The Korea Exchange has changed its operational guidelines, which previously only allowed for the reallocation of market makers when contracts with existing derivatives market makers were terminated, to now include immediate reassignment of market makers during temporary suspensions as well. This is intended to reduce liquidity gaps. Following the specification of the selection criteria for derivatives market makers this month, the Exchange has also created new guidelines regarding the basis for these suspensions.
According to the financial investment industry on the 28th, the Exchange partially amended its 'Equity and Index Derivatives Market Maker Operations Guidelines' and 'Interest Rate, Currency, and General Derivatives Market Maker Operations Guidelines' on the 22nd and implemented them from the 23rd. Market makers are a system where designated securities firms by the Exchange submit buy and sell quotes for products and items with low transaction volumes to help facilitate smooth trading.
Specifically, the new provision states that in the case of termination of market maker contracts under the two operational guidelines, 'the Exchange can suspend the submission of market maker quotes if, for market management purposes, it needs to halt the contract in whole or in part and may establish a period to do so.' Additionally, for equity and index derivatives, the criteria for reassignment now include not only the termination of contracts but also situations of contract suspension.
Until now, when a market maker contract was terminated, the associated product often remained unmonitored without a market maker for some time. This implies a greater likelihood of significant gaps in buy and sell quotes. However, with the revised guidelines, the reassignment of new market makers can now happen immediately from the point of contract suspension.
The Exchange explained that it can enhance investor transaction convenience and market stability through the swift resumption of liquidity provision. An Exchange official noted, '(We had) covered this only in contracts with market makers, but this time we aim to clearly set the standards in guidelines in order to select capable market makers in the future.'
On the 9th, the Exchange also systematized the evaluation criteria and scoring method for the new market maker selection criteria for equity and index derivatives. The quantitative assessment period is defined as the two years prior to the recruitment announcement date, where scores are allocated based on trading and market-making performance, as well as the size and expertise of the participating personnel.
As the short selling restrictions that had been applied to securities firms' derivatives market makers since June were lifted, concerns over unfair trading and the effectiveness of market makers have been raised again, leading the Exchange to enhance the objectivity and management framework for selecting market makers.
According to the Exchange, as of this day, 20 securities firms are taking on the role of market makers for 758 related derivatives, including DB Securities (51), MERITZ Securities (46), Korea Investment & Securities (45), and KB and Hanwha Investment & Securities (44).
However, there are evaluations that participation from securities firms willing to become market makers may dwindle due to the strengthened criteria without additional incentives. In response, an Exchange official stated, 'The reassignment of market-making products is carried out after comprehensively considering the liquidity and trading status of the products, the contracts, and the opinions of the market makers. We will pursue amendments again if any issues arise that we believe necessitate improvement of the system.'