A Matter of Trust

By Michael Hardy | Fall 2014

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Despite the conflict of interest he and his colleagues have identified, Battalio doesn’t believe the market is rigged, as Michael Lewis argued in his recent bestselling book Flash Boys. The problem can be solved by requiring brokerages to pass along their rebates to their customers, which would make sure everyone’s interests are aligned, or by simply requiring brokerages to make their order-routing data public. If investors knew more about how different brokers route trades, they could make a more informed decision about which broker to choose. 

Toward the end of his Senate testimony, Battalio was asked by Senator McCain whether this conflict of interest between brokers and investors was really “a serious issue.”

“We think it is,” Battalio said, lowering his head to speak directly into the microphone. “But we also think it’s an easy one to fix.”

U.S. Senate Permanent Subcommittee Testimony

On June 17, Finance Professor Robert Battalio testified before the U.S. Senate Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs on “Conflicts of Interest in the U.S. Equity Markets.”

Battalio’s testimony addressed three areas of interest:

  1. The conflicts of interest faced by retail brokers in
    determining how to route customer orders, as identified in his paper (co-authored with Shane Corwin and Robert Jennings) titled, “Can Brokers have it All? On the Relation between Make-Take Fees and Limit Order Execution Quality” 
  2. Other market conditions that may create conflicts of interest affecting brokers deciding where to route institutional and retail customer orders; and
  3. Any recommendations for policies that could reduce or eliminate those conflicts of interest and enhance public confidence in U.S. equity markets

Read or watch Battalio’s full testimony on the Senate subcommittee website at http://www.hsgac.senate.gov/ or by clicking this link: http://1.usa.gov/1kLaD5p 


Editor’s Note: Battalio and Corwin’s research has been widely cited in regulatory and legislative forums as well as by the media, including The Wall Street Journal, Bloomberg, Reuters and Traders Magazine. Most notably, subsequent to Battalio’s Senate testimony, Carl Levin released a letter to SEC Chairwoman Mary Jo White calling for the elimination of the “maker-taker” system where exchanges pay market participants for some kinds of orders and charge fees for others. Referencing the Battalio-Corwin study, Levin called the practices conflicts of interest that “erode public confidence.” 

The research also became a focal point of a recent TD Ameritrade update meeting with Wall Street analysts, when one of the analysts pointedly asked CEO Fred Tomczyk to address the issues highlighted in the paper. RIABiz.com, a resource site for financial advisors, subsequently published a lengthy article presenting Tomczyk’s comments and Battalio’s responses. 

Also, the Financial Industry Regulatory Authority sent “sweep letters” to 10 retail brokers in July, asking for details about how they route customer orders. According to The Wall Street Journal, Tom Gira, executive vice president of FINRA’s market regulation department, said the regulator’s concerns about brokerage routing practices were sparked by Corwin and Battalio’s research. 

Battalio and Corwin were awarded a prestigious Q-Group Research Grant in November 2013 for their study. Q-Group awards are given annually to a select group of researchers for superior academic research projects with potential applications in the field of investment management.  


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