we have larger order sizes now than the dark pools. And so I don't think you can just in the absolute lower fees without addressing the rest of the market issues."

Greifeld defended the existence of the fees, saying "there is a positive aspect of providing an incentive for somebody to reveal their hand first," but concurred that regulators may need to reform the model if traders are abusing these payments.

"If that fee is so large, which you could argue it is today, that it creates its own end in and of itself...then that's not right. And I think we have to be prepared to examine what are the unintended consequences," he said.

—By CNBC's Everett Rosenfeld.

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