Vanguard in a comment letter to the SEC said it opposes a plan from NYSE Arca designed to boost ETF liquidity with payments to market makers.
The mutual fund and ETF manager said it does not support the NYSE Arca proposal as currently structured. Ignites.com initially reported on Vanguard’s comment letter.
Earlier this year, NYSE Arca proposed a pilot program that would allow ETF managers to pay additional incentive fees to market makers. The plan was designed to enhance liquidity in new ETFs and funds with low trading volume. ETFs with better liquidity have thinner bid/offer spreads and lower trading costs.
The Nasdaq has floated a similar proposal that would allow ETF sponsors to pay extra liquidity fees to market makers. [Nasdaq Wants ETF Providers to Pay for Additional Liquidity]
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.
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.”