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MARKET PULSE 

FEB-2018

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90% of all call auctions for their stocks 
(minimum is 80%) they then receive 
reimbursement from the exchange for 
transaction costs.

In 2009 Deutsche Börse established a 
specialist model for stocks whose liquidity 
level relegated them to only have a daily 
call auction. The program is a throwback 
to the traditional NYSE specialist. In the 
Deutsche Börse program, the specialist 
has exclusive access to a closed book 
where public limit orders are held. He is 
allowed to use this monopolistic power 
to set whatever spread he sees fit. Just 
as the traditional NYSE specialist, his 
compensation is his trading profits from 
using this monopolistic information 
advantage. 

Chi-X rules provide for a market maker 
called a Designated Liquidity Provider for 
stocks included in the STOXX 50 index. 
DLPs are required to quote within 0.25% 
of the Chi-X inside quotes for their lit 
market at least 80% of the trading day.  

For the European exchanges operated 
by NASDAQ OMX, the Oslo Stock 
Exchange, and Euronext exchanges allow 
listed companies to directly contract with 
a market maker. The listed firm and market 
maker decide on the maximum spread 
width as long as it is less than or equal 

to the exchanged mandated maximum of 
4%. The same applies to the quotation 
size whose minimum is dependent on 
the trading activity of the stock. Market 
makers on NASDAQ OMX’s European 
exchanges as well as those from the Oslo 
Stock Exchange and Euronext receive 
compensation directly from the listed 
companies they trade in. Although many of 
the contracts are not publically available, 
those available for Swedish firms indicate 
an average payment to market makers of 
SEK276,000 while those on Norwegian 
firms indicate an average of NOK300,000.

Asia

The concept of market making has been 
there for the Asian Exchanges for a long 
time too. The concept of market making 
was first adopted In India by Over the 
Counter Exchange of India (OTCEI), a 
stock exchange that comprises of small 
and medium sized firms. Market Makers 
have been operating in the SME markets 
of India from a long time. Recently, the 
market regulator Securities and Exchange 
Board of India allowed stock exchanges to 
appoint market makers in the derivatives 
segment. These market makers, appointed 
and incentivised in a transparent manner, 
can operate for a maximum of six months. 
The move will help Bombay Stock 

Exchange, which has been trying to prop 
up its near-zero market share in futures 
and options. BSE has been pushing for 
this for two years. The new guidelines 
allow exchanges to increase liquidity in a 
transparent manner. It will also help new 
exchanges like United Stock Exchange 
and MCX Stock Exchange get a headstart 
as and when they launch equity derivative 
products. In consultation with BSE, MCX-
SX, NSE and USE, it has been decided to 
permit Stock Exchanges to introduce one 
or more liquidity enhancement schemes 
(LES) to enhance liquidity of illiquid 
securities in their equity derivatives 
segments. While Sebi allowed a new 
stock exchange to appoint market makers 
for all new derivative products it launches, 
for existing exchanges, the provision 
is limited to new products and illiquid 
securities among the existing ones.

Derivative contracts whose average 
trading volume is less than 0.1% of the 
market cap of the underlying will be 
considered as illiquid. An average of 60 
trading days will be considered for this 
purpose. While most stock futures and 
options contracts on BSE will qualify 
under this category, several contracts on 
the NSE F&O segment are also likely to 
qualify for LES.

On the European markets 
operated by NYSE/
Euronext, there are two 
types of market makers 
– auction or permanent. 
The former add liquidity 
for stocks only traded 
through call auctions and 
the latter for stocks traded 
continuously.