SEC charging option traders for arbing the maker-taker model

Market-TakerWhen you lift an offer on an exchange, you pay an execution fee to the exchange – that’s how the exchange pays for its systems and makes money as a for-profit company.

 

Market-makerTo attract liquidity, aka to make sure that somebody entered that offer in the market, exchanges pay market-makers to enter their quotes (it is written somehwere in their complicated fee schedule)

 

That’s what is called the “maker-taker” model.

  • Market-makers get compensated for entering prices.
  • Market-takers pay for the service.

But when the options were illiquid and in high demand (meme stocks), the exchange paid more for the market-maker than they were charging the market-taker. What do you think happened?
-> People traded with themselves. They entered quotes on illiquid securities and bought them through another account. Net, they had no position, except for the extra fee.
-> They eventually created fake accounts to increase the volume.

The SEC has punished the actors for ‘painting the tape‘, aka creating trades without economic interest. Isn’t arbitraging dumb exchanges a pretty decent economic interest?

 

Reference

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Written by Gontran de Quillacq

Gontran de Quillacq is an expert witness and a legal consultant. He is a recognized authority in options, trading, derivatives, structured products, portfolio management, hedge funds, mathematical finance, quantitative investment, strategy research and financial markets in general.

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