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January 1, 2013

Nasdaq Payment Plan Gets Boost

By Peter Chapman

A Nasdaq OMX Group plan to allow issuers of exchange-traded funds to pay broker-dealers to make markets in their securities has won a new lease on life.

Nasdaq first petitioned the Securities and Exchange Commission to be permitted to allow the controversial "Market Quality Program" in late 2011, but the regulator found it difficult to reach a conclusion.

The time allotted to the commission to approve or disapprove Nasdaq's pay-for-market-making program ended Dec. 8. But Nasdaq withdrew its proposal on Dec. 7 and filed a new version on Dec. 8. The refiling started the clock ticking anew. That gave the SEC 45 to 90 more days to arrive at a decision.

The big stumbling block has been Financial Industry Regulatory Authority Rule 5250, which bars broker-dealers from accepting payment for market making.


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However, with the refiling, Nasdaq made public the news FINRA plans to make exchange programs such as the MQP exempt from Rule 5250. That could make it easier for the SEC to approve Nasdaq's proposal. The regulator had indicated in a July regulatory filing that FINRA Rule 5250 was a likely deal-killer.

The concern by regulators and industry executives over paid-for-market-making is that the dealer will manipulate a stock's price to create the illusion of interest in the security.

Nasdaq's new proposal incorporates four minor changes:

* Broader disclosure of the inner workings of program

* More clarity on how the sponsor pays the market maker

* A mandate to make clear that the program is restricted to exchange- traded funds

* Reducing the bottom threshold for inclusion in the program from 2 million shares traded per day to 1 million

The SEC is also mulling a similar proposal from NYSE Arca. In April, Arca submitted its "Fixed Incentive Program," covering ETFs, to the SEC. The regulator is scheduled to decide the fate of that proposal by Jan. 12.