Retirement savings can be damaged by conflicts luring brokers to put their interests ahead of their clients, Senate Permanent Subcommittee on Investigations Chairman Carl Levin (D-Mich.) told a Senate hearing on high-speed trading Tuesday.
“We have to remove the conflict as soon as humanly possible if we are going to restore confidence in the markets. There are steps that must be taken by regulators or Congress,” he said.
One of the conflicts, Sen. Levin noted, is when a retail broker choses a wholesale broker to execute trades and receives money in return.
“This money, known as “payment for order flow,” can add up to untold millions, and almost every retail broker keeps these payments rather than passing them onto clients,” he said.
Another conflict he cited are “maker-taker” arrangements in which a broker sends “nonmarketable” orders (such as limit orders) to create liquidity and receives rebates that are not passed on to clients, Levin said. The maximum allowable charge is 30 cents per hundred shares, but he said they can add up to hundreds of millions for individual brokerage companies.
He said disclosure of this conflict is not enough. While brokers are required to get the best execution for their customers, Levin said, exchanges with the highest rebates often do not offer the best execution for clients. For example, a limit order might not get filled because the broker sent it to an exchange with the best rebate but which may not have had the best price on the security.
TD Ameritrade Trader Group Senior Vice President Steve Quirk said maker-taker rebates are indirectly given to clients in the form of more and lower cost services.
He disclosed on nearly every nonmarketable trade, the company receives a rebate from the venue, amounting to $80 million last year.
After repeated questioning by Levin, Quirk said those orders are “virtually always” routed to the venue with the highest rebate.
New York Stock Exchange President Thomas Farley said the NYSE is seeking elimination of maker-taker rebates.
“The appearance of conflicts undermines confidence in the markets,” he said. He says the rebates are contributing to the drop in participation in the market by individual investors, which is at a 16-year low even though the market is rising.
Farley noted two-thirds of Americans owned stocks, a decade ago and now only half do.
Speaking for a large alternative trading system, BATS Global Markets Chief Executive Officer Joseph Ratterman said maker-taker rebates should not be eliminated since they lead to bid-ask spread reductions.
Washington’s interest in high frequency trading, which had been percolating for years, boiled up with the publishing of Michael Lewis’s Flash Boys this year.
Lewis said with the ability of high-speed traders to gain an unfair advantage over mom and pop investors, the markets are rigged, a charge that Securities and Exchange Commission Chairman Mary Jo White has repeatedly denied.
A hero in Lewis’s book, Bradley Katsuyama, CEO of an alternative trading system, called maker-taker rebates “perverse incentives.”
“Investors are systematically disadvantaged in the way the market is set up,” he said.
Not all high-frequency trading is predatory, but some practices are, he said.
Senator Charges Retirement Savings Hurt By Broker Conflicts
June 17, 2014
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Comments
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I didn't want to forget the Senate either.
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You can't have it both ways. There are $7 commissions for a reason. They send the order-flow away. And this has to be disclosed to clients. The very, very small segment of people this potentially hurts are the people attempting to day trade using a retail broker like TD, eTrade, etc. Most retail investors pay the $7 and hold their investments for longer than the few minutes or hours in a day. There is minor slippage for that instant execution. At most, it would be a $1 or $2 per 1000 shares. That's the cost of doing business to have instant executions which is still much less than it has ever been. Most spreads are .01 wide these days, down from 1/16 or 1/8 of a cent 10 years ago. Better yet, you don't deal with a specialist on the NYSE floor anymore. Anyone remember those days? Brutal executions and you could wait several minutes to hours sometimes for your fill. Anyone not directly connected to the market to do this type of trading, is fooling themselves and ill-informed. It's akin to trying to race an Indy car with your Camry. You just don't do it. Most of the general public has learned of the perils of day trading at this point. A Limit-Order makes this entire argument completely irrelevant. The limit order is where you are willing to buy or sell. If it is marketable, it has to be quoted in the NMS regardless of exchange chosen because it has to post in the market or get filled. Mr. Levin should be focusing on other "so called" investments that are really fleecing the investing public, not the micro-second fills and savings the retail public gets from the instant executions they receive. 10 years ago a retail client could have paid $2-300 dollars to get a couple hundred shares of Microsoft filled with a full-service broker. Now anyone can do it online, in seconds for $7 or less. If Congress was only so scrutinized for their efficiency.
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The only way to remove the conflict of interest is to make brokers, banks, insurance companies and mutual funds have a fiduciary responsibility toward its clients. Mutual funds were excluded by ERISA. Go change ERISA. Good luck getting brokerage firms to be fiduciaries. The press was full of articles in early 2014 about how intense they are to remain with the suitability status with clients. What's interesting is that Merrill Lynch wants its account representatives to become CFPs. Are CFPS fiduciarily responsible to clients?