IOSCO Considers the Role of Liquidity Providers in the Equity Securities Market

IOSCO reviewed changes in the way that liquidity is provided in the secondary markets for equity securities, in light of "the introduction of new technology or the enhanced application of existing technology."

In its final report, IOSCO found that new market participants providing liquidity have replaced exchange specialists or other market makers. IOSCO stated that there are benefits and challenges resulting from these new liquidity providers, as they may be subject to fewer or different obligations than those of traditional market makers. IOSCO based its observations on the survey responses of regulatory authorities, trading venues, and market intermediaries.

IOSCO identified common themes with respect to the approaches taken to market making and liquidity. In order to "promote the provision of liquidity, strengthen investor confidence and foster fair and efficient markets," IOSCO urged regulators to consider:

  • establishing parameters for which firms can act as market makers and making clear their obligations;

  • balancing the responsibilities and benefits of market making;

  • monitoring market makers for compliance; and

  • providing transparency as to the obligations and incentives available to liquidity providers.

IOSCO noted that the findings in its report are based on information gathered prior to the COVID-19 pandemic.

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