A market maker is a firm that will buy and sell a particular security on a regular and continuous basis by posting or executing orders at a publicly quoted price.
Article 48(2) and (3) MiFID II
2. Member States shall require a regulated market to have in place:
(a) written agreements with all investment firms pursuing a market making strategy on the regulated market;
(b) schemes to ensure that a sufficient number of investment firms participate in such agreements which require them to post firm quotes at competitive prices with the result of providing liquidity to the market on a regular and predictable basis, where such a requirement is appropriate to the nature and scale of the trading on that regulated market.
3. The written agreement referred to in paragraph 2 shall at least specify:
(a) the obligations of the investment firm in relation to the provision of liquidity and where applicable any other obligation arising from participation in the scheme referred to in paragraph 2(b);
(b) any incentives in terms of rebates or otherwise offered by the regulated market to an investment firm so as to provide liquidity to the market on a regular and predictable basis and, where applicable, any other rights accruing to the investment firm as a result of participation in the scheme referred to in paragraph 2(b).
The regulated market shall monitor and enforce compliance by investment firms with the requirements of such binding written agreements. The regulated market shall inform the competent authority about the content of the binding written agreement and shall, upon request, provide all further information to the competent authority necessary to enable the competent authority to satisfy itself of compliance by the regulated market with this paragraph.
They ensure that an investor can always trade the particular security and in doing so enhance liquidity in that security Commission Staff Working Document Impact Assessment Accompanying the document Commission Delegated Regulation supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions {C(2016) 2860 final} {SWD(2016) 156 final}, 18.5.2016, SWD(2016) 157 final, p. 62).
Market maker in the MiFID II meaning denotes a person who holds himself out on the financial markets on a continuous basis as being willing to deal on own account by buying and selling financial instruments against his proprietary capital at prices defined by him (Article 4(1)(7) MiFID II).
In the FCA's view (Financial Conduct Authority, Markets in Financial Instruments Directive II Implementation – Consultation Paper I (CP15/43), December 2015, CP15/43, p. 206) anyone who satisfies the definition will be a market maker for the purposes of MiFID, even if they are not under an obligation to make quotes.
However, in practice, a market maker is likely to be someone who is a participant in a market making scheme under Articles 48(2) and 48(3) of MiFID or the corresponding requirements under Article 18.
It may also include a firm engaging in algorithmic trading that is pursuing a market making strategy under Article 17(4) of MiFID.
Commission Delegated Regulation (EU) 2017/578 of 13.6.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards specifying the requirements on market making agreements and schemes specifies market making agreements and market making schemes.
According to the said Commission Delegated Regulation of 13.6.2016 (Article 7(1)) trading venues are required to publish on their website the terms of market making schemes, the names of the firms that have signed market making agreements under each of those schemes and the financial instruments covered by those agreements.
Dealing on own account exemption under Article 2(1)(d) of MiFID II does not apply to market makers.
Article 17(3) and (4) MiFID II
3. An investment firm that engages in algorithmic trading to pursue a market making strategy shall, taking into account the liquidity, scale and nature of the specific market and the characteristics of the instrument traded:
(a) carry out this market making continuously during a specified proportion of the trading venue's trading hours, except under exceptional circumstances, with the result of providing liquidity on a regular and predictable basis to the trading venue;
(b) enter into a binding written agreement with the trading venue which shall at least specify the obligations of the investment firmin accordance with point (a); and
(c) have in place effective systems and controls to ensure that it fulfils its obligations under the agreement referred to in point (b) at all times.
4. For the purposes of this Article and of Article 48 of this Directive, an investment firm that engages in algorithmic trading shall be considered to be pursuing a market making strategy when, as a member or participant of one or more trading venues, its strategy, when dealing on own account, involves posting firm, simultaneous two-way quotes of comparable size and at competitive prices relating to one or more financial instruments on a single trading venue or across different trading venues, with the result of providing liquidity on a regular and frequent basis to the overall market.
Content and form of market making agreements
The necessary content and form of a market making agreement is specified in Article 48(2) and (3) and Article 17(3) and (4) of the MiFID II (see boxes), as well as the MiFID II secondary legislation.
Pursuant to MiFID II market making agreement must be concluded in writing.
The most prominent requirements to be included in the market making agreement arise from the said Article 17(3)(a) and (b) of the MiFID II. Pursuant to the said provisions market making agreement must at least specify:
(a) the obligations of the investment firm in relation to the provision of liquidity and where applicable any other obligation arising from participation in the pertinent scheme;
(b) any incentives in terms of rebates or otherwise offered by the regulated market to an investment firm so as to provide liquidity to the market on a regular and predictable basis and, where applicable, any other rights accruing to the investment firm as a result of participation in the respective scheme.
Pursuant to the said Commission Delegated Regulation of 13.6.2016 market making agreement must include at least:
(a) the financial instrument or instruments covered by the agreement;
(b) the minimum obligations to be met by the investment firm in terms of presence, size and spread that shall require at least posting firm, simultaneous two-way quotes of comparable size and competitive prices in at least one financial instrument on the trading venue for at least 50% of daily trading hours of during which continuous trading takes place excluding opening and closing auctions and calculated for each trading day;
(c) where appropriate, the terms of the applicable market making scheme;
(d) the obligations of the investment firm in relation to the resumption of trading after volatility interruptions;
(e) the surveillance, compliance and audit obligations of the investment firm enabling it to monitor its market making activity;
(f) the obligation to flag firm quotes submitted to the trading venue under the market making agreement in order to distinguish those quotes from other order flows;
(g) the obligation to maintain records of firm quotes and transactions relating to the market making activities of the investment firm, which are clearly distinguished from other trading activities and to make those records available to the trading venue and the competent authority upon request.
Questions and Answers on MiFID II and MiFIR market structures topics, 31 January 2017, ESMA70-872942901-38
Question 4 [Last update: 31/01/2017]
Do the references to 'market makers' in MiFID II Article 2(1)(d)(i) and Article 2(1)(j) cover those market makers as defined under MiFID II Article 4(1)(7) or those firms engaged in a market making agreement according to Article 17(4) of MiFID II?
Answer 4
The reference to market makers' in MiFID II Article 2(1)(d)(i) and Article 2(1)(j) covers both firms engaged in a market making agreement according to Article 17(4) of MiFID II and other market makers covered by Article 4(1)(7) of MiFID II.
Questions and Answers on MiFID II and MiFIR market structures topics, 4 October 2018, ESMA70-872942901-38
Question 9 [Last update: 04/10/2018]
Would any payment received from a trading venue in respect of market making activity or liquidity provision require the conclusion of a market making agreement?
Answer 9
No. The purpose of the requirement in Article 48 is to ensure that any party receiving financial incentives, such as rebates, to provide liquidity on a trading venue is subject to appropriate market making obligations, but these need not always take the form of a market making agreement as specified in RTS 8.
A “rebate” in this context should be read to include negative fees or direct payments to the provider of liquidity as well as to refunds or discounts on fees due from the provider of liquidity to the trading venue. It follows from this interpretation that “maker/taker schemes”, whereby financial incentives are provided to market participants to conclude trades by posting passive orders, are not only allowed for firms required to enter into in a market making agreement in accordance with Article 17(4) of MiFID II but also for other market makers covered by Article 4(1)(7) of MiFID II provided that these are subject to the appropriate market making obligations.
Questions and Answers on MiFID II and MiFIR investor protection and intermediaries topics, 18 December 2017, ESMA35-43-349
Question 20 [Last update: 28 March 2019]
What is the scope of the RTS 27 reporting requirements for market makers and other liquidity providers?
Answer 20
RTS 27 requires market makers and other liquidity providers to report on transactions in financial instruments not subject to the trading obligation. This includes transactions (i) that are conducted on an OTC basis or (ii) pursuant to the pre-trade transparency waivers in Articles 4 and 9 of MiFIR (except orders held in an order management facility of a trading venue pending disclosure). In the case of the latter, both trading venues and market makers and other liquidity providers will account for these transactions in their RTS 27 reports. This is because the scope of the RTS 27 reporting requirements for trading venues covers all transactions in financial instruments, including those that are subject to the pre-trade transparency waivers (Recital 6 of RTS 27).
The obligations set out in the previous paragraph require both (i) market makers and other liquidity providers (that facilitate the trade which is finally concluded on the trading venue) as well as (ii) trading venues (where the trade is finally concluded) to provide RTS 27 reporting. This is to ensure the provision of execution quality data in relation to both OTC trades as well as transactions pursuant to the pre-trade transparency waivers that are carried out on-book and off-book, but under the rules of the venue. This information allows to identify the quality of the liquidity provided by market makers and other liquidity providers.
For trading venues, the requirements under Article 7(2)(k) and (l) of RTS 27 identify among the reported information, the number and value of transactions that are subject to a pre-trade transparency waiver (excluding orders held in an order management facility). This approach ensures that the RTS 27 reports distinguish between (i) liquidity that is subject to a pre-trade transparency waiver and (ii) liquidity subject to pre-trade transparency requirements (and is truly visible).
Question 20 [Last update: 28 March 2019]
What is the scope of the RTS 27 reporting requirements for market makers and other liquidity providers?
Answer 20
RTS 27 requires market makers and other liquidity providers to report on transactions in financial instruments not subject to the trading obligation. This includes transactions (i) that are conducted on an OTC basis or (ii) pursuant to the pre-trade transparency waivers in Articles 4 and 9 of MiFIR (except orders held in an order management facility of a trading venue pending disclosure). In the case of the latter, both trading venues and market makers and other liquidity providers will account for these transactions in their RTS 27 reports. This is because the scope of the RTS 27 reporting requirements for trading venues covers all transactions in financial instruments, including those that are subject to the pre-trade transparency waivers (Recital 6 of RTS 27).
The obligations set out in the previous paragraph require both (i) market makers and other liquidity providers (that facilitate the trade which is finally concluded on the trading venue) as well as (ii) trading venues (where the trade is finally concluded) to provide RTS 27 reporting. This is to ensure the provision of execution quality data in relation to both OTC trades as well as transactions pursuant to the pre-trade transparency waivers that are carried out on-book and off-book, but under the rules of the venue. This information allows to identify the quality of the liquidity provided by market makers and other liquidity providers.
For trading venues, the requirements under Article 7(2)(k) and (l) of RTS 27 identify among the reported information, the number and value of transactions that are subject to a pre-trade transparency waiver (excluding orders held in an order management facility). This approach ensures that the RTS 27 reports distinguish between (i) liquidity that is subject to a pre-trade transparency waiver and (ii) liquidity subject to pre-trade transparency requirements (and is truly visible).
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Questions and Answers on MiFID II and MiFIR market structures topics, ESMA70-872942901-38
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