Study: Rebates Are Key to Where Brokers Route Orders

Stockbrokers appear to routinely send client orders to certain markets with the goal of obtaining payments from exchanges, trading that can stick retail investors with subpar buys and sells, according to a new academic study.

At issue are payments that exchanges make to brokers to attract business. The study largely focused on retail-investor trades and whether these fees designed to boost market liquidity skew broker priorities.

The analysis comes amid a growing debate over exchanges’ trading incentives and how these deals may create conflicts between brokers and their clients.

Excerpt

Mr. Battalio and Mr. Corwin said in an interview that they supported the idea of requiring brokers to pass rebate payments onto customers. “That way a broker would have no conflict of interest when routing an order,” Mr. Battalio said. “It would be a better way to align a broker’s incentives.”

To read the full story, visit The Wall Street Journal Online.

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