Forex market structure and functions

Company Filings More Search Options. It is well known that the Commission needs to undertake a holistic review of our current equity market structure. In fact, the Commission has formed an advisory committee to assist that review.

In areas where there appears to be a compelling need for action—and where the benefits of a particular course of action are clear—there is a functions for action. In areas where there may be a need for action, but where the best course is not readily apparent, recommendations will be made as to areas that require further study, including empirical research.

Finally, in areas where there is no convincing evidence that change is warranted, or where it may appear that suggested reforms might even worsen matters, caution will be urged. And bid-ask spreads for the largest stocks remain pegged at the minimum level of one cent, [5] and overall spreads, including those for smaller functions, are near historic lows.

At the same time, our equities markets have arguably never been subject to more strident and widespread criticism. One overarching aspect of our market structure that has been singled out for forex by many market participants is its highly decentralized nature. How can these competing narratives about the state of our equity markets be reconciled? There are no easy answers.

But the intensity of the ongoing debate makes clear that it is well past time for an objective and dispassionate review of our equity market structure. This review must be fearless and searching. Too much is at stake market the Commission simply to accept the assumptions that underlie the status and the justifications some have offered to defend it. For this review to be principled, however, it must be an informed one.

In other words, whenever the Commission exercises its rulemaking powers, it must do so prudently and, whenever possible, with the benefit of accurate and comprehensive information. Furthermore, any potential revisions to our market structure must be pursued in a careful and measured way.

Past experience shows that even small changes can profoundly alter our equity markets in unforeseen ways. To do so unacceptably jeopardizes the functions of investors and the orderly functioning of our equities markets. Any thoughtful analysis of market structure must begin with a simple realization: A structure that is ideal for one group must, at least to some degree, leave others less well off than they could be. Given that trade-offs are an unavoidable consequence of any market structure, it is important to identify the policy goals that should be prioritized.

Here is the appropriate hierarchy:. Specifically, the Commission is to be guided by market objectives as it seeks to fashion rules to govern equity market structure. Our equity markets have witnessed a profound transformation in recent years. In many ways, this structure has been keenly influenced by a number of regulatory initiatives the Commission implemented over the past 20 years in an effort to encourage competition.

The order protection rule essentially requires all trading centers [54] to ensure that trades are executed at the best publicly quoted prices, even if it means routing an order to a competitor that is publicly displaying a superior price. But market burgeoning number of trading venues carries a number trade-offs, as well.

Second, multiple trading centers can give rise to added costs and complexity, and make our markets more susceptible to disruptions, whether technical or otherwise. Finally, multiple trading centers can lead to transparency issues for investors, who and struggle to identify the venues to which their orders were routed in an effort to secure the best price. Each of these structure is discussed below. First, when trading interest is spread across a multitude of lit venues, [58] traders may find it more difficult and expensive to locate liquidity and execute trades in a timely manner, particularly when larger trades are involved.

A number of recent academic studies have sought to examine the possibility that market quality may suffer when liquidity is spread across a growing number of lit and dark trading venues.

Yet, this appears to be true only up to a point. This study found that In addition, while there may come a point when dark venues capture too much order flow, the evidence currently available to us suggests that we have not yet crossed that threshold.

Nevertheless, this is an issue that deserves attention. The academic literature identifies very real and acute risks that could functions if trading activity continues to be dispersed across a growing web of trading centers. This requires that the Commission closely monitor the levels of dark trading in our markets and their potential consequences for market quality. This surveillance must be sufficiently granular to assess the effects of dark trading on stocks with different market capitalization levels, and across different venues, as studies suggest that different thresholds could apply to each.

Furthermore, while the market quality metrics functions above suggest that markets are functioning well, the Commission cannot grow complacent. There is always room for improvement. The Commission must proactively explore ways to make our markets work still better for investors. To that end, the Commission should consider a number of steps to address the trend of increased dark trading. It has been noted that, to comply with the order protection rule of Reg NMS, [77] trading venues and broker-dealers have developed elaborate IT systems to monitor the prices of all NMS stocks [78] on all lit exchanges, and to route orders accordingly.

The order protection rule has proven to be a vital investor protection, and it should not be weakened lightly. Indeed, the continuing importance of the order protection market has been underscored by recent enforcement actions. For example, the Financial Industry Regulatory Authority FINRA fined one dark pool operator last year for violations of the rule, [85] and just two years ago three exchanges admitted they had failed to obtain the best available price for their customers.

More importantly, the suggested 1 percent threshold could needlessly stifle competition and innovation. The order protection rule appears to have encouraged innovation by helping fledgling exchanges and significant barriers to entry.

Nasdaq, which had a market share of only half a percent just one year ago, has now achieved a full 1 percent market share. For example, last year, the National Stock Exchange and the CBOE Stock Exchange—two exchanges that failed to achieve a 1 percent of market share—were both shuttered.

Nevertheless, if market forces fail to address the situation of an exchange that has failed to reach a reasonable market share over an extended period, market participants have other avenues through which they can seek relief. Specifically, if market participants can demonstrate that linking to a small exchange poses unnecessary costs, and makes the national market system measurably less stable, then market participants could petition the Commission for limited exemptive relief from the order market rule on the ground that such an exemption is in the public interest.

Finally, the growth in trading venues has created transparency issues, as investors generally do not know which of the multitude of exchanges, ATSs, and internalizers their orders are routed to in an effort to obtain the best price.

Anecdotal evidence suggests that this is not an idle concern. A functions by one buy-side firm found that a small purchase order for just 1, shares was sent to 18 different exchanges and dark pools before it was entirely filled.

To address these issues, there is general agreement that investors need better information about order execution quality and routing practices. Just last summer, Chair White asked the staff to prepare a recommendation for the Commission on this issue, [] and these changes should be pursued as quickly as possible. The required updates are too numerous and detailed to list here, but key changes include the following: As noted above, one structure the principal goals of Reg NMS was to foster competition among trading venues.

Structure issue in the market structure debate has proven more polarizing than the maker-taker pricing model—with the possible exception of high frequency trading. Critics decry the maker-taker model for engendering all manner of evils. What follows is a brief summation of the competing viewpoints on the key issues, followed by suggestions for a path forward.

Some commenters believe that the high access fees exchanges must charge in order to pay maker-taker rebates have diverted marketable orders [] away from the exchanges, reducing market quality and impairing the price discovery process. Yet, recent events appear to have confirmed the critical role that the maker-taker model plays in attracting liquidity to exchanges. On February 2,Nasdaq instituted a pilot program in which it reduced access fees and rebates for 14 highly liquid stocks, including both NYSE- and Nasdaq-listed stocks.

Instead, it has been reported that this program has led Nasdaq to lose substantial market share, with no measurable improvement in market quality. Commenters have also argued that the maker-taker pricing model appears to have distorted markets by artificially narrowing quoted spreads. Thus, if the quoted spread on a stock is one cent, the true spread, assuming the take fee is 0. To date, it does functions appear that any empirical study of this issue has been conducted.

Only highly liquid stocks were selected for the Nasdaq pilot program, and it is possible that the competitive environment for these stocks, combined with the continued availability of rebates on other exchanges, kept spreads tight despite the reduction in access fees.

Certain additional factors complicate the analysis of the maker-taker model. First, what has gone largely unnoticed in the broader debate is that the maker-taker model may represent an implicit subsidy for retail investors. According to various observers, the reason for this is that virtually none of the marketable orders placed by retail investors ever reach forex exchange; instead, these orders are internalized by their broker or sold to an OTC market maker that executes the orders against its own inventory.

If the maker-taker model were abolished, however, quoted spreads on at least some stocks could widen to accurately reflect the risks undertaken by liquidity providers, which could potentially harm retail investors.

In addition, one possible explanation for the proliferation of exchanges in recent years is that it has allowed exchanges to offer different maker-taker pricing schemes. Concerns about the maker-taker pricing model have led some to call for the Commission to ban it altogether. One option for the Commission to consider, as recommended by certain market participants and as proposed in a recent House bill, [] is a carefully constructed pilot program.

Market, as the results of the Nasdaq pilot appear to confirm, rebates do not seem necessary in order to maintain spreads on these stocks at their current levels. The reductions in the rebates should be accompanied by a reduction in the access fee cap imposed by Rule of Regulation NMS.

A trade-at rule would presumably help prevent liquidity from migrating away from exchanges by forcing brokers and dark pools to route trades to structure exchanges, unless they can execute the trades at a price that is meaningfully better than the ones available on an exchange.

According to preliminary data, Nasdaq did not lose market share to dark pools. Instead, it lost market share to other exchanges that were still paying full rebates. Given the uncertainty as to the potential impact of eliminating or reducing maker-taker fees, the proposed pilot program should have two phases. The first phase would eliminate or reduce rebates, with a corresponding reduction of the access fee cap.

At that stage, the pilot would not include a trade-at requirement. At the end of the first phase, the Commission would evaluate whether the exchanges lost market share and, if so, to which venues. In the and phase of the program, the Commission could reevaluate the level of the access fee cap, and, if appropriate, include a trade-at restriction to encourage the posting of liquidity on exchanges.

Importantly, the Commission should consider proceeding with the second phase of the program regardless of the results of the first. In fact, recent experience suggests that trade-at rules can have unexpected effects. For example, both Canada and Australia recently implemented robust trade-at rules that failed to increase the amount of liquidity posted on their exchanges.

Worse yet, the imposition of a trade-at rule in both countries was followed by a widening of both quoted and effective spreads. In developing any pilot programs, the Commission would need to carefully weigh these issues, among others.

In addition, the Commission should use the pilot program to assess the validity of claims that a trade-at rule could harm both institutional and retail investors. Nonetheless, since maker-taker rebates remain very much a part of the current structure structure, the Commission must promptly take steps to address the conflict-of-interest issues that these rebates create. Some have argued that existing guidance on best execution is out of date, and has not kept pace with changes in market structure and automated trading.

Furthermore, the Commission should move promptly to revise the order routing rule, Ruleto require brokers to provide additional information that will help investors gauge the quality of the executions they receive. For example, in addition to the updates discussed in Section IV.

Payments for order flow implicate the same conflict-of-interest and market quality issues raised by market fragmentation and the maker-taker pricing model, and the measures structure above should serve to illuminate the effects of this practice, as well. Yet, the payment for order flow regime presents additional forex that also need to be specifically examined.

For instance, some detractors have expressed concerns that the conflict-of-interest issue is particularly acute in the payment for order flow context because of the sheer amount of money at stake for functions brokers.

Some experts, however, believe that the payment for order flow regime has benefitted retail investors. Robust competition, they claim, has forced brokers to pass along to their customers most of the benefits of these payments.

But in light of the controversy surrounding this issue, the Commission should look into whether customers could be made better off. For example, what would happen if brokers were forced to forex all payments for order flow along to their customers?

This would eliminate the existing conflicts of interest, which should go a long way to rebuilding trust in market intermediaries. And although brokers could potentially raise commission rates as a result, retail investors would, in theory, be compensated for this loss by receiving the payments for order flow their orders generate.

Although it is possible that this approach would also lead brokers to charge for additional services, such as online investment tools, this could be a far more efficient result, as it would allocate the costs of these services structure the customers that actually use them, rather than compelling all customers to bear these costs. This would certainly be a more transparent approach, and the value of transparency cannot be overstated. In addition, the justifications that underpin the payment for functions flow regime should be put to the test.

For instance, brokers claim that retail customers benefit from the price improvement they receive when their orders are sold to OTC market makers.

These facts demand that the Commission study the economic consequences of payments for order flow more closely. In addition, this information suggests that the Commission needs to carefully evaluate the consequences of trade-at rules that may form part of any pilot programs in the near future. For instance, just last week, the Commission approved the tick size pilot program, which includes a limited trade-at rule.

The need for future studies, however, should not be a reason for delay. Of course, this is currently difficult as brokers presently do not provide sufficient disclosure about payments for order flow. This should not be acceptable.

Rule should promptly be revised to require brokers to disclose to customers the total amount of payments for order flow the broker receives, as well as the average amount of price improvement customers receive on orders sold to OTC market makers. For example, brokers should report not only direct costs, such as structure and fees paid, but also all benefits that may have reduced those costs, such as price improvement, liquidity rebates, and payments for order flow.

In addition, the Commission should monitor the experience of other jurisdictions, such as the United Kingdom, that have prohibited payments for order flow entirely. The ban also offers an opportunity to determine whether, as some have claimed, market participants will react to the ban by merely seeking alternative ways of providing compensation to those who send them business.

Finally, the Commission needs to evaluate the role that the payment for order flow regime could play in making markets less stable, particularly in times of market stress.

None of this is to say with certainty that the payment for order flow regime could or should be abolished. In light of the serious concerns discussed above, however, it is important for the Commission to examine the payment for order flow regime carefully. Knowledge is always better than speculation. No forex can question that our equity markets have undergone a period of transformational change in recent years, and that the structure that has emerged is far more complex and diverse than in the past.

There are many indications that this new structure has yielded measurable benefits for investors, both large and small. Yet, it has also come at a price, in the form of palpable conflicts of interest, and an intensely competitive environment that has led, at least in some instances, to less than ideal outcomes for certain market participants.

The Commission must work proactively to ensure that our markets are fair and orderly, and that investor protections keep pace with a rapidly evolving marketplace. Hopefully, the concepts, suggestions, and proposals outlined above can help move the process forward. The issues that exist and very complex and I make no claim to having identified any ideal solutions.

My hope has been to provide an informed perspective and issues that the Commission must address. Glosten, and Gabriel V. Rauterberg, The New Stock Market: Sense and Nonsense3 Mar.

Senate Banking Committee July 8,available at http: Harris, and Chester S. Spatt, Equity Trading in the 21 st Century: An Update5 June 21,available at http: Ringgenberg, The Causal Impact of Market Fragmentation on Liquidity11, 29 Apr. An Update8 June 21,available at http: These statistics should not be read to suggest that our equity markets do not face challenges.

For example, some analyses demonstrate a downward trend in average trade volume since the financial crisis. See Victor Reklaitis and Anora MahmudovaWhy trading volume is tumbling, explained in 5 chartsMarketWatch Market 7,available at http: An Update14 June 21,available at http: They also showed lower depth at the inside quotes and beyond.

An Update9 June 21,available at http: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio Now He Wants To Be Your BrokerForbes Nov. Knight Capital Another Reason for Reform Aug. An Investor Perspective2 Apr. Miller, Dark Pools in Equity Trading: Policy Concerns and Recent Developmentsi Sept.

Market Microstructure for Practitioners Instead of routing your order to a market or market-makers for execution, your broker may fill the order from the firm's own inventory. Securities and Exchange Commission, Fast Answersavailable at http: See Stanislav Dolgopolov, The Maker-Taker Pricing Model and Its Impact on Securities Market Structure8 Va. Senate Permanent Subcommittee on Investigations June 17,available at http: Depending on your role in the market, the rules can market from significantly beneficial to very detrimental.

Where you stand on the issues depends on where you sit. They include, among others, the following: These externalities generally result from production efficiencies that traders can realize by using markets to exchanges assets, hedge, or share risks. Industry trends, drivers and policy implications1 Nov. Of course, the interests of profit-motivated traders and investors and issuers are all sometimes aligned. See Securities Exchange Act Release No.

Securities and Exchange Commission, The Investor's Advocate: Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Sense and NonsenseMar. Order interaction promotes a system that maximizes the opportunities for the most willing seller to meet the most willing buyer.

When many trading centers compete for order flow in the same stock, however, such competition can lead to the fragmentation of order flow in that stock. Of the eleven exchanges, three are operated by the New York Stock Exchange, three are operated by NASDAQ, four are operated by BATS, and the final one is CHX. Although 85 alternative trading systems were registered with the Commission as of April 6,only 36 are currently trading.

A list of alternative trading systems registered with the Commission is available at http: Vigorous competition among markets promotes more efficient functions innovative trading services, while integrated competition among orders promotes more efficient pricing of individual stocks for all types of orders, large and small. Together, they produce markets that offer the greatest benefits for investors and listed companiesavailable at http: See FINRA, Alternative Display Facility, Participants, available at http: Execution times were long, costs were high, and institutional investors were not happy with their execution quality.

The implementation of Reg NMS changed this. It forced the NYSE to compete against other exchanges for forex share. This caused the NYSE to lower cost, streamline their technologies, and expedite their average execution time from approximately 11 seconds, circato under a millisecond today.

In contrast, if the limit order instead rests in a dark market, no one except the order submitter can observe the order and none of the information contained in the limit order can be impounded into prices until a trade occurs.

If the limit order does not execute, the market will never know about the order. Van Ness, and Robert A. Van Ness, Competition in the Market for NASDAQ-listed Securities1 Oct. Policy Concerns and Recent Developments, 8 Sept. Stock Exchanges Market Volume Summary Apr. Although dark pools and internalizers do not transmit their best quotations to the consolidated tape, they do transmit their completed trades to the tape.

Thus, structure provide post-trade price transparency. Securities and Exchange Commission, Equity Market Structure Literature Review Part I: Werner, Diving into dark poolsfinding that increased dark pool activity is associated with narrower spreads, more depth, and lower short-term volatility, suggesting an improvement in price efficiencyavailable at http: The Flight of Liquidity Order Flows to Off Exchange Venuesfinding that the diversion of uninformed trade flows to off-exchange venues improves price discovery on the lit exchanges, which become dominated by informed tradersavailable at http: Notably, one study of And markets concluded that increased fragmentation across lit venues reduced price efficiency.

The Chartered Financial Analyst Institute also provided estimates of the tipping points for large, medium, and small cap stocks, both for dark pools and internalization.

These estimates were as follows:. Gorelick, RGM Advisors, LLC, Market Efficiency and Microstructure Evolution in U. Forex CFA Institute, Dark Pools, Internalization, and Equity Market Qualityavailable at http: In particular we find that stocks with higher levels of off-exchange reporting have wider spreads quoted, effective, and realized. We also find that that increased off-exchange reporting is associated with more price impact per trade and higher volatility.

Global Exchange and Brokerage Conference June 5,available at www. In general, NMS stocks are those that are listed on a national securities exchange. Equity Market Structure2 Jan. Many forex have developed elaborate routing mechanisms to comply. Securities Industry Participants, Jan. An Investor Perspective, 2 Apr. Regulation NMSThe Wall Street And Jan. Securities Industry Participants Jan. Stock Exchanges Market Volume Summary May 1, and May 1, five-day average percentage of marketavailable at http: Moreover, such relief need not be limited to a request to decouple entirely from the exchange in question.

A request for exemptive relief could seek to address other issues. For example one group of industry experts has suggested seeking a broadening of the one-cent price band that currently applies under the order protection rule. See Jingle Liu, Darren Marabello, Kapil Phadnis and Gary Stone, Toxicity: ISO inter-market sweep orders would adhere to a 3-cent band.

Regulation NMS, The Wall Street Journal Jan. Securities and Exchange Commission Apr. Global Exchange and Brokerage Conference June 5,available at http: Kaufman to Mary Shapiro, U. Securities and Exchange Commission, dated November 20,available at https: Stock Markets41 Jan. This is called "payment for order flow. Securities and Exchange Commission, Fast Answers, Payment for Order Flow, June 25,available at http: An Investor Perspective7 Apr. Senator and Chairman, Permanent Subcommittee on Investigations, dated Aug.

Recommendations for SEC Rulemaking Attachment February 23, http: Specifically, according to one study, take fees amounted to Stock Markets1 Jan. Keith Ross, Maker-Taker How to Keep Markets EfficientTabb Forum Feb. Lawrence Harris, Trading and Exchanges: Market Microstructure for Practitioners77 A marketable buy limit order would have a limit price set at or above the current ask in the market.

Spatt, Equity Trading in the 21st Century: An Update27 June 21,available at http: The fee for orders to immediately buy any of the stocks in the program through Nasdaq will drop to 5 cents per shares, from 30 cents per shares. Rebates on those stocks for resting orders sent to the exchange will fall to 2 cents per shares, 4 cents per shares, or in some cases be dropped all together, depending on the type of order.

See John McCrank, Nasdaq names 14 stocks to test lower fee and rebate programReuters Nov. Corwin, Robert Jennings, Can Brokers Have it Forex On the Relation between Make-Take Fees And Limit Order Execution Quality4 Mar.

Battalio explains that, to pay the highest rebate, the exchange must also charge the highest take fee. This dissuades liquidity takers from routing their orders to this exchange, thereby reducing the likelihood that the resting limit orders will be executed. An Update, June 21,available at http: Professors Angel, Harris and Spatt provide the following example of how maker-taker distorts the real spread:.

For example, in a 0. ATSs, by contrast, can offer different prices to different customers. See Joe Ratterman, Time to take a break from maker-taker?

NYSE, NYSE ARCA, and NYST MKT. See NYSE Markets Overview, May 6,available at https: Nasdaq also operates three equity exchanges in the United States: Nasdaq, Nasdaq PSX, and Nasdaq BX. See Nasdaq, Transactions, Trading, Equities May 6,available at http: BATS operates four equity exchanges: BZX, BZY, EDGX, and EDGA. See BATS, About the BATS Exchanges, May 6,available at http: Blizzard or a Flurry? The typical prisoner's dilemma is set up in such a way that both parties choose to protect themselves and the expense of the other participant.

As a result of following a purely logical thought process to help oneself, both participants find themselves in a worse state than if they had cooperated with each other in the decision-making process. It would be in the interests of both players to cooperate, but they end up not cooperating because they can see the advantages of free riding and fear the dangers of being taken for a ride. Securities and Exchange Commission, 2 Jan. Under this type of rule, for example, a trading center that was not displaying the NBBO at the time it received an incoming marketable order could either: Gary Stone, Two Weeks Into the Market Structure Experiment… Results are MixedBloomberg Tradebook Feb.

In our opinion, lowering the access fee cap should be a first step a simple first step before instituting Trade-At. In particular, for all three market segments internalization is associated with wider percentage spreads for that firm. See Letter from Chris Nagy, TD Ameritrade, to Elizabeth M.

This may be a specious claim, as the electronic front running strategy appears to succeed only with regard to large, institutional-size orders that are broken into smaller, child orders and sent to different exchanges.

RauterbergThe New Stock Market: SpattEquity Trading in the 21st Century: Sirri, Professor of Finance, Babson College, before the House Subcommittee on Capital Markets and Government Sponsored Enterprises, Feb. Bradley Hope, Fallout From High frequency Trading Hits Brokerages, The Wall Street Journal, April 6,http: An Update, 8 June 21,available at http: TAGa third-party and of transaction analysis.

Securities and Exchange Commission Aug. Q TABB Equity Digest Apr. An Update23 June 21,available at http: STAY CONNECTED 1 Twitter 2 Facebook 3 RSS 4 YouTube 5 Flickr 6 LinkedIn 7 Pinterest 8 Email Updates.

Securities and Exchange Commission. Making Our Markets Work Better for Investors Commissioner Luis A. Securities and Exchange Commission [1]. Introduction It is well known that the Commission needs to undertake a holistic review of our current equity market structure.

A framework for Assessing the Quality of Our Equity Markets Any thoughtful analysis of market structure must begin with a simple realization: Here is the appropriate hierarchy: First, there is no doubt whose interests should be paramount: The next priority should be to structure our equity markets to maximize the public benefits that derive from highly liquid markets, which produce the most accurate prices.

The third priority should be to support the interests of the market participants that support our markets, such as registered dealers and market market, because they are an indispensable part of an efficient and liquid market. It has been argued that such trading merely raises trading costs for legitimate structure, and generally does not provide the benefits of arbitrage. As discussed below, there are some activities that may not appear to benefit ordinary investors, such as the maker-taker pricing model, that may in fact provide some benefits.

The Proliferation of Trading Venues Our equity markets have witnessed a profound transformation in recent years. First, while the Commission has taken the important step of asking trading centers to clarify how their numerous order types operate in practice, [69] the Commission should also study how the use of non-displayed order types by exchanges may affect the price discovery process. Second, the Commission should explore ways of exposing off-exchange trades to more competition. One possibility is to require trades negotiated in market pools and with internalizers to be exposed to the exchanges for potential price improvement.

Third, the Commission should dust off the Regulation of Non-Public Trading Interest proposal issued in[73] and forex whether price discovery could also be enhanced by enacting the provisions proposed in that release. Complexity and Fragility It has been noted that, to comply with the order protection rule of Reg NMS, [77] trading venues and broker-dealers have developed elaborate IT systems to monitor the prices of all NMS stocks [78] on all lit exchanges, and to route orders structure. Transparency Finally, the growth in trading venues has created transparency issues, as investors generally do not know which of the multitude of exchanges, ATSs, and internalizers their orders are routed to in an effort to obtain the best price.

Competition for Order Flow As noted above, one of the principal goals of Reg NMS was to foster competition among trading venues. The Maker-Taker Payment Model No issue in the market structure debate has proven more polarizing than the maker-taker pricing model—with the possible exception of high frequency trading. Liquidity Some commenters believe functions the high access fees exchanges must charge in order to pay maker-taker rebates market diverted marketable orders [] away from the exchanges, reducing market quality and impairing the price discovery process.

Spreads Commenters have also argued that the maker-taker pricing model appears to have distorted markets by artificially narrowing quoted spreads. Other Factors to Consider Certain additional factors complicate the analysis of the maker-taker model. A Path Forward Concerns about the maker-taker pricing model have led some to call for the Commission to ban it altogether. Payments for Order Flow Payments for order flow implicate the same conflict-of-interest and market quality issues raised by market fragmentation and the maker-taker pricing model, and the measures outlined above should serve to illuminate the effects of this practice, as well.

Conclusion No one can question that our equity markets have undergone a period of transformational change in recent years, and that the structure that has emerged is far more complex and diverse than in the past.

These estimates were as follows: Professors Angel, Harris and Spatt provide the following example of forex maker-taker distorts the real spread: