Here’s how NASDAQ’s proposed Market Quality Program will work:
In addition to the annual listing fee, the issuer of an eligible security can opt in and will pay $50,000 a year into the program for a security, to be split equally between quote and trade payments to market makers.The issuer can add another $50,000 per product to the program split at will between the quoting and trading incentives.
Market makers register voluntarily in the program on a security basis and are paid on a pro-rata basis for:
a) Tightening spreads and offering liquidity. To be eligible for payment, they must quote in 500 shares at the NBBO for at least 25% of the time and bid/offer 2500 shares no wider than 2% outside the NBBO for 90% of the time;
b) Trading; payment is pro-rata’ed across those in the program.
The payment is also "use-it-or-lose-it", so if nobody trades in a month or meets the quoting criteria, the money reverts back to the issuer. As the program is voluntary, this also means market makers not in the program and other market participants can trade alongside; if outside the program, they will not be eligible for payment, while those in the program will miss out if not competitive. The payment structure allows market makers to choose which securities to be particularly active in during any one month. And when trading in an ETF meets an ambitious 2 million shares a day, the paid program ends.
All exchanges have on their books a rule that aligns with a FINRA Rule 5250 and bars issuers from incentivizing market markers directly for the obvious reason of market abuse and false price floors being established. Arguably ETFs are hard to manipulate due to their derivative nature, and frankly an attempt to rig the price of a relatively illiquid derivative security in a highly monitored program with a strong electronic footprint verges on stupidity.
Success will largely be defined by the issuers’ willingness to support the program and the market makers’ ability to turn a profit. Two hundred dollars per security per day adds up to a tidy sum across a lot of symbols but it remains to be seen if this is enough. A successful program will also sort the ETF wood from the trees: if one security in the program is successful and another not, it begs a question as to whether products should be withdrawn; likewise ETFs left to languish outside the program will stick out like sore thumbs in the statistics.
The rule filing is waiting to be ‘noticed’ by the SEC, which will start turning the wheels of the rule filing and formal commentary process. If ultimately approved, the writing is on the wall for equities.There is little on the regulatory table at the moment to improve market quality,but prior success of a similar program abroad and political concern over how to improve the lot of smaller securities at least gives this proposal a decent chance of making it to the pilot.
Let the comments begin.