Short note on maker-taker

I did post an article by Allison Bishop on my timeline, that spoke about the need to have a balanced discussion on topics around market structure, and the important role that regulatory agencies played in moderating that discussion among participants. The article also spoke about the maker-taker model and the challenges it posed in assessing if brokers are acting in the best interest of their clients.

While rebates offered by exchanges in the maker-taker model is seen as an incentive provided to makers for providing liquidity and make the venue more attractive to the buy side, I recently ran across an old article that lays out a very logical argument that explains how the rebates make sense. I would not have seen this angle if not for this article by Matt Levine that looks at orders that rest on the exchange CLOB as Put/Call options written by the makers, and rebates as a way of payment for those options. I would recommend you to read this, if you haven't already.

To me, this goes to prove what Allison mentioned in her article -- "Maintaining healthy markets is less like fighting dragons and more like the painstaking task of keeping the arrow of a compass pointed toward true north. We must give ourselves the freedom to constantly correct ourselves in small steps towards a better balance."

More one digs into the issue, one realizes that, the arguments along these topics cannot be laid out in black and white, and they need a much nuanced discussion; and it is important to frame the discussion as such. If I was in one camp earlier, right now I walking back to a place between the two camps, asking myself -- "What other angles am I missing?"

Thanks, Rumman