The market turmoil caused by a trading glitch at Knight Capital Group (NYSE: KCG) highlights the important role that “authorized participants” play to ensure orderly trading in ETFs.

Knight is a key market maker in several smaller ETFs that have lower trading volume. Spreads in these funds widened when Knight pulled back from trading the ETFs but have since recovered along with the firm. [Knight, ETFs Recover After Software Trading Glitch]

The recent disruption has put renewed focus on proposals from the major exchanges that would allow ETF providers to pay additional incentive fees to market makers to keep spreads narrow. [ETF Providers on ‘Pay to Play’]

The plans from NYSE Arca and Nasdaq are designed to boost ETF liquidity, particularly in new ETFs and funds with low trading volume, with payments to market makers. [Vanguard Opposes NYSE Plan to Pay ETF Market Makers]

The Investment Company Institute, the mutual fund industry’s main trade group, has come out in favor of the measures, reports Traders Magazine.

“As ETF sponsors, ICI members have a strong interest in ensuring that the securities markets are highly competitive, transparent and efficient,” said ICI general counsel Ari Burstein. “Liquid markets are critical for ETFs, particularly smaller and less frequently traded ETFs.”

Among ETF providers, BlackRock’s iShares supports the proposals while Vanguard has issues with the NYSE Arca plan, according to the report. The SEC is expected to rule on the matter later this month, it said. [Five Lessons for ETF Investors After the Knight Meltdown]

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