Retail Traders______________Of Note:The markets provide rebates to attract traders who are willing to post limit orders (which specify a buying or selling at a set price).
In essence, the markets pay to ensure that they have goods on the shelf in the form of bids and offers.
Whenever someone comes in and takes those goods off the shelf via a market order to buy or sell at the prevailing price,
they are charged a fee that’s a little higher than the rebate.
The stock exchange keeps the difference.____________________________________________________________________________________________Small investors pay the price for high-frequency trading Boyd Erman
The Globe and Mail
Feb 1, 2011
Dear retail investor, did you know that you are directly feeding the bottom lines of many of those ridiculously profitable high-frequency traders you read about? It’s not that they are outsmarting you, or outracing you with super-fast computers (though they are doing that too).
They are getting paid for just showing up to trade with you. And you in many cases are providing the cash. Canada’s major stock markets, including TMX Group Inc.’s
TSX and Alpha Group’s
Alpha ATS, are paying rebates to draw high-frequency traders, and the money often comes out of the retail investor’s pocket. It’s all part of a battle for market share, and
it’s not just Canada. It’s going on in other major markets such as the U.S. and Britain.Under the trading pricing model that’s become the norm in the stock trading world, known as
“make/take,” exchanges pay some traders and give rebates to others.
The markets provide rebates to attract traders who are willing to post limit orders (which specify a buying or selling at a set price). In essence, the markets pay to ensure that they have goods on the shelf in the form of bids and offers. Whenever someone comes in and takes those goods off the shelf via a market order to buy or sell at the prevailing price, they are charged a fee that’s a little higher than the rebate. The stock exchange keeps the difference.
It’s often the retail investors who tell their brokers “Ah, just grab me 100 shares of XYZ Co. where it’s trading now” who are on the side that pays the fee.
Whole high-frequency trading strategies have sprung up to get on the other side of those trades and collect the rebates.
On any given retail trade of 100 shares, the payment that goes from one side to the other is on the order of 20 to 30 cents, depending on the market,
which is baked into the charges that brokers levy on retail investors. It’s not much on an individual basis, but across the millions of shares traded every day, it adds up.
For that reason, there are those that believe
make/take should be outlawed. They include TD Securities, which does the trading for retail investors who use the TD Waterhouse, the largest discount retail brokerage firm in the country.
“We strongly recommend
make/take exchange pricing be eliminated,” TD managing director David Panko wrote in a submission to Canadian market regulators dated Jan. 17. He said stock
markets should be forced to charge everyone a flat fee to eliminate “side payments from exchanges which are ultimately funded by retail brokers.”There are some oft-cited benefits to the arrival of high-frequency traders.
Their constant posting of orders has created tighter spreads between the bid and ask prices on most Canadian stocks.
But even that is somewhat of an illusion, argues Jos Schmitt, head of Alpha Group, which runs the second-largest stock market in the country.
“The spread is not really narrower because someone is paying for it.
That someone is usually the retail broker who is working for the retail investor, and that retail broker is under more and more cost pressure.”
In his opinion, those payments feed three main risks for retail investors:
Some retail brokers may drop out of the business, meaning less choice for retail investors; other brokers may reduce services to offset the higher cost of trading; still others will simply pass on the cost to retail investors.
However, Mr. Schmitt, while critical of make/take, argues that he can’t stop offering the pricing at Alpha because it’s too prevalent and trading would just shift to the competition.
“You have no choice. If we take our
make/take away, it will have a very big impact,” he said. “You can’t eliminate it on your own.”
When the London Stock Exchange tried it, its market share plunged, he noted.
In Canada,
Omega ATS, one marketplace that has eschewed rebates, has less than 1.5 per cent of the Canadian trading market.
The only way is for regulators to force everybody to give up
make/take. But even then, unless bigger markets like the U.S. went along, trading would just likely shift across the border in interlisted stocks that make up much of the Canadian market.
But there is an option for Canada to address some of the problem.
Regulators could start by putting a cap on fees to keep a lid on how much retail investors have to pay, as the U.S. has already done.
As Mr. Schmitt says, it’s pretty hard to put the genie back in the bottle. But a cap on
make/take rebates would at least keep the genie from flying any higher.
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Thanks for checking out my page. Red Mars ............
Why I Trade Penny Stocks - Part 26My current short term combined account goal (RSP & TFSA) is $135,000.
