Meet the Market Makers: Adding Liquidity, Stability and Efficiency to Trading

02 October 2019 by TSX Venture Exchange
Market maker

One of the primary jobs of any stock exchange is providing ample liquidity and stable, efficient trading for the securities of its listed companies. Investors want to be able to buy and sell stock whenever they want, and at a price that most accurately reflects what those shares are worth. 

A vibrant and liquid trading infrastructure is critically important to the healthy functioning of Canada’s capital markets, and our overall economic integrity.

At TMX Group, our key stakeholders – including issuers, investors and dealers – are our top priority. It is therefore our mission to promote a healthy and liquid market for every listed security. To ensure we’re consistently delivering the value these stakeholders seek, we operate a robust market maker program which plays a pivotal role in the trading process.

What is a market maker, and why are they important?

The primary responsibility of a market maker is to augment liquidity as needed and ensure that a competitive, two-sided market exists during continuous trading hours. Put another way, their mandate is to step in when the natural liquidity of the market may not be enough to support smooth and orderly trading in a given security. So, for example, if an investor is seeking to sell a stock, but there isn’t a ready buyer, the market maker may step in to buy the shares to complete the transaction. Market makers play a major role in why transactions take place so quickly.

All of TMX Group’s market makers are firms that are registered with the Investment Industry Regulatory Organization of Canada (IIROC) and with TSX. These market makers monitor trading activity in the given security to which they’ve been assigned in real time.

Their various roles

Market makers also support the Minimum Guaranteed Fill facility, which is designed to provide guaranteed fills for smaller-sized orders from retail investors. In addition, they are also responsible for automatically filling odd-lot (less than 100 shares) orders at the “national best bid and offer” price, which very simply put, is the highest bid and lowest offer price quoted across all major Canadian marketplaces.

Market makers also serve an important function when it comes to early detection of irregular or unusual trading. Because they are very familiar with the securities they cover, market makers can spot possible anomalies in trading and flag it to the appropriate regulators.

In exchange for carrying out their obligations, TSX market makers receive various financial and trading incentives for taking on their role and carrying out their duties. Their performance is closely monitored and assessed on a monthly basis to ensure they’re meeting their ongoing obligations.

Innovation, and the secondary market making program

In 2016, TMX Group set out to work with the market making community to determine the best approach to enhancing the TSX Market Making program to promote the highest market quality metrics on every TSX-listed symbol. The goal was to modernize the program performance metrics to better reflect the changing Canadian equity market structure.

As a result, TMX Group introduced a secondary market maker on each corporate security to help boost liquidity and promote tighter “spreads” (the gaps between the bid price and ask price of a security). A phased rollout of the secondary market maker program on TSX was completed in September of 2018. The early results have been impressive: over a three-month period, there was a significant improvement in the narrowing of the spread on securities with a secondary market maker when compared to similar securities with only a single market maker.

In addition, secondary market making delivered improvements in the percentage of time that a security spent at the national best bid or offer price.

Market makers serve a vital role in the healthy functioning of Canada’s capital formation ecosystem, and these modern, client-focused organizations are committed to continuous improvement.

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