The Australian capital markets research body, in conjunction with the University of Technology Sydney, analysed market activity over a period of 12 months either side of the introduction of the scheme. They assessed the impact of the rebates on spreads and volumes and also looked at whether trades increased liquidity.

“Liquidity improvements are accompanied by consistent changes in actual trading outcomes, indicating that the scheme has been successful in improving quoting behaviour as well as affecting trading activity,” Dr Elvis Jarnecic, a research director at CMCRC and author of the report stated.

Additionally, CMCRC believes the rebates themselves are a significant cause of these improvements. 

“Market liquidity has been enhanced following the introduction of the scheme [and the] improvements in both bid-ask spreads and depth are most pronounced in periods when rebates are paid,” Dr Jarnecic observed.

There was a fear that because high frequency traders are the most active in the market, although they often do not have a large market presence, that the introduction of the scheme would not improve market transparency and price efficiency. However, according to the authors of the report, the costs of this are outweighed by the benefits of liquidity and tighter market spreads.

“Our results indicate that market makers are net suppliers of liquidity and are therefore fulfilling their mandated duties,” Dr Jarnecic stated, adding that “in the year following the scheme, profits generated from supplying liquidity are significantly greater than position-taking profits.”

The ETF Market Making Scheme rewards those market participants by giving them a rebate that covers all trading and clearing fees over the calendar year. The scheme was introduced by the ASX in August 2010.