In institutional equity trading, rebates have been a point of contention since the late 1990s, when Bill Clinton was U.S. President and the Dow Jones Industrial Average scaled 10,000 for the first time.
Supporters say exchanges paying rebates on order flow is a perfectly legitimate practice of rewarding customers and offering volume discounts. Critics say rebates create conflicts of interest, and shortchange end investors if brokers route in ways that disadvantages clients.
One aggravating factor is a lack of transparency. Many market participants do not know either the amount of the rebate or where it ends up. Full disclosure of this information would effectively resolve the issues, according to Stino Milito, Co-Chief Operating Officer at Dash Financial Technologies.
“Rebates themselves aren’t a bad thing. When used properly they lower – sometimes drastically – transaction costs for clients and switching to a cost-plus model when possible better aligns the interests of the broker and the client,” Milito said. “But the issues arise if brokers aren’t using them in their client’s best interest. If brokers are willing to show how and why they’ve routed a client’s orders the way they have, this becomes a non-issue overnight, and managers should demand access to real-time order routing details, regardless of the pricing policy they have in place.”
To read the full article, click here.