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NASDAQ Seeks To Pay Market Makers In Exchange For Improved ETF Trade & Quote Performance

April 12th, 2012

Jackie Noblett, writing for Ignites.com, spotted a recent SEC filing by Nasdaq that proposes a “Market Quality Program” (MQP) where, “an ETF sponsor would pay an annual fee of $50,000 to $100,000 per ETF to Nasdaq. The fee, which would be in addition to the traditional listing fees, would be passed on to market makers in the form of a rebate in exchange for improving trade and quote performance. Any fees not paid out to market makers would go back to the ETF sponsor.”

The filing states that, “in rewarding Market Makers that are willing to “go the extra mile” to develop liquid markets for MQP Securities, the MQP would clearly benefit traders and investors by encouraging more quote competition, narrower spreads, and greater liquidity… the MQP will lower transaction costs and enhance liquidity in both ETFs and their components, making those securities more attractive to a broader range of investors. In so doing, the MQP will help companies access capital to invest and grow. And the MQP may attract smaller, less developed companies and investment opportunities to a regulated and transparent market and thereby serve the dual function of providing access to on-Exchange listing while expanding investment and trading opportunities to market participants and investors.” 

The filing notes that, “There is support for paid for market making (also known as “PFMM”) at the highest governmental levels. Congressman Patrick McHenry, the Chairman of the House Committee on Governmental Reform and Oversight, for example, recently noted that agreements between issuers and market makers to pay for market making activity “…would allow small companies to produce an orderly, liquid market for their stocks. Research has shown that these agreements, already permitted overseas, have led to a positive influence on liquidity for small public companies.” [Related: SEC Widens Probe of Exchange-Traded Funds]

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This program admittedly will require rule changes as it runs against the prohibitions of direct payments to market makers for liquidity imposed by the Financial Industry Regulatory Authority and Nasdaq.  

According to the Ignites.com article, there are many advocates of this program including, Adam Patti, CEO of IndexIQ, Greg Friedman, head of ETF product development at Russell Investments, and Reggie Browne, managing director at Knight Capital Group (NYSE:KCG). The common theme for their enthusiasm is the incentivization of market makers to provide the necessary seed money to bring new products to market. [Related: Financial Industry Regulatory Authority (FINRA) Warns Investors of Gold Stock Scams]

We are curious, what are your thoughts on the new rule change?

See the full SEC filing: HERE

Related: S&P 500 Index (INDEXSP:.INX), SPDR S&P 500 ETF (NYSEARCA:SPY), Nasdaq Composite (INDEXNASDAQ:.IXIC), Dow Jones Industrial Average (INDEXDJX:.DJI).


NASDAQ:QQQ, NYSE:DIA, NYSE:SPY


 

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