The New York Stock Exchange announced this week the start of a pilot program to attempt to rejuvenate trading in many illiquid exchange traded products. While many ETFs are wildly popular like SPDR S&P 500 (SPY), trading over 100 million shares per day, there are hundreds like the Columbia Select Large Cap Value (GVT) which trades about 800 shares per day. Under the NYSE Arca Exchange Traded Product Incentive Program issuers of illiquid ETFs (typically Wall Street banks) can pay the exchange $10,000 to $40,000 per product annually. In return the exchange will funnel the fees to those firms designated as market makers as long as they seek to boost trading volumes in the product.


As we saw recently in discussing the Italian tax on HFT, most firms with the distinction of market maker in the U.S. are those that partake in high frequency trading. The good folks at Themis Trading provide some background info on the ETP market which shows just how this segment is tailored to HFT and other institutions rather than individuals.

-In the United States alone there are about 1200 ETPs alone, with AUM of approximately $1.3 trillion.
-Only 3% of US households own these ETPs.
-There are about 36 ETP sponsors/Issuers.
-Over the 2002-2012 period, ETPs have issued over $1 trillion in new shares.
-The industry is top heavy – ½ of the trillion dollar industry’s assets are held in just 25 of the more than 1,500 different ETPs.

These products typically allow high frequency trading machines to take advantage of slight price dislocations between venues as well as the underlying assets the products must own. In order to do so, the firms must pay the exchange’s data and co-location fees to receive the fastest information. What this program essentially does is pay HFT firms to take up trading in products that they’re not yet trading. In doing so, high frequency traders will generate larger trading volumes thereby increasing exchange revenue. It’s the definition of a win-win situation for the NYSE while the high frequency traders get subsidized for merely switching which products they’re trading.