Bats Offers Up to $400,000 Rebate to Traders Who Lift ETF Volume

  • Payment offers incentive to provide liquidity in all markets
  • Traders need to ‘support the market on the most volatile days’

When it comes to exchange-traded funds, Bats Global Markets Inc. has decided it’s the trading volume, not the listing, that pays.

So the U.S. stock exchange is rolling out cash sweeteners to encourage the biggest traders of Bats-listed ETFs to trade more shares, more frequently, Bats said in a statement on Tuesday. Starting Sept. 1, lead market makers will receive as much as $400,000 per ETF each year, depending on the average daily volume, the company said.

Rewarding these traders, who provide liquidity to ETFs and facilitate the funds’ creation and redemption, marks a strategic adjustment for Lenexa, Kansas-based Bats, which previously offered money to issuers to list their ETFs on its platform. That cash is now headed to the market makers, after a stock market rout last August pushed exchanges, fund providers and investors to bolster the infrastructure behind ETF trading. Paying large traders is part of that effort to keep the market liquid and orderly even in times of turmoil, according to Bryan Harkins, head of U.S. markets at Bats.

“The whole intention is to further incentivize market makers so that the business of market making is much more attractive,” Harkins said in an interview. “That in turn encourages them to support the market on the most volatile days.”

U.S. stocks took investors for a wild ride on Aug. 24, 2015, a session sullied by trading halts in hundreds of securities and difficulties getting shares trading. The pauses muddied asset valuation, discouraging market making and spurring even bigger price swings.

Bats -- which competes against Nasdaq Inc. and the largest player in ETFs, Intercontinental Exchange Inc.’s NYSE Arca platform -- plans to give market makers payments on a sliding scale. The top level of $400,000 per year is reserved for any ETF that trades more than 35 million shares per day on average, the statement said. None of the exchange’s 98 ETFs currently fits that criterion, but the market does have some funds that trade five to 10 million shares a day, Harkin said. That will be worth $50,000 a year to market makers.

“If the exchange and the market maker are enjoying superior economics on the liquid products, that in turn should subsidize their role for the illiquid products,” said Harkins. “If we build superior market quality, it allows us to win listings.”

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