Nasdaq OMX is pushing forward with a plan to allow issuers of exchange-traded funds to indirectly pay market makers for quoting, a proposal that could help bring greater liquidity to lightly traded ETFs.
The exchange unveiled the proposal last year, but the Securities and Exchange Commission is said to have rejected it for various technical reasons. Now those issues have been resolved, and the proposed rule change will be published in the Federal Register for public comment, Nasdaq said.
Under the proposal, issuers of an ETF would pay $50,000 to $100,000 each year to fund payments to market makers, with unused funds being returned to the issuer. The exchange would administer the program.
The benefit of the program, in Nasdaq’s view, would be to have a clear, objective, rules-based structure to foster greater liquidity and better market quality.
According to Nasdaq, the proposed market-quality program would allow ETF issuers to make sure market makers at least pay attention to the issuer’s products. Market makers would only be paid if they can improve market quality.
For market makers admitted to the program to receive money, they would have to clear three hurdles. First, for 25 percent of the trading day, the market maker would be required to have at least 500 shares on both the bid and offer side at the national best bid and offer. Second, for 90 percent of the trading day they would have to post bids and offers no further than 2 percent away from the NBBO. Third, within that 2 percent, there would have to be at least 2,500 shares of aggregate bids and 2,500 shares of aggregate offers.
Once market makers made those three hurdles, then they would be qualified to receive payments. Equally important, according to the exchange, is that the distribution of funds would be made on a pro rata basis, so the higher the quality of a market maker’s performance, the larger piece of the pie they would receive in terms of payment.
Though the notion of issuers being able to pay market makers has been discussed for the past few years, the Nasdaq plan could be the first time regulators approved such a proposal.