Market making, at its core, is a simple exchange where the market maker gives immediate liquidity and takes the bid/ask spread in return. This is set to become much more complicated in MiFID II as ESMA is mandated to introduce market making obligations.

Under ESMA’s latest draft investment firms using algorithmic trading for market making for at least 30% of the available trading hours will be required to enter a market making arrangement with the venue which includes a quoting obligation for 50% of the trading hours. Most importantly, this market making obligation will apply to allinvestment firms and although EMSA has indicated that they would only consider direct exchange members, the relevant RTS 15 draft is still unclear on that point. It remains to be seen whether this new barrier to entry will lead to new innovations or better liquidity. In any case, it’s ironic that these obligations on liquidity provision are being put forward by the very same European Commission that has just kicked-off its new Capital Markets Union program to remove barriers to cross-border investment.