How Broker Rebates Work

In today’s NYT, Jonathan Macey and David Swensen write on the pernicious practice of broker rebates. Brokers are supposed to get the best trades for their clients:

But that’s not what is happening. Instead, brokers routinely take kickbacks, euphemistically referred to as “rebates,” for routing orders to a particular exchange. As a result, the brokers produce worse outcomes for their institutional investor clients — and therefore, for individual pension beneficiaries, mutual fund investors and insurance policy holders — and ill-gotten gains for the brokers.

Although the harm suffered on each trade is minuscule — fractions of a cent per share — the aggregate kickbacks amount to billions of dollars a year. The diffuse harm to individuals and the concentrated benefit to Wall Street create yet another way in which the system is rigged, justifiably eroding public confidence in the fairness of the financial system.

Posted by on July 18th, 2017 at 11:40 am


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