NYSE Backs Payments for ETF Market Makers
Traders Magazine Online News, May 4, 2012
“It’s been a very limited number—us and only a handful of others—that have been actively taking on new products in the existing program,” Walvoord said. “Anything incrementally better helps the equation when a new listing comes along.”
Walvoord said that from his perspective, the risks and costs involved in being a lead market maker far exceed $40,000 a year, but if the program is embraced, it could bring millions of dollars collectively into the LMM industry. That could tip the scales and get some firms already active in ETF market making to jump the broom and become official LMMs.
Last month, Nasdaq proposed issuers on its exchange could pay $50,000 to $100,000 annually to fund payments to market makers. BATS, which launched its first primary listing of an ETF earlier this year, already has its own plan in place to encourage market making of exchange traded products.
In Walvoord’s view, all of these programs have their merits, and they will likely appeal to different firms in different ways, depending on how they are structured. The important thing, however, is that people are taking an interest in encouraging LMMs and improving market making.
“The exchanges and the marketplace at large are paying attention to this issue,” Walvoord said. “I think what’s game-changing is the fact that they’re taking first steps in this direction.”
Noah Hamman, founder and chief executive officer of the ETF issuer AdvisorShares, said he is in favor of any plan that will help tighten spreads. He is excited about the proposals, though he added he was not sure how effective they will be.
Increasing incentives for market makers could be particularly helpful for actively managed ETFs like the ones offered by AdvisorShares. These funds tend to have lower trading volumes in comparison to index-based products, so better market making could increase displayed liquidity and make investors more comfortable with the funds.
“Our type of ETF isn’t about the buying and selling and frequent use,” Hamman said. “I’m getting guys who are dollar-cost averaging. They’re buying it like they would buy an actively managed mutual fund, so that volume isn’t always there.”
If market makers could be enticed to step in and lower overall costs for investors, AdvisorShares would most certainly participate in the program, Hamman said.
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