Market making activity

Report notes

1. Market making occurs in four products:

   • Benmore base load quarterly futures
   • Otahuhu base load quarterly futures
   • Benmore base load monthly futures
   • Otahuhu base load monthly futures.

2. The market making session runs from 3:30pm to 4:00pm New Zealand time during each trading session and a market maker is required to make markets for at least 25 minutes of each market making session unless they opt out (see note 4).

3. A market maker provides two-way quotes for each market-made product and those quotes must comply with maximum spread and minimum quantity criteria. Each quote is to have two sides – a bid quote, or an offer to buy, and an ask quote, or an offer to sell.
   For all four market-made products, the maximum spread is the greater of 3% or NZ$2.00. Prior to 13 January 2020, the maximum spread was the greater of 5% or NZ$2.00.
   For the quarterly base load products, the minimum quantity is 30 contracts in all quarters, per side. Prior to 13 January 2020, it was only 10 contracts in the spot and spot plus one quarters, i.e. contracts maturing in the current quarter and the next quarter, and 30 contracts for all other quarters.
   For the monthly base load products, the minimum quantity is 30 contracts per side in the front six months, i.e. contracts maturing in the current month and the following five months. Prior to 13 January 2020, the minimum was only 10 contracts per side.
   For each market-made product, the minimum quantity requirements are reduced by the number of contracts a market maker actually trades during that market making session.

4. The report shows the number of market making sessions where market makers met the specified criteria of their agreement with ASX (outlined in note 3 above). The market making agreements do not require that market makers meet the criteria in every market making session. They may opt out for no specific reason in up to five sessions per month. Market makers are also exempt in ‘permitted circumstances’. A permitted circumstance is defined in the market maker incentive agreement and covers a range of situations such as the ASX trading platform being unavailable for any reason, e.g. an earthquake severs the internet connection, or where market making may result in the market maker breaching any applicable law. The market making activity report makes no distinction between the various reasons why a market maker may not have met the specified criteria in a market making session.

   • On 27 March 2020, ASX introduced additional flexibility for market makers during the period that the Covid-19 level 4 restrictions are in place. The number of exemptions allowed under the voluntary arrangement has been increased from five to seven days per calendar month. These flexibility arrangements will end after three months or at the end of the alert level 4 in Wellington and Auckland, whichever comes first.
   • New Zealand moved from alert Level 4 to alert level 3 at 11.59pm on Monday April 27. The period during which the flexibility provisions apply was extended so that they continued during alert level 3.
   • The flexibility provisions ended when New Zealand moved to alert level 2 at 11:59pm on Wednesday 13 May.

5. ASX trading sessions occur on business days. Some business days are designated as market making holidays. There was no requirement for market makers to be active on 24, 27, 30, or 31 December 2019; or 20 January 2020 (Wellington Anniversary Day); or 27 January 2020 (Auckland Anniversary Day).

6. The market making activity data that underlies this report is unavailable for download.

7. The Authority is unable to reveal the precise terms and conditions of the market maker incentive agreements, beyond that which is presented in these notes.

8. The Authority introduced an urgent Code amendment to insert a dormant, mandatory market-making scheme into the Code, effective from 3 February 2020. The mandatory scheme will be triggered into effect for one or more market makers if the terms of the voluntary market-making agreements are not met. Being an urgent Code amendment, it will expire on 3 November 2020, by which time the Authority expects to have implemented an enduring solution for market making.