Maker-taker
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The "Maker-taker" model in options trading came from a pricing model that was used by the equity market. Developed by Island ECN in 1997, it was designed to give liquidity providers an incentive to trade in markets where spreads are extremely tight. It rewards liquidity providers by giving them rebates, and it charges customers who remove liquidity from the exchange. Maker-taker pricing is predicated on a penny-increment environment.[1]
This model was only adopted by the options exchanges fairly recently and has been controversial. After the Chicago Board Options Exchange (CBOE) got rid of customer transaction fees in May 2000, the idea of passing fees along to the customer has been anathema in the options market. There was a fear in the industry that charging customers for access to liquidity would inhibit the market's growth.[2]
The maker-taker model is in contrast with the "customer priority" model. Under customer priority, any account identified as “customer” goes to the head of the queue for priority of fill, without paying a transaction fee to the exchange. The exchange stays in business by charging market makers fees for transactions and payment for order flow. The payment for order flow is paid to brokerage firms as an inducement to send their orders to a given exchange.[3]
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References
- ↑ Options Maker-Taker Markets Gain Steam. Traders Magazine. Retrieved on May 1, 2008.
- ↑ Breaking Down Maker-Taker. The Options Insider, June 2007. Retrieved on April 30, 2008.
- ↑ Balancing the Options. Futures Industry Magazine. Retrieved on May 23, 2008.
