Though often criticized, broker rebates provide an incentive for efficient trades, but one model offers investors a better deal. Using discounts in the form of rebates is a well-worn marketing tactic used in myriad industries, from auto dealers to cable providers to retailers like Amazon. Dash Financial Technologies CEO, Peter Maragos, shares his commentary on the rebate debate.
The principle is pretty straightforward: If a business offers customers a rebate, they’ll be more likely to buy their products or use their services.
Straightforward, that is, except when it comes to U.S. equity exchanges. Critics, notably the IEX Exchange, have demonized the practice of giving rebates to brokers who execute orders on a specific exchange, even going so far as calling the practice a “kickback” in congressional testimony. They and others claim the practice creates a conflict of interest for brokers, and the Securities and Exchange Commission is now actively studying the matter.
Before we suffer regulatory overreach, however, we should take a step back and look at the bigger picture: There is nothing intrinsically wrong with rebates. The problem here is with the brokerage industry’s dominant fee model, which results in rebates benefiting the broker-dealers themselves and not investors. Specifically, these include the pension and mutual funds that invest the hard-earned savings of millions of Americans.
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