By now it's known that Knight Capital's position as a top ETF market maker is in danger, which raises a related question: Who are the other ETF market makers? And how does the business work?

There are about two dozen ETF market makers on several different listings. It's a low-margin business -- earlier this year, the ICI and Vanguard helped squash a proposal to make incentive payments to market makers.

Listed ETFs are required to have a lead market maker, or LMM, whose responsibilities include providing continuous quotes for the ETF.

Among the firms that provide ETF market making services, Knight is one of the biggest, if not the biggest. According to a spreadsheet listing the lead market makers, or LMMs, for nearly 900 ETFs on the New York Stock Exchange, which MFWire accessed through the NYSE website, Goldman Sachs served as LMM for 339, the highest total, followed by Knight, with 210 LMM contracts. Other companies that are the LLM for a significant number of ETFs are Susquehanna Capital Group, IMC Chicago, Timber Hill LLC, and GETCO LLC.

Top ETF LMMs (and ETFs Served) Goldman Sachs & Co. (339) Knight Equity Markets (210) Susquehanna Capital Group (91) IMC Chicago (80) Timber Hill LLC (51) GETCO LLC (30) LaBranche Structured Products (13) Sun Trading (11) OTA, LLC (7) Virtu Financial (7) Jane Street Capital (1) Source: NYSE Website

Damon Walvoord, head of ETF Capital Markets for Susquehanna, gave MFWire a quick seminar on the opaque ETF market making business. He said that although approximately 25 percent of ETF trades go through Knight, the possibility of the company's collapse has not structurally endangered the market.

"We have not felt any ramifications so far," he said. "We and others like us are not going to let the market fall apart. And there are plenty of other liquidity providers out there."

Walvoord said that "around two dozen" firms provide ETF market making services. Even though Knight is the LMM for approximately 450 or 500 ETFs, as he estimates, the number of firms using Knight for their ETF trades has clearly dropped in the last few days.

"We have noticed that firms are very definitely routing fewer orders through Knight," Walvoord said. "We used to route through Knight on several trades, and we have stopped."

LaBranche Structured Products, Sun Trading, OTA, Inc., Virtu Financial, and Jane Street Capital are other firms listed as LMMs on the NYSE. The NASDAQ index does not publicly list the market makers for listed ETFs, and a NASDAQ spokeswoman did not return MFWire's calls.  

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