Bryan Johanson, managing director for global index and exchange traded products at NYSE Euronext, in a May Traders Magazine article said firms have been increasingly reluctant about becoming lead market makers for ETFs, and the exchange wanted to offer an additional incentive to attract market makers to that role.
The Financial Times in May reported the NYSE Arca pilot program would allow an ETF provider to pay the exchange an optional incentive fee, between $10,000 and $40,000 per year, on top of annual fees of $5,000 to $55,000.
“The optional fee would go to a qualifying firm that applies to be the lead market maker for the ETF, with the exchange taking 5% of that payment as an administration fee. If an LMM [lead market maker]does not meet or exceed minimum performance standards for a given month, it would not receive payment,” the FT reported.
“I see programs like this as a way to unclog seed capital for new ETFs,” said Reggie Browne, managing director at Knight Capital Group, a lead market maker in hundreds of ETFs, in the article. “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.”