Has the introduction of the ASX’s ETF Market Making Scheme improved efficiency and increased trading activity? A new study answers these questions.
Jag Dosanjh PhD candidate, U. Sydney Prof. David Michayluk U. of Technology Sydney Dr Elvis Jarnecic Senior Lecturer, U. Sydney Keywords: Capital markets, market designAn exchange-traded fund (ETF) is composed of a group of stocks, bonds or other investments and can be traded on stock exchanges (like Shares) where the price of the ETF constantly fluctuates. Most ETFs reflect an index or investment sector and the price of a particular ETF is usually very similar to the net asset value of its underlying assets. Most but not all ETF’s have a market maker to provide liquidity and trading opportunity. In Europe and the U.S. ETFs are very popular with investors as they allow them the benefits of diversification at low cost, are easy and convenient to trade and may have tax advantages. In Australia the ETF market is growing rapidly and on 1st August 2010 the ASX introduced its ETF Market Making Scheme to further enhance the ETF market. A study by Jagjeev Dosanjh, Professor David Michayluk and Dr Elvis Jarnecic looks at the im- pact of this scheme and provides empirical evidence that suggests the scheme has improved the efficiency of the ETF market. The study also examines market maker profitability during the scheme and concludes that there is no significant change in profits for market makers which imply that the benefits of improved efficiency have come at no extra cost to investors. Jag’s research uses publically available information to examine The ETF market for a period of 12 months before and 12 months after the introduction of the Scheme in August 2010. The scheme allows market makers to receive monthly rebates if maxi- mum spread and minimum quantity requirements are met. To analyse efficiency the study focuses on liquidity, specifically the bid-ask spread and depth. The research finds that since the introduction of the scheme, changes have been economically significant with the bid-ask spread declining as much as 46% and depth rising as much as 57%. The decline in bid-ask spread and the rise in depth signifies improvements in market efficiency. The second part of the study looks at market maker trades to see how they derive their income and whether they are suppliers of liquidity. The research provides evidence suggesting that market makers are suppliers of liquidity and that their profits have neither declined nor risen during the scheme. These unchanged profits indicate that costs have not risen for investors. Jag’s research concludes that recently introduced changes to the ETF market mak- er scheme have positively contributed to market quality through increased trading activity and ETF market efficiency.”
Author(s): Jag Dosanjh, David Michayluk, Elvis Jarnecic