Money Management Executive
Nasdaq is hoping to lure exchange-traded fund listings away from the American Stock Exchange and New York Stock Exchange Euronext with its proprietary ETF marketplace. Harry Tutwiler, Nasdaq's vice president of financial products, said the goal is to have 40 new exchange-traded funds listed by next quarter.
As of Sept. 30, Nasdaq listed only 20 ETFs. The American Stock Exchange had 360, the New York Stock Exchange 166, and the New York Stock Exchange Arca 41.
However, Nasdaq, which officially rolled out the marketplace in October, handles a large percentage of the transactions by volume. In August it handled 52.1% of the trading volume of exchange-traded funds, up from 34.8% in April.
The platform was designed to add liquidity to the ETF market. Its centerpiece is the appointment of "designated liquidity providers," or market makers, one or more of whom will be chosen through a consultative process between the ETF sponsor, Nasdaq, and the market-making firms, Mr. Tutwiler said at a New York conference sponsored by the Structured Products Association.
During an ETF's incubation period, Nasdaq will give these liquidity providers specific responsibilities and price incentives.
Though Mr. Tutwiler said that Nasdaq ordinarily likes to make money on each transaction, its ETF marketplace will initially be a loss leader through the use of "inverted transaction rebates," which will continue until an exchange-traded fund's trading volume grows to beyond 250,000 shares. At that point incentive payments from Nasdaq will end.
Initially, liquidity providers will be paid 0.004 cents per share for every transaction on which Nasdaq receives a fee of 0.003 cents. "When ETFs graduate, they will go back to the standard economics," Mr. Tutwiler said. That usual scenario includes Nasdaq charging 0.004 cents per share and liquidity providers earning 0.003 cents of that, he said.
In other words, on top of reducing its transaction fees and turning over to market makers its reduced 0.003 cents per share earned on transactions, Nasdaq will pay an additional 0.001 cent to motivate liquidity providers.
The first ETF, the SPDR Fund from the American Stock Exchange, came out in 1993. So the Amex and its many followers had a big head start on Nasdaq. "We haven't been able to compete, but that's all about to change," Mr. Tutwiler said.
That competition is welcomed, said Lisa Dallmer, senior the vice president of exchange-traded funds and index services at NYSE Group.
"Competition is good for any market. There's more opportunity for choice, which will spur more innovation," she said.
Ms. Dallmer said she is flattered that Nasdaq's ETF marketplace is copying the model that NYSE Arca, the exchange's all-electronic trading platform, unveiled last year.
That model now supports 94 ETF listings, with more to come as such products are voluntarily moved to NYSE Arca exchange from ordinary New York Stock Exchange listing status to improve trading efficiencies.
The New York Stock Exchange acquired Archipelago Holdings and its all-electronic stock exchange system in April 2005.
By the end of this year, all 166 ETFs listed on the New York Stock Exchange will be moved to NYSE Arca. Currently the New York Stock Exchange accounts for 41% of all exchange-traded fund listings and 67% of the entire assets across the exchange-traded fund industry, Ms. Dallmer said.
Nasdaq does not deny it is copying the NYSE Arca revenue model. In applying to the Securities and Exchange Commission to start the marketplace, it said explicitly that it was doing so.
"It's not uncommon for new competitors to enter high-growth areas," she said. "But what is important is for issuers to be working with people with experience."
Perhaps no stock exchange is more acquainted with the idiosyncrasies of the exchange-traded fund market than the American Stock Exchange, which 14 years ago helped create the first ETF tracking to the Standard & Poor's 500.
"ETFs have been important to us and are part of our identity," said Scott Ebner, the senior vice president of the ETF marketplace at the American Stock Exchange.
"We've got very serious competition in this business from NYSE Arca and Nasdaq," Mr. Ebner said. "We are working hard to support the ETF market and continuing to do what we always we have."
He said there's still plenty of room for new exchange-traded funds and issuers.
