ETF Providers on ‘Pay to Play’

June 26th at 4:26pm by Tom Lydon

The New York Stock Exchange Arca’s recent proposal to allow incentive payments to market makers to boost exchange traded fund liquidity has heavyweight fund providers at odds. BlackRock and Vanguard are on different sides of the rope when it comes to paying market makers directly, according to a recent report.

“It’s hard to say to the firm that is using its own capital to ‘stick your neck out there,’” said Paul Weisbruch, vice president of Street One Financial LLC.

The Nasdaq Stock Market Inc. and NYSE Arca have filed proposals with the Securities and Exchange Commission to allow ETF sponsors to pitch cash incentives to market makers directly, reports Jason Kephart for Investment News.

In an earlier SEC comment letter on the Nasdaq plan, Vanguard said the program could create a “pay-to-play” environment for ETF providers to launch new ETFs or maintain liquidity.

Evidently, BlackRock supports the notion that if market makers have an incentive, they are more likely to maintain tighter bid/ask spreads and provide more liquidity for ETFs that trade less often than more popular ones. [What is an ETF? - Part 13: True Liquidity]

Vanguard is in direct opposition to this proposal, and does not fund it legitimate to allow sponsors of less actively traded exchange-traded funds to subsidize the markets for their products. Vanguard holds the belief that the proposals benefit market makers a lot more than they do long-term investors. [Vanguard Opposes NYSE Plan to Pay ETF Market Makers]

Theoretically, a movement such as this should allow a more even list of ETF offerings, and create more chance for smaller providers to garner assets as the larger, established players. For example, the NYSEArca has proposed that ETF sponsors pay $10,000 to $40,000 a year to market makers in the form of an “optional incentive fee.” [ETF Growth Creates Need for More Education]

Ari Burnstein for the ICI also pointed out that the Lead Market  Maker Issuer Incentive Program would create a conflict of interest between the market makers and the ETF providers. [How to Cut ETF Trading Costs]

The incentive program will essentially help out the smaller ETF players and could benefit day traders, as it would narrow the spreads on various trades. Long term buy-and-hold investors would likely not see a difference, reports Kephart.

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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