Reporting courtesy of James Armstrong/Traders Mag.

Following a similar proposal by Nasdaq OMX, NYSE Euronext has unveiled a plan to allow market makers to get paid for providing liquidity for exchange-traded funds. If approved, the plan could reduce the number of funds listed without lead market makers.

On April 27, NYSE formally asked the Securities and Exchange Commission to authorize a pilot program that would add incentives for firms that become LMMs. Under the proposal, issuers would be allowed to pay an additional $10,000 to $40,000 per year to attract market makers.

Bryan Johanson, managing director for global index and exchange-traded products at NYSE Euronext, said firms have been increasingly reluctant about becoming LMMs, and the exchange wanted to offer an additional incentive to attract market makers to that role.

Under the NYSE plan, issuers could pay an optional quarterly incentive fee to the exchange, which would then use that money to distribute credits to LMMs that meet minimum performance standards.Johanson said the exchange discussed the matter with market makers and found that around $10,000 to $40,000 was the level at which they started to consider taking on new exchange-traded products.

“We didn’t want this to be overly burdensome for the issuers,” Johanson said. “We tried to balance their interests with the market makers so we could come up with a figure that was appropriate and fair.”

A Financial Industry Regulatory Authority rule prohibits payments for market making, but NYSE argues this rule applies to securities of individual companies, not to exchange-traded products. Continue reading →