The Securities and Exchange Commission gave the green light on the New York Stock Exchange market-maker incentive program to provide greater liquidity and efficiency for trading certain exchange traded funds.
Under this one-year pilot program, fund issuers can opt to pay between $10,000 and $40,000 per exchange traded product annually so that lead market makers, or LMMs, can receive fixed quarterly fixed payments, instead of variable enhanced transaction rates, for hitting monthly LMM quoting obligations, reports Cinthia Murphy for IndexUniverse.
Essentially, the new program replaces the Financial Industry Regulatory Authority’s current Rule 5250 that prohibits fund providers from paying market makers to improve liquidity for ETFs on its behalf. Proponents of the program believe that rewarding market makers will improve market efficiencies.
Currently, Authorized Participants, or market makers, have little incentive to ensure tight bid/ask spreads on smaller U.S.-listed ETFs during times of market volatility.