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Massachusetts Regulator Targets Brokerage Firms in “Maker-Taker” Probe

The Massachusetts Secretary of State recently sent letters of inquiry to brokerage firms in an examination of whether the firms received financial rebates from stock exchanges to whom they routed orders without regard to whether the price benefited investors. The Wall Street Journal reported that the probe focused on a longstanding, SEC-approved stock market practice called “maker-taker,” which allows stock exchanges to pay rebates to traders who post new orders, while collecting fees from traders who execute against orders posted on the exchanges. According to the WSJ report, critics say the maker-taker system incentivizes brokers to send customers’ orders to the exchange that pays the highest rebate, however the system’s defenders contend that the rebates increase the numbers of buy and sell orders posted on exchanges and lead to lower trading costs. The Massachusetts investigation was partially spurred by persistent criticism of rebates by IEX Group, which operates a smaller stock exchange that doesn’t offer rebates. IEX, which was made famous in Michael Lewis’s 2014 book “Flash Boys” is also trying to lure listings from giant stock exchanges like the NYSE, Bloomberg reported. The SEC recently approved IEX’s bid to run closing and opening auctions, a major boost in its efforts to compete with larger exchanges, Bloomberg reported. The SEC has launched a pilot program to review the maker-taker system and possibly reduce the fees brokers pay to access stock exchanges, according to media reports.