The NYSE Euronext has received approval from the US Securities and Exchange Commission (SEC) to launch an incentive programme aimed at market makers in exchange-traded products (ETPs). The programme has been devised to enhance liquidity and reduce trading costs and is expected to launch in the second half of the year.
NYSE Euronext has unveiled an incentive programme aimed at improving ETP liquidity.
The programme, which initially will be run as a pilot for 12 months, offers an alternative for incentivising lead market makers (LMM) to be the primary market maker in certain ETPs selected by issuers.
LMMs play a crucial role in promoting a consistent, fair and orderly market in their ETP assignments, benefiting both the ETP issuer and the end investor transacting in those products.
Under the programme, issuers are given the flexibility to choose the amount they would like to pay between $10,000 and $40,000 per ETP annually to be a part of the programme. Issuers can select five existing ETPs in addition to any new ETP listed for inclusion in the scheme. Issuers will immediately benefit from having oversight of an obligated market maker assigned to their ETPs, resulting in improved market quality with narrower spreads, increased quote depth and reduced execution costs for investors trading the products.
LMMs get fixed quarterly payments, rather than variable enhanced transaction rates, in return for meeting their monthly LMM quoting obligations. These obligations include a percentage of time at the national best bid and offer requirement, a maximum spread and minimum depth requirement, and a layering requirement which requires the LMM to display size within 2% of the national best bid and offer.
Laura Morrison, Senior Vice President of Global Index and Exchange Traded Products at NYSE Euronext, said: “At NYSE Euronext, we believe LMMs play a crucial role in promoting a consistent, fair and orderly market in all securities, particularly ETPs. We are proud to offer our issuers this optional incentive programme, proving that NYSE Arca is committed to providing ETP market participants with the best service and innovative market structure to meet their ETP listing and trading needs.”
NYSE Euronext’s major rival in the US ETP space, Nasdaq OMX, has also embarked on an ETP-related market maker incentive scheme. Back in May it announced that its ‘Market Quality Program’ (MQP) – a scheme which bears much resemblance to NYSE’s programme – would launch sometime during the second quarter of 2013. Like the NYSE programme, Nasdaq’s MQP scheme allows issuers of ETPs to contribute funds to the exchange that may be used to pay market makers that improve the liquidity and quality of the markets in selected ETPs.
The London Stock Exchange, too, has taken steps to improve ETP liquidity and grow trade volumes, though has followed a different approach – it recently cut execution fees by 50% and lowered the thresholds for volume discounts for registered market makers in ETPs.