What Is 'Maker-Taker'? And How Could A New SEC Test Program Change Your Trading?

On Friday morning’s PreMarket Prep, KOR Group President Dave Lauer and founder/CEO Christopher Nagy discussed the origins, impact and shortcomings of the “Maker-Taker” market structure.

Maker-Taker's Humble Beginnings

The Maker-Taker structure is a fee structure most stock exchanges now use that involves paying rebates to the “makers” that provide liquidity to the market and charging the exchange’s “taker” customers who utilize the liquidity.

Laurer explained that the structure originated with early market maker Island.

“Island said we’ll pay people who want to rest orders on the exchange. When they get hit, they’ll be the market makers, and the people who come in with aggressive, active orders that hit those resting orders, they’re going to be the takers,” Laurer explained.

“That fee structure really swept through the industry and basically every stock exchange has this same kind of fee structure now.”

Related Link: SEC To Wall Street: No More Non-GAAP Accounting... For Real This Time

Today, Tomorrow And Beyond

In the early days of the maker-taker system, the SEC determined that Island’s fee structure, 30 cents per every 100 shares traded, would be the legal cap for these types of access fees.

Unfortunately, since these fees are charged on a per-share basis and many online brokers charge commissions on a per-order basis, the Maker-Taker structure provides brokers with an incentive to manipulate order routing to minimize fees.

“What it’s led to is this conflict of interest between how brokers route orders… and the execution quality that the ultimate placer of that order is receiving,” Laurer said.

Nagy added that the result of this market distortion is that retail orders often go to exchanges that pay the highest rebate rather than exchanges that offer the best prices or quickest executions.

Recently, the SEC’s Equity Market Structure Advisory Committee (EMSAC) has proposed a potential test pilot to study the relationship between the Maker-Taker structure and market quality.

Depending on the structure of the testing program and the results the EMSAC obtains, the SEC could choose to modify or completely eliminate the current Maker Taker model in coming years.

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