How does market making work?
Each day the ETF issuer publishes the list of securities that make up the ETF or ETP, enabling market makers to calculate the net asset value (NAV) of the ETF throughout the trading day. This helps market makers to more accurately price the ETFs. They place a 'spread', which is their return, around the NAV, resulting in:
- a bid price, at which they will buy ETFs, and
- an offer price, at which they will sell ETFs.
They then place these prices on ASX for investors to trade with. This spread will vary throughout the trading day.
The appointed market makers receive incentives from ASX when making markets in accordance with the applicable market making specifications. The market making specifications include a minimum time period for making markets under the scheme, as well as a minimum liquidity requirement. There is also a limit on the maximum spread between the bid and offer price that a market maker can quote when making markets under the scheme.
The schemes recognise that there will be certain circumstances when the appointed market makers cannot reasonably be expected to make markets in accordance with the market making specifications.
You generally pay a little more to buy ETFs than you would receive for selling ETFs at any given time. The width of the spread can vary between different ETFs. For some heavily traded ETFs the offer may be only a couple of cents higher than the bid, while for less liquid ETFs the spread may be wider.