NYSE Arca has revised its controversial proposal to allow issuers of exchange-traded products to pay broker-dealers to make markets in their securities.
In a filing with the Securities and Exchange Commission last week, Arca changed the name of its “Fixed Incentive Program” to the “ETP Incentive Program;” limited the size of the program, described the quoting obligations for those market makers involved and addressed a Financial Industry Regulatory Authority rule that prohibits the practice.
The changes are in response to concerns by the SEC and industry participants that Arca’s original proposal—submitted a year ago—was too broad, ran afoul of FINRA rules and did not require enough of the market maker participants.
Under the program, issuers of exchange-traded products would contribute between $10,000 and $40,000 per year to a dealer to quote two-sided markets in their securities. NYSE Arca would facilitate the transfer of funds between the issuers and the lead market makers for their products.
The re-filing comes shortly after the SEC approved a similar plan by Nasdaq.
Behind the initiative is concern by Arca that its members are refusing to act as lead market makers in smaller, less liquid ETPs because the risks outweigh the rewards. “Inventory risks may be higher for certain ETPs with low volume and low shares outstanding,” Arca told the SEC in its filing.
According to the filing, about 10 percent of the newly listed ETPs of the past three years trade on Arca without lead market makers. Their absence results in poorer market quality, Arca asserted.
Arca’s original proposal covered all of the more than 1,300 exchange-traded products listed on the exchange. The revised proposal covers only those that trade below one million shares per day, on average. That threshold is the same as Nasdaq’s proposal yet still comprises the vast majority of ETPs, according to data on Arca’s website.
Arca’s original proposal did not require participating lead market makers to adhere to any set quoting requirements. Under the revised proposal, they must meet three requirements.
First, they must maintain quotes at the national best bid or offer or better.
Second, they must quote at least 2,500 shares on both sides of the market at prices that are no more than 2 percent away from the NBBO.
Third, they must either quote at the NBBO or better 15 percent of the day or maintain “size setting” quotes at the NBBO or better 25 percent of the day.
Among other matters, the SEC was concerned that the proposal would run afoul of FINRA’s Rule 5250 which prohibits market makers from accepting payments from issuers.
In its revised proposal, Arca informed the SEC that FINRA advised Arca that it would update the rule to exclude Arca’s ETP program.
