Market Making Mechanisms
In coordination with the development of a market-making system and to improve market liquidity, the current trading system has established quote request and quote functions. A “quote request” refers to a request for a price quote made to a market maker by a trader with an interest in trading in the market and acting through its futures commission merchant (FCM). A “quote” is a price quote provided by a market maker on receipt of the information that a trader has a trading-related need for the price and has requested a quote.
I. Quote Requests
Traders with a trading need may ask an FCM’s associated person to initiate a quote request via the FCM’s computer system, requesting that a market maker quote a price for a given contract month or series (options). When an FCM executes a quote request, that request includes the product code and contract month or series, but need not specify the quantity or whether a buy or sell price is requested. After the TAIFEX computer system receives the quote request, it immediately transmits the quote request information to every market maker responsible for making a market for that product, and transmits the information it receives in response to the FCM that initiated the quote request on behalf of the trader. TAIFEX simultaneously discloses the quote request information to the market.
Quote requests may be made during trading hours. The system does not accept quote requests prior to market open because order data may not be published and quote data may not be disclosed at that time.
After the quote request information is transmitted to market makers, all market makers responsible for making a market for that product are obliged to provide a buy quote and a sell quote for the product within 20 seconds. If the trader making the quote request thinks the price offered by a quoter is acceptable, the trader may immediately place a consignment order, which order will undergo call-market matching. The prices reported by the market makers must conform to TAIFEX’s bid-ask spread requirements. The reported quantity (e.g., minimum reported quantity) must also conform to the relevant rules and regulations.
Each quote is valid only for a period of time (currently 20 seconds). If a trade is not executed, it is removed from the order book. However, market makers may choose to designate a quote “rest of day,” in which case the quote will remain valid until executed, the market maker cancels the quote, a new quote is entered, or market close. A quoter may have only one valid quote in the system for a given contract month or options series. A new quote therefore cancels and replaces the previous quote. The updated quote sheet is entered into the order book in chronological sequence, and the time is based on the time of the execution of the update.
Because the quotes market makers enter into the system are for confirmed orders and not simply reference quotes provided to the market, once quotation orders are placed in the system, they are entered into the ordinary order book for matching. In addition to publishing the quote data just as it is published for an ordinary order (in futures trading, the five prices immediately above and below are published), the system also publishes the best buy and sell quotes on the market and the quantity of each as reference for traders.
Market makers may offer quotes during the trading session. Because no order information is published prior to market open, to avoid publishing the order information of only particular persons (market makers), which would affect the market, the system does not accept quotes prior to market open.