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BSE paves way for market making in derivatives

BS Markets Bureau

The Bombay Stock Exchange derivatives segment has decided to introduce market-making scheme in derivative products such as futures and options on index and individual stocks and will appoint market makers on competitive basis.

BSE will appoint market makers for all the 31 stocks under derivatives and futures and options in Sensex on the basis of competitive bidding.

A single market maker will be restricted to make the market in maximum two futures products to ensure wider participation by members, BSE said.

The spreads for index and stock futures would be specified in terms of price. The spreads for index and stock options would be specified in terms of the implied volatility stated in annualised terms for bid and offer.

According to the BSE proposal the market-making scheme is for those members who desire to provide for any of the derivative product/s buy and sell orders within a maximum spread on continuous basis for a minimum quantity.

"Considering our market share in the derivatives segment, providing initial liquidity is of paramount importance. The BSE is introducing a strong market-making scheme with significant financial benefits to the market makers, which at present has the potential to provide this elusive liquidity to derivatives," BSE said.

A market maker is a member who provides for buy and sell orders within a maximum spread on continuous basis for a minimum quantity. The spreads would be specified in terms of price.

The maximum spread and the minimum quantity can be mutually decided between the exchange and the market maker. The exchange would prefer the one who commits for a lower spread and larger quantity.

The rewards for the market maker for making the market will be directly proportional to the volumes generated in the selected futures product.

A market maker could earn up to Rs 4,50,000 a month with the average daily volume of only Rs 1 billion in stock the specified futures and Sensex futures products.

The rewards for the market maker for making the market will be directly proportional to the volumes generated in the selected futures product.

Additionally, the market maker would be exempted from the transaction charges of Rs 2 per 100,000 (except contribution of Rs 0.20 towards the Trade Guarantee Fund and Rs 0.05 towards Investor Protection Fund) for the value of the transactions done by him., during the currency of the scheme.

A single market maker will be restricted to make the market in maximum two futures products to ensure wider participation by the members.

"The exchange believes that the scheme will provide liquidity to the derivatives segment as the market maker will be obliged to give two way quotes in the selected futures products all the time (more than 80% of the total monthly trading time) within the range of buy-sell spread already agreed upon," says Sanjiv Mehta, CEO, derivatives segment, BSE.

He adds, "This will provide investors an opportunity to enter and exit any particular transaction with considerable ease."

The market maker will also be obliged to give a minimum depth (a minimum number of contracts on both on buy and sell side).

This will bring in more market participants to trade in the futures products. The normal risk management measures would be applicable to the market makers.

To facilitate market making, the exchange will also provide innovative excellent system features.

Also, the system will provide the facility to modify multiple orders at a time, through the special pending order window, by punching a single key. These system features will be of immense help to the market maker and will facilitate the market making activities.

Any trading-cum-clearing member (TCM)/ trading member (TM) of the derivatives segment of the exchange could participate in the bidding process.

A single marker maker will be restricted to make the market in maximum two futures products to ensure wider participation by the members. The market maker will be obliged to give two way quotes in the selected futures products all the time (more than 80 per cent of the total monthly trading time) within the range of buy-sell spread already agreed upon.

Additionally, the market maker is not obliged to give quotes if his net open interest crosses Rs 25 million. The market maker will also be obliged to give a minimum depth (both on buy and sell side).

This will bring in more market participants to trade in the futures products. The normal risk management measures would be applicable to market makers.

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