NYSE Pulls ETF Liquidity Plan
January 17th, 2013 at 6:26am by Tom Lydon
While the exchange traded fund industry has gathered over $1.3 trillion in assets, the majority of assets under management is found in the top funds. There have been steps to increase interest and liquidity in smaller products, but NYSE Arca recently withdrew its support to help ETF sponsors to pay market makers.
The Big Board recently announced that it is withdrawing its Lead Market Maker Incentive Program pilot proposal just days before the SEC’s final verdict, reports Jackie Noblett for Ignites. [iShares: Encouraging Liquidity in New ETFs]
Under the pilot proposal, sponsors could provide incentives for trading firms to take on the role of lead market maker for an ETF with low assets. Compared to the regular market maker, lead market makers have to meet higher performance standards for the bid and offer quotes to the market. [Vanguard Opposes NYSE Plan to Pay ETF Market Makers]
Additionally, lead market-makers have to maintain quotes and hold inventory of the ETFs. These tasks become riskier in ETFs that have lower volume and shares outstanding since it would be hard for the market makers to offload the positions. [Nasdaq Wants ETFs to Pay for Additional Liquidity]
Despite shelving this proposal, the exchange operator is working on a revised lead market-maker incentive program proposal. [Meet the ETF Market Makers]
Nasdaq also pulled a similar proposal last month. The exchange proposed to create a so-called market liquidity program that let fund sponsors provide additional pay beyond its listing fee to market makers but they would have to provide quotes with higher spreads and deeper liquidity.
“It’s most important when the product is brand-new. [Investors] will immediately dismiss a product based on what the screen liquidity or bid-ask spread is, even though that’s not always what the true liquidity is,” Adam Patti, CEO of ETF firm IndexIQ, said in the article. “Anything that keeps bid-ask spreads tight and the depth of liquidity sufficient is a good thing because it’s good for investors.” [Nasdaq Floats ETF Liquidity Plan]
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Max Chen contributed to this article.
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