Courtesy of Bloomberg LP reporter Nina Mehta

2013-03-22 22:29:10.364 GMT

U.S. regulators approved Nasdaq Stock Market’s request to allow the sponsors of some exchange- traded funds to offer payments to market makers.     The Securities and Exchange Commission decision loosens a ban on the compensation that has been in place since 1997.

Nasdaq OMX Group Inc., which plans to begin the program as a one-year pilot, argued along with NYSE Euronext before Congress in 2011 that payments to market makers may increase liquidity and improve prices to investors in less-active securities.   Approval of the program comes amid concern that stocks with lighter volume are suffering in America’s computerized equity markets because they are less attractive to automated traders.

NYSE Arca, an all-electronic venue that competes with Nasdaq, submitted a request to the SEC yesterday for its own initiative. Payments for market making in smaller companies is allowed in some European countries.

“It will incentivize market makers to collect revenue by posting bids and offers at the exchange,” Chris Hempstead, director of ETF execution at broker WallachBeth Capital LLC in New York, said in a phone interview. “Market makers will compete with one another to capture that revenue stream and drive the bid-ask spread to a tighter band.” Continue reading →