There have been a number of investigations and allegations made on how the millions of people in this country who have their money invested in insurance policies, mutual funds, and pension plans, are being fleeced. Brokers and investments must, by law, give their clients the most favorable terms, looking at 12 different exchanges and choosing the best one. Unfortunately, however, it seems that brokers are not sticking to these rules. This is something Jonah Engler has recently uncovered and is now trying to change.
The Business of Brokerage According to Jonah Engler
It is a known fact that brokers often take rebates for choosing certain exchanges over others. What this means is that investors do not get the best outcome possible, but brokers gain more. In a sense, the system is rigger. On the grand scheme of things, the harm done is minuscule on a trade by trade basis, but it is much greater on non-professional investors who have placed their financial future into these trades.
If a broker is to find the best financial option out there, then they should look at incentives to buy and sell with a queue that is as short as possible. The longer the queue, the worse the outcome. However, it seems brokers still choose the longer queues and that these queues are also the ones that offer the greatest rebates.
There are exchanges that don’t engage in these tactics. For instance, the IEX does not pay any rebates at all. They also have a type of speed bump in place, so that ordinary investors have a fighting chance against the high frequency trading. They opened on August 19, 2016 with a simple promise: to execute trades better.
Another option to consider is BATS, which was founded by a high frequency trader and is now a significant rival stock exchanges. Their website shows what the execution quality is of all the different exchanges. This website, which uses data from FINRA and other debt knowledge sources, has shown that Nasdaq, which has always led the spread rankings in the S&P500, is losing ground to IEX.
Yet, the overall market share that IEX currently enjoys is just 2% of the total market, despite having much more effective spreads. According to Jonah Engler, this is because IEX is a principled exchange that does not pay kickbacks – or rebates. Both the New York Exchange and BATS are following suit in this, reverting some of their exchanges back to a model that does not use kickbacks.
If more would follow suit, then the securities market in this country would have far greater quality and integrity. It makes the whole system fair and would increase people’s faith and trust in the industry as well. With kickbacks in place, it becomes impossible for a broker to truly follow their best execution duty, even if they are legally obliged to do so.
Jonah Engler belies that the Securities and Exchange Commission (SEC) should also be involved in this, as they are the ones who can enforce brokers working with the best options for their clients, not themselves.