Maker-Taker Model History

Read a great post on Medium today by Jim Greco, author of Trading Places.  Jim describes the history and introduction of rebates in US Equity trading dating back to the mid 90’s.   The history lesson is great for so many in the industry now, but were not in the business 20 years ago.

Jim explains the reason for the introduction and the more current potential conflicts it causes, stating that the “…incentive was created for brokers to optimize their execution to generate more rebate revenue.”  Further he states that while there was no real “collusion or top down orders” (to keep these rebates from clients), it was “a series of decisions, made over the years” and ultimately became a “small, but important, source of revenue to the brokers.”

The question Jim raises, is whether the rebates should be eliminated, as some exchanges would hope, or whether a “Regulatory Solution” that would “mandate that brokers pass along to customers all fees and rebates incurred in agency execution” is warranted.  Jim notes that brokers are hesitant to accept this solution “because of the complexity of accommodating passed back rebates/fees in back-office systems.”   Jim goes on to suggest that these fears are “overblown.”

No matter what happens to rebates, for years Firm58 has been helping US broker dealers calculate these fees/rebates on a per transaction basis to (1) provide insight into trading gross margins per client, (2) calculate fees for reconciling exchange bills, and (3) passing fees or rebates back in the form of a cost-plus billing solution.  This is all provided in a managed, secure hosted environment.  The difficulty comes in changing back offices processes and getting operational teams to change their own practices.  However, traders and front office professionals who demand loudly enough usually succeed in changing the culture, business,and revenue model for the better.

Firm58 has in recent years even reduced the burden by managing the changing Public Equity and Option Exchange fee schedules, so that its clients can focus on business relationships, not data inputs.  With a client portal front-end, outsourced services and managed exchange fees, Firm58’s Revenue & Exchange Fee Management solutions reduce a heavy operational burden and introduce a real solution for the problem that Jim Greco outlines in the post mentioned above.