The Big Systemic Market Structure ETF Risk That No One Is Talking About
It’s not every day asset management firms advocate for the right to pay new service fees. Yet that is exactly what we are doing.
Recently, FINRA put out a request for the ETF industry to comment on lifting Rule 5250 — a rule put in place long before ETFs were recognized as the vehicle of choice for the modern investor, a rule that prevents ETF issuers from properly incentivizing market makers.
As it stands today, ETF market makers are compensated through a “maker-taker” model, paid for providing liquidity and paying in for taking away liquidity. Those rebates are enhanced when taking on market maker obligations, which include continuous quoting of a two-sided market within a predefined spread range and a minimum acceptable amount of depth on the bid and ask.
While any market maker can trade ETFs opportunistically, only the lead market maker enjoys the enhanced rebates that the “LMM” programs offer. However, as market fragmentation continues, the primary listing venues where trading is eligible for the enhanced rebates only see fractional volumes.
This article was published by ThinkAdvisor, please click this link to read the article.