Courtesy of Tom Steinert-Threlkeld

Nasdaq, NYSE and BATS are slugging it out with incentives, new order types and a new exchange to resuscitate trading in ETFs…

Once it worked. Now, not so much.

For years, the Nasdaq Stock Market designated a single market maker for each exchange-traded product. Later, the BATS Exchange treated exchanged-traded products no differently than other equities. No special treatment for trading in ETFs.

Meanwhile, NYSE Arca created lead market makers and gave them premium rebates for trading in exchange-traded funds, and gave other market makers rebates as well.

Both models worked fine, as institutional and retail investors pulled out of mutual funds that invested in stocks and rushed in droves into exchange-traded funds that also held baskets of stocks-and could be traded like them, too.

Only about 82 million shares of ETFs were traded in an average day in 2004, accounting for 2.15 percent of consolidated volume. By 2008-at the height of the credit crisis-that had surged to 1.1 billion shares and 12.5 percent of all trading. By 2011, the 1.2 billion shares traded every day in exchange-traded products of all kinds accounted for 15.4 percent of all trading.

Then, the hammer dropped. Daily volume fell 22.0 percent last year, to 941,000 shares a day. And the share of trading went down to 14.3 percent, by Rosenblatt Securities’ count.

The bloom was off the boom-even as investors keep pouring money into the funds, adding another $16.6 billion into North American ETFs in the first quarter of 2013, with $1.4 trillion invested all told in ETFs, in the United States.

“Investing in ETFs is continuing to increase. It’s just happening in places other than the secondary markets, like NYSE Arca or Nasdaq or BATS,” said Laura Morrison, senior vice president for global indices and exchange-traded products at NYSE Euronext.

For the full article courtesy of TradersMagazine, please click here