CBOE's European exchange launch came with a flood of new data, giving us a chance to review a HUGE and under-followed part of exchange strategy. Class is in session! MARKET MAKER PROGRAMS 101:
Show this thread
Why do MM programs matter? An exchange's core value add is 𝙡𝙞𝙦𝙪𝙞𝙙𝙞𝙩𝙮. No liquidity = no trading = no revenue. Exchanges provide this liquidity by incentivizing MMs to quote prices & trade with other customers. They use MM programs to do this. They matter A TON.
-
-
A few weeks ago CBOE released two key European MM program documents ahead of launch, AKA the juicy strategy stuff. you can find these here: https://www.cboe.com/europe/derivatives/support/market_making/ …pic.twitter.com/UwDVxYxwfu
Show this thread -
Let's look at the 2nd program in this list - the Futures Liquidity Provision Program. This document outlines the rules & parameters market makers must follow when interacting with CBOE's European futures products.pic.twitter.com/RFpfHASAak
Show this thread -
Most MM programs can be split into two halves: Obligations - what MMs must do when in the program Rewards - what MMs get for following program rules CBOE's program is no different.
Show this thread -
OBLIGATIONS MMs must quote prices in certain products at certain times of the day with enough size & quality to support liquid trading. CBOE lays out a scoring system to grade each of these parameters in a specific, detailed way:pic.twitter.com/KR080PtT2q
Show this thread -
REWARDS If MMs follow all program rules & get high performance scores they're eligible for sizable rewards. In CBOE's case, these rewards are: - Deep trading discounts - A monthly cash prize pool - Monthly revenue shares with CBOE itselfpic.twitter.com/KfC2DCLQ84
Show this thread -
From the exchange's perspective, these MM programs are a game theory exercise. We want MMs to do XYZ for the best markets possible; how do we do that? Giving firms ways to compete for large sums of $ normally gets the job done.
Show this thread -
From the MMs perspective, it's the same game theory challenge as the exchange, just flipped. Exchange incentives may cause them to trade a losing strategy just to get the rewards & come out profitable at the end of the month.
Show this thread -
If we see an exchange make quick changes to its MM program after a product launch, it could mean the program isn't working as intended, or they got feedback from the market & found a better strategy. Big changes in volume & revenue could follow.
Show this thread -
I find MM program strategy extremely fascinating, important and under-followed. If you found this interesting consider checking out my newsletter where I write about things like MM programs & other exchange topics:https://frontmonth.substack.com/
Show this thread
End of conversation
New conversation -
-
-
I would be a little careful using "liquidity" and "trading volume" interchangeably here, as i think the difference is relevant in this case (it isn't always important) Crypto bros probably don't realize yet (but exchanges do)
Thanks. Twitter will use this to make your timeline better. UndoUndo
-
Loading seems to be taking a while.
Twitter may be over capacity or experiencing a momentary hiccup. Try again or visit Twitter Status for more information.