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Friday, April 13, 2012

ETF Sponsors to Pay Market Makers

News summary by MFWire's editors

Exchange-traded fund providers may soon be able to pay market makers to boost trading in fledgling ETFs. Bloomberg reports that the Nasdaq Stock Market has asked the SEC to allow the exchange to set up such an ETF market maker incentive program and that the NYSE Arca is also talking with the regulatory agency about such a program.

Paying market makers to increase a security's trading volume or reduce its bid-ask spread is currently illegal in the U.S. thanks to a 1997 Finra ruling, the wire service notes.

On April 6 the Nasdaq filed with the SEC to create a program under which an ETF provider would pay $50,000 or $100,000 per year beyond the annual listing fee so that market makers would then maintain minimum numbers of bids and quotes on certain ETFs throughout the market day.

Those penning the proposal anticipate that the program would help ETFs that trade below 2 million shares daily and would benefit investors by making available huge volume of share to buy and sell at better prices.

"If ETF issuers want to incentivize market makers for services they provide, there should be mechanisms in place for that," Reginald Browne, co-head of the ETF group at Knight Capital Group in Jersey City, New Jersey, said in a phone interview with Bloomberg. "With more than 50 markets in the U.S., there's just not enough incentive for market makers to bear the risk."

"It's a tough problem they're trying to solve," Michael Bleich, CEO of New York City-based market maker Scout Trading, said to the wire service -- about 70 percent of Scout's volume is in ETFs. "Investors looking at a new product may want to invest but someone must provide a liquid market," he said. "In the ecosystem of trading activity, it may not be profitable for market makers, including ourselves."

Others who provided feedback for the article include: Tim Quast, founder of Denver-based consulting firm ModernNetworks IR; Amber Anand, a finance professor at Syracuse University's Whitman School of Management; and Laura Morrison, head of NYSE Euronext's U.S. exchange- traded products listings and trading business. 

Edited by: HFD

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