Oversight practices must evolve to meet the shifting nature of equity markets, suggests a new report from the International Organization of Securities Commissions (IOSCO).
The global regulators group published a report examining the shifting liquidity environment in global equity markets, which finds that in many markets the reliance on traditional market makers to ensure adequate liquidity has been on the decline.
In their place, the incentive programs used by trading venues to attract order flow are now “crucial” to driving the liquidity needed to ensure market efficiency, the report noted.
Among other things, these programs include practices such as fee rebates or reductions for providing liquidity, payment for order flow, trading priority, and other sorts of advantages.
This shift away from traditional market making “may present both benefits and challenges, especially where the efficient functioning of equity markets relies on the participation of entities that have no obligation to provide liquidity,” IOSCO said.
As a result, the report recommended that regulators consider these shifts as part of their oversight to ensure that “evolving markets continue to function effectively.”
The report sets out key considerations for regulators in their oversight of liquidity provisions, including registration requirements, market maker obligations, balancing the benefits and obligations of liquidity incentive arrangements and mandating disclosure.
IOSCO noted that its research on the subject was carried out prior to the emergence of the Covid-19 outbreak. It is now considering possible future work on the impact of the pandemic on market making and liquidity in equity markets.