Nasdaq Seeks Approval for Revised “Paid-for-Market-Making” Plan

Nasdaq OMX Group filed a new plan with the Securities and Exchange Commission last week to introduce a program that would allow issuers of exchange-traded funds to pay broker-dealers to make markets in their securities.

The new Nasdaq “Market Quality Program” replaces an existing proposal that the SEC had until Friday to approve or disapprove. Nasdaq withdrew that proposal on Thursday. Nasdaq’s new plan, filed Friday, is essentially the same as the first, but with one wrinkle.

According to the exchange operator, the Financial Industry Regulatory Authority plans to make exchange programs exempt from a rule that bars broker-dealers from accepting payment for market making.

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 the primary stumbling block to approving Nasdaq’s proposal.

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. In 1997, with the ruling, FINRA codified a ban on the practice.

According to Nasdaq, with its rule change, FINRA will make exempt exchange programs such as the MQP. FINRA could not be reached for comment.

Once the Nasdaq proposal is published in the Federal Register, the SEC has between 45 and 90 days to approve or disapprove it. The regulator is asking for comments.

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 January 12.