Both market-making firms and ETP issuers have spent the past several months mapping out their arguments for participating in the proposed programs. Issuers are evaluating the extent to which the added cost of enrollment would benefit them indirectly through increased assets in the funds. Market makers are evaluating whether the bounty would be worth the cost of inventory and trading risk.
Damon Walvoord, head of ETF capital markets for market-maker Susquehanna International Group in Bala Cynwyd, Pa., points out that these proposed programs are only designed to increase “on-screen liquidity,” accessible through the public markets as displayed quotes — resting bids and offers — on exchanges and ECNs
“We don't expect that the new incentive programs would offer significant impact or improvement to block-size liquidity, which is already quite ample,” said Mr. Walvoord, whose firm is the LMM for 215 Arca-listed ETPs.
In comment letters last year, the Investment Company Institute and large issuers State Street Global Advisors and BlackRock were generally positive on programs designed to “promote market quality and efficiency,” while The Vanguard Group was more concerned about the impact on ETF shareholders as issuers would likely “seek to recoup those costs in some way from the ETF and its shareholders.”
Through a spokesman, Vanguard, which lists 17 of its 65 ETFs on Nasdaq, said its concerns voiced in the initial comment letters haven't changed.
David Abner, head of capital markets for New York-based WisdomTree Asset Management, a unit of WisdomTree Investments, said the company will evaluate the programs and determine “if the funds and investors will benefit.”
In some cases, such liquidity training wheels might be superfluous. Occasionally, long-listed dormant ETPs suddenly become popular — attracting assets and trading — as their particular theme or investing style catches on. WisdomTree's Japan Hedged Equity Fund is a recent example.
Trading in the fund has increased 15-fold year-over-year in response to aggressive monetary policy in Japan. Net flows into the fund stand at $5.3 billion over that time period, more than all but three other ETPs.
“Anytime you are increasing costs for small ETF sponsors without a direct correlation to asset growth, you put startups and innovation at a disadvantage,” said Noah Hamman, CEO of Bethesda, Md.-based AdvisorShares Investments, which sponsors 18 actively managed ETFs with $805 million in assets under management.
Market leader iShares, by contrast, boasts more than $600 billion in ETP assets under management in the U.S. alone. Still, Joseph Cavatoni, managing director for iShares capital markets, Americas, at BlackRock in New York, said there has to be “demand in the product” and that “market-making alone does not make for success.”