On 11 August 2020, the International Organisation of Securities Commissions (IOSCO) published a report, Liquidity provision in the secondary markets for equity securities. The report identifies some of the key elements of market making programs that may help promote the provision of liquidity, strengthen investor confidence and foster fair and efficient markets. The report focuses only on liquidity provision in equity securities and does not extend to other asset classes such as exchange traded funds or derivatives.
The information in the report draws on responses to a survey of regulatory authorities, trading venues and market intermediaries. In addition to providing a summary of the survey responses, the report identifies some common themes with respect to the approaches taken to market making and liquidity provision. It also highlights those themes that regulators could consider as key elements of market making programs that may promote the provision of liquidity, strengthen investor confidence and foster fair and efficient markets:
- Registration or the formal role given to market makers and the obligations imposed on them.
- Balancing obligations and benefits.
- Monitoring for compliance.
- Public disclosure about market making programs.
In its conclusion the report makes a number of points including:
- Liquidity provision plays a vital role in price discovery and is a crucial element of fair and efficient markets.
- While equities markets have historically relied on formal exchange market makers to ensure effective price discovery, in many jurisdictions a transition away from this reliance has been unfolding for many years. This change may present both benefits and challenges.
- 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 consideration of new elements to ensure that evolving markets continue to function effectively.