IOSCO Outlines Key Elements of Effective Market Making Programmes

The key elements may help promote the provision of liquidity, strengthen investor confidence, and foster fair and efficient markets, IOSCO says.

IOSCO (International Organization of Securities Commissions) has published a new report exploring how liquidity provision in equity securities markets has evolved in recent years.

“Liquidity provision in equity securities markets plays a vital role in price discovery, thereby helping markets to function efficiently,” IOSCO says. The report does not cover liquidity provision to other asset classes such as ETFs or derivatives.

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The report identifies common approaches taken to market making and liquidity provision, including in relation to obligations and incentives, and highlights key elements of market making programmes that may help promote the provision of liquidity, strengthen investor confidence, and foster fair and efficient markets.

The key elements include:

  • Registration of market makers to formalise their role, to help ensure compliance with all applicable requirements including ensuring that trading is fair and orderly
  • Balancing obligations and benefits, to ensure adequate incentives for market makers to participate while also addressing concerns regarding fairness with respect to advantages and access
  • Compliance monitoring, to establish whether the market maker is meeting its obligations and is entitled to the benefits of the programme, and to prevent undue advantage being granted to market makers.
  • Public disclosure about market making programmes, to ensure transparency and allow market participants to understand the obligations, benefits, incentives and impacts.

“The incentive programs employed by trading venues are crucial to attracting the necessary liquidity to ensure market efficiency, and the corresponding oversight role of regulators may require a consideration of new elements to ensure that evolving markets continue to function effectively,” IOSCO says.

The full report is available here.

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