The market-maker for BAM.PR.J did a really shitty job yesterday. According to information supplied by TMX DataLinx the quote at 14:51:59 was 25.66-26.69 and the spread stayed in the range of ninety-seven cents to a dollar six until the close – over an hour. It really is time that the Market Maker system was reformed, if the smiley-boys aren’t going to take it seriously.
In a nutshell, every TMX-listed security has a market maker. The Market Makers service odd-lots, take responsibility for the top-secret Minimum Guaranteed Fill function and agree to maintain a spread on their securities below a certain level. In return, they get a very nice privileges: they can elect to participate in trading on the passive side, taking a cut of up to 30% of the passive side’s fill on every trade [see comments]. This is deemed to be a fair trade-off, and I’m not about to say it isn’t.
But it can only a fair trade-off if the privileges are earned, and it can only be viewed as a fair trade-off if details of the Market-Maker’s execution of his side of the contract are viewable.
There are no details given of any kind of auction system whereby, for instance, a dealer willing to enforce a $0.25 spread can simply take the privileges away from an extant market maker only willing to enforce $0.50. There are no details given of the committments made. There are no details given on actual Market-Maker performance. The TMX claims to monitor Market Maker performance and remove privileges in the event of poor performance, but since no details are given the credibility of this claim is open to question.
I am sick and bloody tired of B-School snots at the TMX telling me not to worry my pretty little head about such complicated matters because the TMX is in charge and on the case. I am outraged that I was told that seven seconds at the close was a inconsequential period for a wide spread on SLF.PR.E at year-end, when it is well known that this is sufficient time to analyze and react to literally thousands of quotation changes. If the TMX is going to grant preferential trading privileges, over-riding the price-time priority they purport to consider holy, they should damn well prove that those preferential trading privileges have been won and earned in a competitive market place.
There’s not much I can do about this, but that’s never an excuse for doing nothing. Accordingly, from this day forward I will be publicizing the daily half-dozen highest excess spreads according to the “Last” quotes (with any luck, they will soon be the “Closing” quotes) available to me. Excess Spread is defined as the spot rate less the average spread as computed by HIMIPref™. Issues considered for inclusion in the list are, and will continue to be, restricted to those incorporated in the HIMIPref™ Preferred Share Indices.
The table for January 27 looks like this:
| Wide Spread Highlights | |||
| Issue | Index | Quote Data | Notes |
| BAM.PR.J | OpRet | Quote: 25.65 – 26.69 Spot Rate : 1.0400 Average : 0.6729 |
YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2018-03-30 Maturity Price : 25.00 Evaluated at bid price : 25.65 Bid-YTW : 5.06 % |
| HSB.PR.D | Perpetual-Discount | Quote: 23.62 – 24.05 Spot Rate : 0.4300 Average : 0.2761 |
YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-01-27 Maturity Price : 23.38 Evaluated at bid price : 23.62 Bid-YTW : 5.34 % |
| PWF.PR.M | FixedReset | Quote: 26.54 – 27.00 Spot Rate : 0.4600 Average : 0.3404 |
YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-02 Maturity Price : 25.00 Evaluated at bid price : 26.54 Bid-YTW : 3.85 % |
| BAM.PR.G | FixedFloater | Quote: 22.70 – 23.20 Spot Rate : 0.5000 Average : 0.3971 |
YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-01-27 Maturity Price : 25.00 Evaluated at bid price : 22.70 Bid-YTW : 3.49 % |
| HSB.PR.E | FixedReset | Quote: 27.47 – 27.75 Spot Rate : 0.2800 Average : 0.1836 |
YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-30 Maturity Price : 25.00 Evaluated at bid price : 27.47 Bid-YTW : 3.80 % |
| CM.PR.P | Perpetual-Discount | Quote: 25.18 – 25.56 Spot Rate : 0.3800 Average : 0.2909 |
YTW SCENARIO Maturity Type : Call Maturity Date : 2012-11-28 Maturity Price : 25.00 Evaluated at bid price : 25.18 Bid-YTW : 5.08 % |
In return, they get a very nice privileges: they can elect to participate in trading on the passive side, taking a cut of up to 30% of the passive side’s fill on every trade.
I’m curious where you get this information? I don’t think it’s true. They are obliged to service MGF and market priced odd lots (eg: the TSX trading engine automatically assigns the trade to the MM’s account) but I don’t think their passive orders have any kind of “priority” nor do they have the ability to place any special types of hidden orders. Most of what I know about the market maker system is here
over-riding the price-time priority they purport to consider holy
Actually, to be more exact, the TSX uses a price-broker-time priority system. If there are two passive orders at the BBO, one from broker “A” and the other from broker “B” and an active order comes in from broker “A” it trades with the passive order from broker “A” even if that order would have had lower time priority than the one from broker “B”. So if you often trade on the passive side, it is supposedly advantageous to go through a broker that has clients that generate a lot of active volume. See for example this.
Copy-edited by JH using arcane powers not available to ordinary mortals. Hah!
Oops,
Fixed link #1
Fixed link #2
This blog really needs either a preview your comment function or an edit your comment function!
I’m curious where you get this information?
I had it a little wrong. TSX Rule 4-802(2) states:
Actually, to be more exact, the TSX uses a price-broker-time priority system.
Yes. My statement was not precise.
This blog really needs either a preview your comment function or an edit your comment function!
Uh-huh. There may be a WordPress “Plug-In” with this functionality, but I’m afraid of plug-ins. I am concerned that they may have vulnerabilities not present in the core system – so I use the core system, with exactly one plug-in.
Interesting, thanks. So looks like the MM can turn participation on and off (and do so on a per-side basis). Whether the MM has enabled participation for one or the other side used to be part of the public datafeed until 2008.
Note that a market participant can deprive the MM of his participation by using a Bypass Order. It would be interesting to know whether most of the smart order routers in use at the moment utilize this tag.
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