The Gateway to Algorithmic and Automated Trading

Market-making scheme helps Aussie ETF market, study finds

First Published 2nd July 2013

Rebates have generated a lot of public discussion, but one study found that a scheme for market-making rebates in the Australian ETF market boosted liquidity.

Sydney - The introduction by ASX of its ETF Market Making Scheme has improved trading and market efficiency in the Australian exchange traded fund market, a study by the Capital Markets Cooperative Research Centre (CMCRC) found.

The study analysed market activity for 12 months either side of the scheme's introduction in 2010 to assess the impact of market-maker rebates. To qualify for the rebate, contracted market makers had to meet spread and volume obligations 80% of the time over a calendar month, with the rebate covering all trading and clearing fees. The authors also looked at trades made to see how income was derived and whether market makers supplied liquidity.

The study was conducted by Dr Elvis Jarnecic, a research director for the CMCRC's Financial Markets Research Centre, and Professor David Michayluk and Jagjeev Dosanjh of the University of Technology, Sydney.

"Our results indicate that market makers are net suppliers of liquidity and are therefore fulfilling their mandated duties," Jarnecic said. "In the year following the scheme, profits generated from supplying liquidity are significantly greater than position-taking profits."

There have been public arguments against market maker obligations in recent years, because high frequency traders are the most active market makers but often have no obligation to maintain a market presence.

Jarnecic said: "Liquidity improvements are accompanied by consistent changes in actual trading outcomes, indicating that the scheme has been successful in improving quoting behaviour as well as affecting trading activity."