* Pilot program was approved by SEC, no date set
* Exchanges looking to boost liquidity in growing market
* Small securities could benefit by paying market makers
By Trevor Hunnicutt
NEW YORK, June 13 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, Getco and Goldman Sachs & Co 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, 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
, 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, 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, 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
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
, State Street Corp 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, 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.