The London Stock Exchange (LSE) is seeking market feedback on plans to launch an integrated electronic market making scheme on its International Order Book (IOB) for trading foreign depository receipts.
As early as 2 April, the LSE wants to introduce the market making programme to replace its existing named order functionality.
Named orders allow any IOB trading participant to enter a single-sided bid or offer, with the order displaying the member’s name against a specifically priced and sized order of its choosing. According to the LSE, named orders comprised just 0.1% of IOB order flow in January 2012.
In a consultation document, the LSE said it had been approached by a number of member firms wanting to provide market making services in one or more IOB securities. The new scheme would bring market making on the IOB in line with SETS, the LSE’s order book for UK stocks.
Registered market makers in IOB instruments would be required to offer a two-sided electronically executable quote in at least exchange market size for 90% of the continuous trading period and throughout the entire closing auction phase.
Market makers would also be subject to different obligations, depending on whether the IOB security in which they provide liquidity is cleared through a central counterparty (CCP). Market makers for clearable IOB securities would be subject to quoting a maximum spread of 5%, compared to 10% for non-clearable instruments. The UK exchange began offering clearing services for the 50 most liquid IOB stocks in March 2009 through Anglo-French CCP LCH.Clearnet.
If implemented, the exchange plans to review the market making programme after its first three months of operation.
According to LSE data, US$16.3 billion in IOB securities was traded in January 2012, down from US$22.2 billion in January 2011. Of the top 20 stocks traded across the LSE in the second half of 2011, five – Gazprom, Lukoil, Rosneft, Norilsk and Sberbank – were IOB depository receipts.
The deadline for responding to the consultation paper is 9 March.