MARKET MAKING AND SINGLE PRICE
Securities Traded with “Continuous Auction with Market Maker Method” and “Single Price Method” on the Equity Market
Exchange traded funds, warrants and certificates traded on the Collective and Structured Products Market are required to be traded with “Continuous Auction with Market Making Method”.
With regard to all other equities that are not included in BIST 100 Index and traded on the Collective Products Market, with the exclusion of the equities traded on the Watchlist Market, Pre-Market Trading Platform and Equity Market for Qualified Investors, equities with a free-floating market capitalization of less than TL 10 million may be subject to market making.
Securities included in BIST 100 Index are always traded with continuous auction system.
Securities traded on the Watchlist Market, Pre-Market Trading Platform and Equity Market for Qualified Investors (has not been launched yet) are traded with single price method since they are included in D Group as required by the Capital Markets Board’s resolution no 31/1080 dated October 31, 2014. As required by the said resolution, equities included in C Group since their free floating market capitalization is less than TL 10 million will be traded with single price method unless a brokerage company has been appointed for market making or liquidity providing.
Information regarding the trading method for the equities is available in Borsa İstanbul’s Daily Bulletin.
What is Continuous Auction with Market Making Method?
Continuous auction with market making method refers to the trading method aimed at providing liquidity for securities traded with continuous auction. Continuous auction with market making method is applicable for exchange traded funds, warrants, and certificates traded on the Collective and Structured Products Market, and equities with a free floating market capitalization of less than TL 10 million.
Market Maker Member and its Functions
Market maker member is a member that fulfills the basic market making criteria and whose application for market making has been accepted by Borsa İstanbul Board. Market maker members start operating after signing “Market Making Letter of Undertaking for Borsa İstanbul Equity Market”.
Market makers are expected to prevent any extreme price movements which may occur as a result of short term supply-demand imbalances in securities that have insufficient depth for continuous auction trading and whose free floating market capitalization is low; to provide liquidity to the market on a continuous basis, and thereby to contribute to the efficient improvement of the continuous auction environment.
Quotation refers to a notification of price and quantity in the form of a bid or ask order sent by a market maker member, and which defines the price range within which the security can be traded in consideration of the values during the trading session. A member defined as a market maker in the system is able to enter quotation in all instruments. Multiple market makers and multiple quotations (belonging to various market maker entities) are possible for a single instrument. Quotation prices do not constitute a separate price limit. Trades may be conducted at levels exceeding the quotation price (provided that they are within the 20% limit). Quotations are treated as normal orders. So orders may be entered and the trades may be carried out before the market maker enters the quotation. In the session flow, there is not any session states allowing only quotation entry or amendment. Quotations can also be entered in call auctions such as the opening and closing sessions. Market makers are obliged to enter PYM for client accounts and PYP for house accounts in the AFK areas for quotation entries. Reduction of fee for the market maker is calculated over the daily evaluations, and realized monthly. Even if the volume is decreased with an update of the quotation, priority is lost because each quotation amendment is deemed as cancelation and entering a new order.
Markets and Securities subject to Continuous Auction with Market Making Method
Exchange traded funds, warrants and certificates traded on the Collective and Structured Products Market are required to be traded with continuous trading with market making method. With regard to all other equities that are not included in BIST 100 Index and traded on the Collective and Structured Products Market, with the exclusion of the equities traded on the Watchlist Market, Pre-Market Trading Platform and Equity Market for Qualified Investors, equities with a free-floating market capitalization of less than TL 10 million and A and B group equities traded onEmerging Companies Market may be subject to market making.
Benefits of Continuous Auction with Market Making Method
The basic operating system for Borsa İstanbul Equity Market is continuous auction. This trading method is supported with single price trading method in the session opening. Continuous auction is used in developed markets as the most efficient method, while it is applied in a hybrid system supported by a market maker in the case of securities weak in liquidity and whose free floating market capitalization is low. Continuous auction with market maker method is a hybrid structure where the orders sent for the market maker’s quotations as well as those in the publicly disclosed order file are matched according to price and time priority, and traded.
This method aims at ensuring the price stability in the relevant security through the bid and ask quotations given by the market maker, and the extreme price volatility falling outside the limits of market is naturally prevented. Thereby, securities traded with a market maker are protected from artificial price movements that intimidate investors. The market maker’s quotations, which will stay in the system during the session offer an important assurance for the liquidity of the security.
As a result, continuous auction with market maker method offers a secure environment against extreme volatility and possible manipulative trades. Market makers are provided with significant rights so that they can control the securities for which they are responsible, and therefore, it becomes more difficult to manipulate the price of the relevant security contrary to the will of the market maker.
Eligibility Criteria to Be a Market Maker
The eligibility to be a market maker is defined by two criteria set by the Board of Directors of Borsa İstanbul. Moreover, as a result of “III-37.1 Communiqué on Principles Regarding Investment Services, Activities and Ancillary Services” there come out an extra criterion related with the authorization levels regarding the operational fields of the intermediary institutions.
Altogether, the criteria to be a market maker at the Equity Market are shown on the table below:
The intermediary institutions currently serving as market makers which applied to Capital Markets Board for the new structure with regard to the mentioned Communiqué above before July 1th, 2015 and also whose applications have not been finalized yet will be subject to the current criteria.
Table: Current and New Criteria to Be Eligible for Market Making
The members, that do not meet the main criteria above but that are founder/issuer of a capital market instrument they applied for or the capital market instrument they applied for was issued by a sister company in the same conglomerate with itself that made the initial public offering of a capital instrument and have an inventory of the capital market instrument that can be used for market making activity are accepted to be eligible to act as a market maker for only those related capital market instruments by the consent of the board of directors of BIST. In the evaluation of such exceptional cases, the preference of the company whose shares are to be assigned a market maker is taken into consideration, if declared.
The members that do not meet the main criteria cannot apply to be assigned as a market maker for a capital market instrument if they do not fit in those exception rules mentioned above.
The eligibility criteria to be a market maker for each member is re-evaluated in every six months and the new status is announced. The license of market making of a member that no longer meets the criteria is revoked and its market making activity in the related capital market instruments is prevented. Nevertheless, the market making activity of the members which act in the context of the exception rules continues in the related instruments even though they do not meet or fail in time to meet the criteria.
The member gaining the eligibility for market making activity within or after the evaluation period can be reauthorized to act as a market maker. The member under this circumstance needs to make a new application to be reassigned as a market maker for the capital market instrument it would act on.