Handling Of Market Maker Program For Futures And Options
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Summary
(Reference Translation) Handling of Market Maker Program for Futures and Options Market Established May 1, 2020 Revised September 7, 2022 (Effective: September 9, 2022) Tokyo Commodity Exchange, Inc
Items Contents Notes I. Purpose ・ The purpose of this document is to establish necessary matters in relation to the market maker program, in order to ensure the smooth execution of transactions and improve liquidity in the TOCOM futures and options market by securing trading opportunities for investors through continuous quoting, etc
II. Outline 1. Definition ・ A “market maker” is a trading participant designated by TOCOM to conduct market making or provide liquidity (hereinafter referred to as “market making”)
・ “Market making” is continuous quoting of a bid and an offer by a designated ・ A trading participant shall Primary Market Maker (hereinafter referred to as “PMM”) for their designated conduct market making or contracts as specified by TOCOM. liquidity provision for its ・ “Liquidity provision” is quoting of a counter-bid or offer within a scope that a proprietary account or for a designated Liquidity Provider (hereinafter referred to as “LP”) deems appropriate final customer (in case for their designated contracts as specified by TOCOM. where a customer of a trading participant is an intermediary broker between the trading participant and the final customer, it refers to those who entrust transactions to the broker. The same applies to the following.) 1DISCLAIMER: This translation may be used for reference purposes only. This English version is not an official translation of the original Japanese document. In cases where anydifferences occur between the English version and the original Japanese version, the Japanese version shall prevail. This translation is subject to change without notice
(Reference Translation) Items Contents Notes account
・ From time to time, a final customer will be referred to as a Market Maker
・ In cases where a trading participant conducts market making for its proprietary account or for a final customer account, the market maker is only allowed to submit an application as either a PMM or LP for the same eligible product (multiple applications are not allowed)
2. Eligible ・ The following futures and options contracts and types are eligible for market Products & making, etc
Type Eligible Products PMM LP Futures Platts Dubai Crude Oil Futures ○ ○ Futures Gasoline Futures ○ ○ Futures Kerosene Futures N/A ○ Futures East Area Baseload Electricity Futures ○ N/A Futures East Area Peakload Electricity Futures ○ N/A Futures LNG (Platts JKM) Futures ○ ○ 2DISCLAIMER: This translation may be used for reference purposes only. This English version is not an official translation of the original Japanese document. In cases where anydifferences occur between the English version and the original Japanese version, the Japanese version shall prevail. This translation is subject to change without notice
(Reference Translation) Items Contents Notes 3. Designation of Market Makers, etc
(1) Recruitment of ・ TOCOM will set the application period and the eligible products for market ・ In the case where a Market making, etc. as-needed and accept applications from trading participants who maximum number of market Makers wish to participate in market making in the TOCOM futures and options market. makers is established, TOCOM will announce the maximum number and the selection method during application acceptance
(2) Application for ・ A trading participant who wishes to be designated as a market maker shall submit Designation the prescribed "Application Form for Market Maker" to TOCOM via the dedicated as Market page for market maker in Target (hereinafter referred to as "dedicated page for Maker market maker")
・ In cases where a trading participant conducts market making for a final customer account, in principle only for the first of submitting, a copy of "Written Confirmation pertaining to Market Making" attached to "Application Form for Market Maker" must be submitted with respect to each individual final customer for which such trading participant conducts market making via dedicated page for market maker
3DISCLAIMER: This translation may be used for reference purposes only. This English version is not an official translation of the original Japanese document. In cases where anydifferences occur between the English version and the original Japanese version, the Japanese version shall prevail. This translation is subject to change without notice
(Reference Translation) Items Contents Notes ・ A trading participant shall apply the Sub-Participant Code which is exclusively used ・ In principle, only one s Sub- for market making, etc. by submitting the prescribed "Application Form for Participant Code can be Measuring Sub-Participant Code" via dedicated page for market maker. A trading notified. The applicant may participant is not allowed to use said Sub-Participant Code except for transactions notify up to twenty Sub- for market making conducted for its proprietary account or for a final customer Participant Codes, where account nineteen of the twenty Sub- ・ A trading participant shall use reasonable effort to submit, if any, additional Participant Codes must be information which TOCOM deems necessary to accept the application of the Self Trade Prevention trading participant. enabled Sub-Participant Codes
(3) Designation ・ In cases where TOCOM receives an application from a trading participant, ・ Designation of market of Market TOCOM shall designate the trading participant as a market maker after reviewing maker is conducted on the Maker the application form etc. first business day of every month
(4) Cancellation of ・ In cases where TOCOM receives an application from a market maker to cancel its ・ In cases where the market Designation designation as a market maker, TOCOM shall cancel such designation. maker intends to cancel its as Market designation, in principle, the Maker, etc. market maker shall submit "Cancellation Form for Market Maker" via dedicated page for market maker at least 1 month prior to the date it wishes to lose its designation
・ In cases where TOCOM takes measures such as 4DISCLAIMER: This translation may be used for reference purposes only. This English version is not an official translation of the original Japanese document. In cases where anydifferences occur between the English version and the original Japanese version, the Japanese version shall prevail. This translation is subject to change without notice
(Reference Translation) Items Contents Notes ・ TOCOM may revoke or suspend market maker designation or take other suspension of designation, measures deemed necessary by TOCOM in the following situations: TOCOM shall make an inquiry with market maker in advance
(a) Where TOCOM deems that the market maker does not sufficiently fulfill its role ・ Paticularly, this measure will as a market maker. apply where a market maker (b) Other cases where TOCOM considers designation as a market maker violates related laws or inappropriate. regulations, or exchange rules, etc
4. PMM (1) Role of PMM ・ A PMM shall endeavor to conduct market making for the specified products in the ・ In cases where there are "Application Form for Market Maker", in accordance with requirements prescribed some requirements by TOCOM. prescribed by TOCOM for a. Requirement of the same product, a PMM Market shall endeavor to conduct Making market making in accordance with requirements a PMM selects. However, a PMM can select only one requirement
・ TOCOM prescribes the following matters as market making requirements. ・ The requirements on the left (a) Quoting time period shall be specified in (b) Range and number of contract months and issues for each eligible product Appendix 2 for each eligible 5DISCLAIMER: This translation may be used for reference purposes only. This English version is not an official translation of the original Japanese document. In cases where anydifferences occur between the English version and the original Japanese version, the Japanese version shall prevail. This translation is subject to change without notice
(Reference Translation) Items Contents Notes (Eligible issues) product for the whole day, (c) Maximum spread for bids and offers day session, and night (d) Minimum quantity for bids and offers session respectively
(e) Other matters which TOCOM deems necessary in consideration of trading conditions of the eligible product, etc
b. Easing / ・ A market maker may have market making requirements eased or be exempted Exemption of from them in the following situations: Market (a) In cases where trading in the eligible product is halted or suspended
Making (b) In cases where multiple market makers of the same eligible product declare ・ In cases where the number Requirements to TOCOM that they are unable to provide quotes, and TOCOM deems it of market makers of the reasonable. same eligible product is only (c) Other cases deemed necessary by TOCOM. one, then the declaration from such one market is applicable
c. Measures for ・ A PMM may temporarily suspend market making due to market conditions, trading Failure to situation, system failures, etc
Fulfill Market ・ If a PMM is unable to fulfill its role, TOCOM will not impose a direct penalty on such Making PMM. However, the fee discount rate which is described in item “4. (2)" may be Requirements lowered in such conditions, and if a PMM's performance rate is significantly low and TOCOM deems that it will not recover in near future, TOCOM may cancel its designation as a PMM
(2) Incentives for ・ TOCOM shall provide PMMs with some incentives, such as discounts on trading PMMs fees and bonuses, etc., in consideration for market making
a. Trading fee ・ TOCOM will discount the trading fees of PMMs in accordance with their average ・ For details on the method of discount monthly performance rate for market making specified by TOCOM. measurement of the average monthly 6DISCLAIMER: This translation may be used for reference purposes only. This English version is not an official translation of the original Japanese document. In cases where anydifferences occur between the English version and the original Japanese version, the Japanese version shall prevail. This translation is subject to change without notice
(Reference Translation) Items Contents Notes performance rate, please refer to Appendix 1. (Same ・ A PMM will be eligible for discounted trading fees for transactions executed through as Item 4. (2) b.) the Sub-Participant Code, which it registered with TOCOM in advance as the ・ The subject of fee discount dedicated Sub-Participant Code used for calculating transactions of such PMM. and discount on PMM trading fee is as shown in Appendix 2. (Same as Item 4. (2) b.) ・ TOCOM will announce the average performance rates as of mid-month and month- end to PMMs. (Same as Item 4. (2) b.) b. Payment of ・ TOCOM will pay the fixed amount specified by itself to a PMM based on the Fixed Amount average monthly performance rate for the market making by the PMM
c. Allowance of ・ TOCOM may make allowance to criteria for receiving incentives for eligible Criteria for products as described in a. and b. in above under the market conditions that Receiving TOCOM specifies
Incentives 7DISCLAIMER: This translation may be used for reference purposes only. This English version is not an official translation of the original Japanese document. In cases where anydifferences occur between the English version and the original Japanese version, the Japanese version shall prevail. This translation is subject to change without notice
(Reference Translation) Items Contents Notes d. Use of ・ TOCOM will allow a PMM to use more than the upper limit of User IDs, set per ・ Type and number of Additional User Final Investor (meaning the proprietary trading division or final customer of the additional use of User IDs ID trading participant), in accordance with the number of eligible products for which that TOCOM allows shall be the PMM conducts market making, etc. specified in Appendix 4
・ In cases where TOCOM deems that the market maker does not sufficiently fulfill its role as a market maker, TOCOM may suspend the additional use of User IDs
5. LP (1) Role of LP ・ LP shall conduct matching quotes within the scope the LP deems appropriate for ・ Market making eligible products. requirements like those ・ TOCOM shall measure the monthly trading volumes based on trades executed required of PMMs shall not through the Sub-Participant Code, which it registered with TOCOM in advance as be established for LPs
the dedicated Sub-Participant Code used for calculating transactions of such LP
(2) Incentives for ・ TOCOM will discount trading fees of LPs in accordance with their monthly trading ・ The discount on trading fees LP volume for eligible products. for LPs is as shown in the ・ The eligible transactions for discount on trading fees shall be the transactions Appendix 3
described in Item “5. (1)”
8DISCLAIMER: This translation may be used for reference purposes only. This English version is not an official translation of the original Japanese document. In cases where anydifferences occur between the English version and the original Japanese version, the Japanese version shall prevail. This translation is subject to change without notice
(Reference Translation) Items Contents Notes 6. Other ・ A market maker is required to notify TOCOM of contact person information according to the predetermined "Notification Form pertaining to MM's Contact Information" via dedicated page for market maker and must promptly notify TOCOM if its contact person will be changed
・ If there is a change in the role of market makers and incentives, TOCOM will announce such changes at least one (1) month in advance. However, such a notification shall not apply to minor changes, etc
9DISCLAIMER: This translation may be used for reference purposes only. This English version is not an official translation of the original Japanese document. In cases where anydifferences occur between the English version and the original Japanese version, the Japanese version shall prevail. This translation is subject to change without notice
(Reference Translation) Appendix 1 Calculation Method of Performance Rate for Market Making Calculation Method of Performance Rate ・ TOCOM shall calculate an average monthly performance rate for the whole day (from start of day session to the end of night session), day session, and night session, respectively, based on the daily performance rate which is measured for each period
(1) Daily performance rate for the whole day. (Same as the day session and night session.) = Time period of fulfilling market making requirements (*) / Quoting time period (*) Requirements for market making mean the conditions specified by TOCOM for each eligible product. (Please refer to Appendix 2.) (2) Average of monthly performance rate for the whole day. (Same as the day session and night session.) = Sum of daily performance rates / Number of eligible days for market making (*) When average of monthly performance rate (%) includes a figure of a decimal point or less, it shall be rounded off
10DISCLAIMER: This translation may be used for reference purposes only. This English version is not an official translation of the original Japanese document. In cases where anydifferences occur between the English version and the original Japanese version, the Japanese version shall prevail. This translation is subject to change without notice
(Reference Translation) Appendix 2 Market Making Requirements and Incentives for PMM Items Oil Eligible Products Platts Dubai Crude Oil futures Gasoline futures Type of requirements Type 1 Type 1 Quoting Time Whole day (Day and Night sessions) Period Requirements Eligible Issues 5th and 6th Contract Months 5th 8 ticks (JPY 80) 5th 9 ticks (JPY 90) Maximum Spread 6th 7 ticks (JPY 70) 6th 8 ticks (JPY 80) Minimum Quantity 5 contracts 4 contracts Monthly average performance rate of 40% or more. Monthly average performance rate of 60% or more
Criteria for Note: LP incentives, described in appendix 3, will apply even if Note: LP incentives, described in appendix 3, will apply even if Receiving the monthly average performance rate does not reach the above the monthly average performance rate does not reach the above Incentives criteria. criteria
Incentives Transactions for the eligible product (Platts Dubai Crude Oil futures) Performance rate : Discount Discount on Transactions for the eligible product (Gasoline futures) or more less than Trading Fee JPY 20 per contract 40% 60% : JPY 11 per contract (*1) Note: Only applied to transactions in the auction market
60% : JPY 22 per contract Note: Only applied to transactions in the auction market
(*1) Regarding Platts Dubai Crude Oil Futures, in addition to the discount on trading fee described above, incentives equivalent to usage fee of OUCH user ID(s) that each PMM uses shall be provided up to 2 IDs for 60% or more performance rate (JPY 50,000 per month per OUCH user ID)
11DISCLAIMER: This translation may be used for reference purposes only. This English version is not an official translation of the original Japanese document. In cases where anydifferences occur between the English version and the original Japanese version, the Japanese version shall prevail. This translation is subject to change without notice
(Reference Translation) Items Electricity Eligible Products East Area Baseload Electricity futures East Area Peakload Electricity futures Type of requirements Type 1 Type 1 Quoting Time Day session Day session Period Requirements Eligible Issues 2nd Contract Month 2nd Contract Month Determined based on bid price level Determined based on bid price level Maximum Spread (Refer to appended table 1-1) (Refer to appended table 1-1) Minimum Quantity 1 contract 1 contract Criteria for Receiving Monthly average performance rate of 50% or more. Monthly average performance rate of 50% or more
Incentives Incentives Sum of a. and b. Sum of a. and b
a. Transactions for the eligible product a. Transactions for the eligible product Discount on JPY 146 per contract (No charge) JPY 49 per contract (No charge) Trading Fee Note: Only applied to transactions in the auction market. Note: Only applied to transactions in the auction market
b. Fixed Amount JPY 200,000 per month b. Fixed Amount JPY 200,000 per month 12DISCLAIMER: This translation may be used for reference purposes only. This English version is not an official translation of the original Japanese document. In cases where anydifferences occur between the English version and the original Japanese version, the Japanese version shall prevail. This translation is subject to change without notice
(a) Where OSE deems that the market maker does not sufficiently fulfill its role ・ In cases where the market maker intends to cancel its designation, in principle, the market maker shall submit …
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Frequently Asked Questions
What is the role of market makers in options trading?
Market makers basically make sure that there is both depth and liquidity in the options exchanges. In their absence, there would be significantly less transactions carried out and it would be much harder to buy and sell options. There would also be less options in the way of different contracts available in the market.
How do market makers operate?
Secondly, and this is relevant to how market makers operate, they are priced on the exchanges with a bid price and an ask price. Anyone looking to buy options contracts would pay the ask price of those contracts, while anyone selling or writing contracts would receive the bid price.
Can market makers buy and sell options simultaneously?
Of course, it will not always be possible for a market maker to buy and sell contracts simultaneously – otherwise there would be little need for them in the first place. So they are still potentially exposed to the risk of price movements and time decay of the options they own.
What is the market maker protection tool?
The Market Maker protection tool is aimed at preventing too many simultaneous trade executions on quotes provided by a Market Maker or Liquidity Provider, offering additional control of the market risk.