On June 6, 2013, the SEC approved a one-year pilot program designed to incentivize market makers to take “lead market maker” assignments in certain low-volume exchange-traded products (including ETFs) by offering an incentive fee structure. Participating issuers (or their sponsors) would be charged fees that would be credited to the lead market makers. A similar program, the NASDAQ’s Market Quality Program, was approved on a pilot basis in March 2013.

NYSE Arca believes that the program could result in more efficient, liquid markets for certain exchange-traded products. This could be good news for sponsors of startup ETFs, which tend to be smaller and less frequently traded. But the programs raise concerns about conflicts of interest and whether the program could lead to diminished market making activity in ETFs that are ineligible for the program. Critics have also suggested that the program could create a “pay-to-play” environment for eligible exchange-traded products. In implementing the program on a pilot basis, the SEC acknowledged the need for market participants, the exchange and the regulator to evaluate the overall effect of the program on the market for smaller and less frequently traded ETFs.