In the light of the current TOM discussion it’s a little bit a spoiled party, but Euronext Liffe will introduce new flavors of liquidity provider schemes. In the current set-up, market makers in options can apply for two different roles:

Competitive Market Maker (CMM)

Obligation to quote at least 10% of all calls and puts in an option class. In return, they get lower fees and some bandwith to send and update quotes. In reality this means the trader can avoid difficult long term options, and has to stay away from the deep in the money options. Funny thing is they can avoid their quoting obligations when going on a holiday a few days a year. Broadly speaking, there are unlimited places for CMM roles.

Primary Market Maker (PMM)

Obligation to quote every call and put in an option class. A lot more bandwith than the CMM, but can’t avoid trading long term options when desired. Also, there’s no possibility to stop quoting for a couple of days. There are a limited number of PMM’s per option class, usually around four. A little more in de AEX index options. Difficult to obtain, as it is a closed shop.

This month all option classes will be auctioned again among the market makers. Will be a good opportunity to see who will be quoting which option class in which role. It’s an interesting topic to discuss the benefits of being a liquidity provider when TOM will take a lot of flow anyway. In addition, still trying to find out how TOM will arrange to trade on Euronext prices – maybe they pass through the orders themselves immediately on Euronext but this raises more questions.

Extra Competitive Market Maker

The new flavor of Liquidity Provider is the Extra Competitive Market Maker (CMX). Basically, this is a version of liquidity provider between PMM and CMM. Instead of 10% of the calls and puts, 30% needs to be covered with quotes. In return for this commitment, more bandwith is supplied. This CMX looks to be made for market makers who wish to quote everything like a PMM, but are scared for the long terms.

The question will arise why one would want to quote anyway. It’s a serious risk and the rewards are diminishing as a lot of order flow will trade on your sharp prices, but at another exchange against another market maker.

Link (pdf)

Bits of Freedom

Last but not least, the ugly banner on the right for the successful organization Bits of Freedom. Ignore the angry birds stuff and donate a few bucks, they need it. They stand up for freedom on the internet, worth fighting for.