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]