A Guide for Market Makers on ETFplus - Borsa Italiana...Market Makers will be monitored continuously...

A Guide for Market Makers on ETFplus

Effective 6th May 2019

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1.0 Introduction 3

1.1 Scope 3 1.2 Summary 3 1.3 Registration Process 6 1.4 Monitoring and Reporting 7

2.0 Specialist 7

2.1 Benefits to being a Specialist 7 2.2 Requirements 8 2.3 Obligations 8 2.4 IT set up 10 2.5 How to become a Specialist 11 2.6 Resignation of status 11

3.0 Advanced Liquidity Provider (AdLP) 11

3.1 Benefits to being an AdLP 12 3.2 Requirements 12 3.3 Obligations 12 3.4 IT set up 14 3.5 How to become an AdLP 15 3.6 Resignation of status 15

4.0 MiFID II Market Maker 15

4.1 Benefits to being a MiFID II Market Maker 15 4.2 Requirements 16 4.3 Obligations 16 4.4 IT set up 18 4.5 How to become a MiFID II Market Maker 18 4.6 Resignation of status 19

5.0 Explanation of Monitoring 19

6.0 Contacts and Links 20

6.1 Contacts 20 6.2 Links 20

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1.0 Introduction

Borsa Italiana’s ETFplus market is an order-driven environment, with integrated

market maker liquidity provision, delivering stable two way prices, along with a

minimum size and maximum spread obligation. The liquidity of each instrument

listed on the ETFplus market is supported by at least one market maker; a

Specialist, and potentially several other voluntary market makers.

This document acts an informative guide for all three types of Market Makers,

detailing; the benefits, requirements, technical set up and the process to

become a Market Maker.

This document is applicable to members that are currently providing liquidity on

the ETFplus market, or are aiming to do so, through the posting and maintaining

of firm quotes, complying with the specific presence, size, spread and

comparable size obligations (detailed within this guide).

1.1 Scope

The scope of this document applies to all ETFs, ETCs and ETNs listed on

Borsa Italiana’s ETFplus market.

1.2 Summary

There are three types of Market Makers who can provide liquidity, in terms of

two way prices and minimum size, to the instruments listed on the ETFplus

market:

- A Specialist (S)

- Advanced Liquidity Provider (AdLP)

- MiFID II Market Maker (MiFID II MM)

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The below table summarises the key points for each Market Making scheme. A

more granular explanation can be found under the relevant section of each

scheme within this document.

Specialist

Advanced Liquidity

Provider

MiFID II

Market Maker

Motivation Mandatory for listing,

appointed by the

issuer. Requirement

of one Specialist per

instrument

Providing additional

liquidity voluntarily.

There can be

several AdLPs per

instrument

MiFID II market

making strategy.

There can be

several MiFID II

MMs per instrument

Quoting

obligation

During opening

auction (from 9:02),

continuous trading,

volatility auction and

closing auction.

Continuous trading

only

Continuous trading

only

Daily

compliance

rate

60% 55% 50%

Obligations

during normal

market

conditions

Max. spread

Min. countervalue

Max. spread = S

max spread

Min. countervalue:

€10,000

Max. spread = S

max spread

Min. countervalue:

€5,000

Obligation

level

The above

obligations are set

per instrument –

there is no

standardisation

among instruments

All ETFplus

instruments will

follow the above

obligation

All ETFplus

instruments will

follow the above

obligation

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Resignation Notice should

ensure the continuity

of the function

No restrictions No restrictions

Quote vs.

Order1 Named quotes and

named orders

Anonymous quotes

and/or standard

orders

Anonymous quotes

and/or standard

orders

Stressed

market

conditions

obligations

Spread obligation is doubled and size obligation is reduced by

50%

Volatility

Auction

Spread obl. doubled

and size obl. is

reduced by 50%

No obligations

Exceptional

circumstances No obligations

Size

obligation

check

Total buy countervalue > Min coutervalue obligation

Total sell countervalue > Min countervalue obligation

Spread

obligation

check

(VWAP Sell – VWAP Buy) divided by

(VWAP Sell + VWAP Buy) / 2

<= Max Spread

VWAP Buy/Sell is computed considering the volume up to

compulsory min counter value obligation.

Comparable

size

Obligation

Max (Total Buy Quantity, Total Sell Quantity) = Max

Min (Total Buy Quantity, Total Sell Quantity) = Min

If ( Min < ( Max / 2 )) Then test has failed

Total buy/sell quantity up to Min. counter value obligation

1 Regardless of the Market Making scheme, the member must develop the relevant message on

their trading system to conform with the relevant parameters and successfully pass the relevant set up test. For more information, please contact Client Technology Services.

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CompID2

CompID “S” is

allowed to send

named orders and

quotes to the

relevant instruments

only

CompID “D” is

allowed to send

orders and

anonymous quotes.

CompID “F” is

allowed to send

orders only, for the


only.

CompID “M” is

allowed to send

orders and

anonymous quotes.

CompID “L” is

allowed to send

orders only, for the


only.

Application Written undertaking Member Portal Member Portal

1.3 Registration Process

The process to become a Market Maker differs depending on the type of Market

Maker a member wishes to apply for.

To apply for status as a Specialist, the member must be appointed by the

relevant issuer and only then, may they apply for such status through a

dedicated Specialist form. The Specialist form can be found in the instructions

section on Borsa Italiana’s website, here (Section: “Applications for admission

to listing and the documentation to be attached”).Please note that there are two

separate Specialist forms, one for ETFs and one for ETCs/ETNs.

To apply for status as either an Advanced Liquidity Provider or MiFID II Market

Maker, the member must apply within the Member Portal.

More information on how to become each type of Market Maker can be found in

the relevant section within this document.

2 The member must decide which CompID they would like to be set up with when joining the

relevant scheme. It is not possible to operate with different Comp IDs from the same Market Making scheme, i.e. for AdLP activity, the member must decide CompID “D” or “F”, it is not possible to have both. .

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The list of current Market Makers are published on Borsa Italiana’s website.

1.4 Monitoring and Reporting

Market Makers will be monitored continuously by Borsa Italiana.

Each Market Maker will have a daily compliance rate, with the assessment

calculated on a monthly basis.

Each Market Maker can consent to Borsa Italiana providing performance related

data to the relevant issuer(s), for those relevant instruments which they are

supporting.

2.0 Specialist

A Specialist will be required to place compulsory comparable bid and ask orders

which respect a maximum spread and minimum countervaule. There can only

be one specialist per instrument – the specialist is to be appointed by the

relevant issuer.

2.1 Benefits to being a Specialist

Specialists will receive a total exemption from the trading fees for transactions

deriving from the fulfilment of trading specialist obligations. Specialists are also

granted a number of free of charge transactions per second (tps), which is

dependent on the number of instruments supported as Specialist.

Number of instruments for which the specialist has

undertaken to support liquidity for

Total number of

tps

1 – 50 50 tps

51 – 150 100 tps

150 + 200 tps

The free tps are attached to the specialist CompID only.

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2.2 Requirements

The Specialist must be appointed by the relevant issuer.

2.3 Obligations

Specialist obligations are defined by Borsa Italiana.

- Obligation to display bid and ask prices continuously.

The Specialist shall comply with the obligation to enter simultaneous

buy and sell orders for comparable quantities.

- Obligation to display a minimum size.

The Specialist must honour the obligation to display a minimum size for

the instruments which it supports as Specialist.

Each instrument has a defined minimum size. Borsa Italiana classifies

each instrument into one of three liquidity categories (see table below).

Borsa Italiana defines the minimum size for each instrument in relation

to the liquidity category. The instrument is categorised into one of the

three liquidity categories on the basis of the liquidity assessment of the

underlying.

Minimum

Countervalue (Euro)

Spread

L1 50,000 Min: 3% - Max: 6%

L2 100,000 Min:1% - Max: 3%

L3 200,000 Max: 1%

During stressed market conditions as well as volatility auction, the size

is reduced by 50%.

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- Maximum spread obligation.

The Specialist’s orders have to be entered at comparable competitive

prices, i.e. the bid and ask prices must not diverge by the maximum

spread. The maximum spread obligation is defined per instrument on

the basis of the liquidity category which the instrument is in (as per the

above table). The spread obligation is assessed according to the

following formula:

(VWAP Sell – VWAP Buy) divided by (VWAP Sell + VWAP Buy) / 2

<= Max Spread

VWAP Buy/Sell are computed considering the volume up to compulsory

min counter value obligation.

During stressed market conditions as well as during volatility auction,

the spread is doubled.

- Comparable size

The Specialist must make sure that the total bid size orders does not

diverge more than 50% against the total ask size orders according to

the following formula:




The total buy/sell quantity considered is up to minimum counter value

obligation.

- Temporary suspensions

In exceptional circumstances, declared by Borsa Italiana’s Trading

Surveillance department, the Specialist may submit a request to Borsa

Italiana for the suspension of quoting obligations for those instruments

which they are a Specialist for.

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Borsa Italiana constantly updates the table on their website which summarises

the minimum size and maximum spread obligations for each financial

instrument traded on the ETFplus market.

More information on Specialist obligations can be found in Borsa Italiana’s

Guide to the Parameters.

Specialists are required to adhere to their obligations for 60% of each trading

day. The assessment takes also into account Specialist’s compliance with

obligation during auction phases (for the opening auction, from 9:02 since the

Specialist presence is mandatory from 9:02). The assessment will be calculated

and disseminated on a monthly basis. Their performance is assessed

considering the minimum compulsory size. The counter value quoted by the

Specialist, that exceeds the minimum compulsory counter value does not

contribute to the performance assessment.

The daily compliance rate will be calculated in terms of four separate

components:

- Presence

- Size

- Spread

- Comparable size.

2.4 IT set up

Transactions entered to fulfil the quotation obligations must be “Named Quotes”

or “Named Orders”. “Named Quotes” allow the specialist to contextually submit

bid and ask orders, whilst also identifying the orders as coming from a

specialist.

New specialists must test the “Named Quote” or “Named Order” or both

functionalities before starting the activity. Specialist is to decide which

functionality they will be using.

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Specialists are given a dedicated interface (CompID “S”) to the market that can

be used for specialist activity only and only for the instruments which they

support as Specialist.

2.5 How to become a Specialist

The Specialist must be appointed by the issuer for the relevant instrument(s)

and only then, can they proceed with signing the agreement to become a

Specialist, which is signed through a dedicated Specialist form.

The Specialist form can be found within the instructions section on Borsa

Italiana’s website, here.

2.6 Resignation of status

In order for a Specialist to terminate the agreement to fulfil their obligations as a

Specialist, Borsa Italiana must be notified in writing at last three months before

the effective date of the termination. Borsa Italiana may accept shorter notice if

the continuity of the Specialist function is ensured by another entity entering into

the undertakings of the obligations to be fulfilled by the Specialist for the

relevant instrument(s).

It is the responsibility of the issuer to ensure that there is an entity available to

replace the current Specialist for the relevant instrument(s) prior to the

termination of the current Specialist’s agreement.

More information can be found in Borsa Italiana’s rules.

3.0 Advanced Liquidity Provider (AdLP)

An AdLP, as a voluntary Market Maker, will be required to provide liquidity by

placing comparable competitive bid and/or ask orders on their own account,

which respect a maximum spread and minimum countervalue. As the AdLP

scheme is voluntary, there may be unlimited AdLPs per instrument. An entity

can freely apply to be an AdLP for any instrument.

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3.1 Benefits to being an AdLP

AdLPs will receive a 100% discount on their passive executed orders, provided

that on the instrument(s) they are registered as an AdLP, they: i) achieve a 20%

share of trading (calculated as AdLPs turnover as a percentage of the total

turnover for the instrument, multiplied by 2) and ii) respect quoting obligations

set by Borsa Italiana.

Number of instruments for which the AdLP has

undertaken to support liquidity for

Total number of

tps

1 - 50 0 tps

51 - 250 50 tps

251 – 500 100 tps

501 – 750 200 tps

750+ 300 tps

An AdLP will see the discounted trades in their monthly bill.

3.2 Requirements

No requirements. An entity must only sign the agreement with Borsa Italiana,

which is managed through Member Portal. An AdLP can voluntary apply to

support the liquidity of any instrument.

3.3 Obligations

AdLP obligations are defined by Borsa Italiana.


The AdLP shall comply with the obligation to enter simultaneous buy

and sell orders for comparable quantities.

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The AdLP must comply with the obligation to display a minimum size of

€10,000 for all instruments in which they support as an AdLP.

During stressed market conditions, the size is reduced by 50%.


The AdLP must comply with the same maximum spread obligation that

is set for the Specialist for the instrument(s) they support as an AdLP.

Specialist’s spread can be found on our website, here.

The spread obligation is assessed according to the following formula:


<= Max Spread

VWAP Buy/Sell is computed considering the volume up to compulsory


During stressed market conditions, the spread is doubled.

- Comparable size obligations

The AdLP must make sure that the total bid size orders does not

diverge more than 50% against the total ask size orders according to






obligation.

AdLPs are required to adhere to their obligations for 55% of each trading

day. The quotes displayed during auction phases are not included in the

performance assessment. The assessment will be calculated and

disseminated on a monthly basis. Their performance is assessed

considering the minimum compulsory size. The counter value quoted by

the AdLP, that exceeds the minimum compulsory counter value does not

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contribute to the performance assessment. The daily compliance rate will

be calculated in terms of four separate components:

- Presence

- Size

- Spread

- Comparable size

3.4 IT set up

Orders entered to fulfil the AdLP quoting obligations must be “Anonymous

Quotes and Single Orders” or “Single Orders”. “Anonymous Quotes” allow the

AdLP to contextually submit bid and ask orders, whilst also identifying that they

are from an AdLP.

A new AdLP must test the “anonymous quote”, should they wish to use this

functionality, before starting the activity.

AdLPs are given the option of two dedicated interfaces for the relevant

instruments:

- CompID “D” for those AdLPs that wish to submit both orders and

anonymous quotes

- CompID “F” for those AdLPs that wish to submit orders only

An AdLP must decide which interface they wish to use when signing the

agreement to be an AdLP. The AdLP activity should be covered using only one

naming convention (CompID “D” or CompID “F”), but the member can set up

more CompID’s of the same type.

The “D” or “F” CompID may be used for AdLP activity only and only for those

instruments which the entity supports as an AdLP.

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3.5 How to become an AdLP

The agreement to become an AdLP is signed through Member Portal. When

signing the agreement you will be able to select the instruments that you would

like to support as an AdLP and which interface.


The discontinuation of the activity of an AdLP must be communicated to Borsa

Italiana and the resignation of status as an AdLP is managed through Member

Portal. The resignation shall entry in force from the date specified by Borsa

Italiana in agreement with the AdLP.

4.0 MiFID II Market Maker

This section is for those who perform Market Making strategies according to

MiFID II, which requires the entity to enter into an agreement with the relevant

exchange, Borsa Italiana in this instance.

Please let it be noted, that Borsa Italiana will not perform any monitoring to

analyse and alert a member as to whether they are performing a Market Making

strategy according to MiFID II. It is the responsibility of the entity in question to

determine as to whether they are performing Market Making strategies

according to MiFID II.

A MiFID II Market Maker will be required to provide liquidity by placing

comparable competitive bid and/or ask orders on their own account, which

respect a maximum spread and minimum countervalue, as defined by Borsa

Italiana. There may be unlimited MiFID II Market Makers per instrument (or

none).

4.1 Benefits to being a MiFID II Market Maker

There will be a monetary incentive for those members which respect the

obligations of a MiFID II Market Maker in stressed market conditions. This

benefit is defined in the Price List for trading services.

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4.2 Requirements

No requirements. An entity must only sign the agreement with Borsa Italiana,

which is managed through Member Portal. There are no limits to the number of

products a single entity can support as a MiFID II Market Maker.

4.3 Obligations

MiFID II Market Maker obligations are defined by Borsa Italiana.


The MiFID II Market Maker shall comply with the obligation to enter

simultaneous buy and sell orders for comparable quantities.


The MiFID II Market Maker must comply with the obligation to display a

minimum size of €5,000 for all instruments in which they support as a

MiFID II Market Maker.

During stressed market conditions, the size is reduced by half.


The MiFID II Market Maker must comply with the same maximum

spread obligation that is set for the Specialist for the instrument(s) they

support as an MiFID II Market Maker. Specialist’s spread can be found

on our website, here. The spread obligation is assessed according to



<= Max Spread

VWAP Buy/Sell is computed considering the volume up to compulsory


During stressed market conditions, the spread is doubled.

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- Comparable size obligation

The Mifid II Market Maker must make sure that the total bid size orders

does not diverge more than 50% against the total ask size orders

according to the following formula:





obligation.

MIFID II Market Makers are required to adhere to their obligations for 50% of

each trading day. The quotes displayed during auction phases are not included

in the performance assessment. The assessment will be calculated and

disseminated on a monthly basis. Their performance is assessed considering

the minimum compulsory size. The counter value quoted by the MIFID II Market

Maker, that exceeds the minimum compulsory counter value does non

contribute to the performance assessment.

The daily compliance rate will be calculated in terms of four separate

components:

- Presence

- Size

- Spread

- Comparable size

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4.4 IT set up

Orders entered to fulfil the MiFID II Market Maker quoting obligations must be

“Anonymous Quotes and Single Orders” or “Single Orders”. “Anonymous

Quotes” allow the MiFID II Market Maker to contextually submit bid and ask

orders.

A new MiFID II Market must test the “Anonymous Quote”, should they wish to

use this functionality, before starting the activity.

MiFID II Market Makers are given the option of two dedicated interfaces for the

relevant instruments:

- CompID “M” for those MiFID II Market Makers that wish to submit both

orders and anonymous quotes

- CompID “L” for those MiFID II Market Makers that wish to submit

orders only.

A MiFID II Market Maker must decide which interface they wish to use when

signing the agreement to be a MiFID II Market Maker. The MiFID II Market

Maker activity should be covered using only one naming convention (CompID

“M” or CompID “L”), but the member can set up more CompID’s of the same

type.

The “M” or “L” CompID may be used for MiFID II Market Maker activity only and

only for those instruments which the entity supports as a MifID II Market Maker.

4.5 How to become a MiFID II Market Maker

The agreement to become a MiFID II Market Maker is signed through Member

Portal. When signing the agreement you will be able to select the instruments

that you would like to support as a MiFID II Market Maker and which interface.

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The discontinuation of the activity of an MiFID II Market Maker must be

communicated to Borsa Italiana and the resignation of status as an MiFID II

Market Maker is managed through Member Portal. The resignation shall entry in

force from the date specified by Borsa Italiana in agreement with the MIFID II

Market Maker.

5.0 Explanation of Monitoring

Under each Market Maker scheme, Borsa Italiana will perform continuous

monitoring of each entity to ensure that they are fulfilling their obligations as

detailed in the relevant agreement.

Borsa Italiana will assess each entity against the components of specific

presence, size, spread, and comparable size obligations as detailed within this

document, on a daily basis.

Each Market Maker can consent to Borsa Italiana providing performance related

data to the relevant issuer(s), for those relevant instruments which they are

supporting.

The assessment of the daily compliance rate will be aggregated to a monthly

compliance rate assessment.

6.0 Setting up a CompID

Prior to starting the Market Making activity of any of the three schemes detailed

within this document, the entity must first, request for the relevant CompID to be

set up. The request can be managed through the Member Portal.

For any queries related to requesting or setting up the CompID, please contact

our Client Technology set up team on [email protected]

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7.0 Contacts and Links

7.1 Contacts

For general ETP queries, please contact our ETF team on:

[email protected] or +39020726419

For any queries on the technology set up, please contact our Client Technology

Services on:

[email protected]

For first level support, please contact our Service Desk on:

[email protected]

7.2 Links

Borsa Italiana’s ETF home page

Member Portal

Borsa Italiana's Rules

Borsa Italiana's Instructions

Borsa Italiana's Price List

Borsa Italiana's Specialist Obligations per Instrument

Borsa Italiana's Guide to the Parameters

Market Makers Performance Report

Disclaimer

The publication of this document does not represent solicitation, by Borsa Italiana S.p.A., of public saving and is not to be considered as a recommendation by Borsa Italiana as to the suitability of the investment, if any, herein described. This document has not to be considered complete and it is meant for information and discussion purposes only. Borsa Italiana accepts no liability, arising, without limitation to the generality of the foregoing, from inaccuracies and/or mistakes, for decisions and/or actions taken by any party based on this documents. Trademarks Borsa Italiana and Borsa Italiana's logo, ETFplus, IDEM, MOT, MTA, STAR, SeDeX, MIB, IDEX, BIt Club, Academy, MiniFIB, DDM, EuroMOT, Market Connect, NIS, Borsa Virtuale, ExtraMOT, MIV BIt Systems Piazza Affari Gestione e Servizi, Palazzo Mezzanotte Congress and Training Centre and PAGS are owned by Borsa Italiana S.p.A. FTSE is a registered trademark of London Stock Exchange plc and The Financial Times Limited and is used by FTSE International Limited under licence. London Stock Exchange, the coat of arms device and AIM are a registered trade mark of London Stock Exchange plc. The above trademarks and any other trademark owned by the London Stock Exchange Group cannot be used without express written consent by the Company having the ownership of the same. Borsa Italiana S.p.A. and its subsidiaries are subject to direction and coordination of London Stock Exchange Group Holdings (Italy) Ltd – Italian branch. The Group promotes and offers the post-trading services of Cassa di Compensazione e Garanzia S.p.A. and Monte Titoli S.p.A. in an equitable, transparent and non-discriminatory manner and on the basis of criteria and procedure aimed at assuring interoperability, security and equal treatment among market infrastructures, to all subjects who so request and are qualified in accordance with national and community legislation, applicable rules and decisions of the competent Authorities. @March 2020 London Stock Exchange Group plc All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieve system without prior permission from the copyright owners.

A Guide for Market Makers on ETFplus - Borsa Italiana...Market Makers will be monitored continuously...

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