NYSE program to boost liquidity of exchange-traded products

NEW YORK Thu Jun 13, 2013 2:38pm EDT

NEW YORK (Reuters) - NYSE Arca, a major U.S. market for exchange-traded products (ETPs), will launch an initiative this year to help issuers of some lightly-traded securities to boost their liquidity.

The U.S. Securities and Exchange Commission approved on June 6 a pilot program by the securities exchange that will let issuers indirectly pay market makers like Deutsche Bank Securities (DBKGn.DE), Getco and Goldman Sachs & Co (GS.N) to give more favorable bid-offer spreads for participating ETPs.

A date is not yet set for the program to start, said Laura Morrison, senior vice president of Global Index and Exchange Traded Products for NYSE Euronext NYX.N, which runs Arca.

ETPs are a catch-all term encompassing exchange-traded funds, notes and other products that trade like normal securities, yet can derive their value from a basket of assets.

NYSE Arca lists the most ETPs. Its more than 1,300 ETPs see an average of around $13 billion in daily trades, according to XTF, an ETP data provider.

Other exchanges, including one run by Nasdaq OMX Group (NDAQ.O), are making similar pushes to make markets more stable and liquid, while encouraging new issuers to come to market.

The biggest problem for traders and issuers of the securities is when there are too few market participants to bridge the difference - or spread - between an ETP's trading price and its actual value. Big spreads limit investors' ability to trade the securities and can mean paying a premium for ETFs.

The heavily-traded SPDR S&P 500 ETF (SPY.P), for instance, has an average bid-ask ratio of just 0.01 percent. By contrast, the specialized and thinly-traded Global X Top Guru Holdings Index (GURU.P), has a bid-ask ratio of around 0.51 percent.

Such low-volume products can be subject to volatility that reflects the market climate more than their fundamental value, said NYSE's Morrison.

"If there's some weird quoting issue, that investor will never come back," she said. "You're only as good as your last trade."

Some of NYSE Arca's small ETPs average just hundreds of dollars in daily volume. About sixty have come to market without "lead market makers," which the exchange requires meet certain standards on price and other metrics.

Under the program, the lead market makers will get between $10,000 and $40,000 in fees collected from participating sponsors, the institutions that create and administer exchange-traded products. Top sponsors include BlackRock Inc (BLK.N), State Street Corp (STT.N) and Vanguard Group Inc.

The exchange will select market makers. Only ETPs with average daily volume below one million shares will participate.

The program could create a "more desirable situation" for both investors and issuers, said Stephen Massocca, managing director at Wedbush Securities, which trades ETPs but has no direct involvement in the Arca program.

The new program would mean an upfront cost for issuers who participate, and that could lead to higher fees for investors.

But Reginald M. Browne, global co-head of the ETF group at Knight Capital Group Inc (KCG.N), which is a lead market maker for many ETPs, said the initiative would still help solve a key problem for retail and institutional investors - assessing liquidity, not price.

Until recently the Financial Industry Regulatory Authority banned issuers from paying market makers. That rule was relaxed earlier this year.

(Reporting By Trevor Hunnicutt; Editing by Lauren Young and Nick Zieminski)