Thread by @vivbajaj

This circular from NSE has potential to massively reduce liquidity in market as market makers who are actively giving bid and ask may find it difficult to maintain the optimal order to trade ratio.

Thread on this.

Who are Market Makers ?

These are high frequency traders (algorithms now) which are always there in the market depth to provide entry and exit to various market participants.

They are typically providing bid and ask at every depth of the market. Hence lots of orders.

There is always high order to trade ratio for these market makers as number of trades executed out of these orders are not within their control. Market is very dynamic and one has to remain with their orders to capitalize on any execution on both side.

However they are known for crowding the market with pending orders. Which you can say is bad depending on your point of view.

There are issues of market spoofing which is becoming a global issue with more and more systems sending orders without intentions of executing them.

You can say the culprits of technology overload in modern market structure.

However this needed to be controlled and there are many ways exchanges have done it in the past e.g monitoring and penalizing using order to trade ratio etc.

This new circular makes it more tougher for genuine market makers to bring active liquidity in the system as they will be afraid of adding orders to fulfill the depth.

Infact everyone will prefer to become a price taker and not price giver. So who will give depth ?

Conclusion

This circular will be implemented from 5th Apr.I think many market makers will be careful with their system now as there is no way to monitor any violation that they are getting into as exchange has not shared the exact value of parameters.

This may impact liquidity.