NYSE Arca's SEC proposal to allow incentive payments to market makers to boost ETF liquidity has made enemies.

Executives from Vanguard [profile] and the Investment Company Institute recently countered the proposal with comment letters to the SEC last week.

Vanguard managing director and CIO Gus Sauter was especially firm in withholding support for the Lead Market Maker Issuer Incentive Program. In his letter, Sauter claimed that the program does not benefit investors, and also that the source of funding for incentives is unclear.

Meanwhile, in more sweetly worded correspondence, senior counsel Ari Burstein for the ICI pointed out that the program may create "conflicts of interest" between issuers of exchange-traded products and market makers.

Sauter's and Burstein's are the only letters submitted in response to the proposal to date.

Both Sauter and Burstein also wrote the SEC last month regarding a similar proposal filed by Nasdaq earlier this year that would grant ETF sponsors permission to pay fees to market makers. (All comments regarding the Nasdaq proposal can be read here.)

In his letter regarding Nasdaq's proposal — which he neither supported nor opposed — Sauter had argued that market makers receiving payments, which have been prohibited "for good reason" since the 1970s, should only be allowed for a "compelling" rationale and "narrowly tailored" purpose. Neither of these standards have been met by NYSE Arca's proposal, Sauter wrote last week.

Burstein was also less critical of the Nasdaq proposal.

According to a report by the Financial Times in May, the NYSE Arca proposal would allow an optional incentive fee between $10,000 and $40,000 per year, excluding annual fees of $5,000 to $55,000, to be paid to market makers.

"I see programs like this as a way to unclog seed capital for new ETFs," Reggie Browne, managing director at Knight Capital Group, told the FT. "There is a material risk exposure to launching ETFs in some of these asset classes, and a [lead market maker] is bearing all the risks associated with funding the ETF."

Sauter and Burstein, as well as NYSE Arca officials, could not be reached for comment. 

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