Liquidity Fears Stalk the $4 Trillion ETF Market. Here's One Fix - Bloomberg

Liquidity Fears Stalk the $4 Trillion ETF Market. Here's One Fix - Bloomberg:

Market mayhem this month has re-ignited fears about how the $4 trillion U.S. ETF industry will react in a liquidity crunch. Europe may have an answer for averting disaster.

The nightmare scenario: volatility prompts market-makers to withdraw when they’re needed most, blowing out transaction costs and freezing trading. It’s an outcome that’s been raised by the likes of Moody’s Investors Service Inc. and T. Rowe Price Group Inc. this year as late-cycle swings convulse markets.

Some see a potential cure in a practice that’s commonplace from Italy to the U.K. but banned in America: ETF providers paying market-makers directly. The argument goes that conflict-of-interest concerns are misplaced -- and that traders under contract to keep transacting in passive instruments will do so come hell or high water.