The trading rules will be implemented as part of the new hybrid trading platform that will be based on the Market Maker system. While ensuring liquidity through the use of Market Makers, the new rules will take full advantage of "investor protection" at the execution prices/opportunities. Following is a summary of the key trading functions, basic rules and market structure.
Market structure
- High-liquidity stocks (Hybrid-Market Making Issues): Market structure combines an order-driven auction function with market making. The "Hybrid" includes the best elements of both types of markets: the transparency and efficiency of an auction structure and the continuous liquidity of a dealer structure.
- Other stocks (Pure-Market Making Issues): Pure-Market Making structure provides the opportunity for investors to be able to execute the orders under any circumstances (to get immediate executions in stocks that trade less frequently). Continuous execution opportunities are warranted as well as the improved liquidity, through the constant updates of bid and ask quotes by Market Makers.
- Best Execution Rule: Firms (Market Makers) are required to execute customer retail orders at the best price available in the market, even if the executing dealer is quoting an inferior price.
- Rules to provide better opportunity for customers’ order execution: When a firm (Market Maker) trades for its own account at a price superior to a customer order, the firm must promptly execute the order (– up to the size of its own trade). (Manning Rule)
When a firm receives a customer order (in a Hybrid stock) that is priced equal to or better than its own quotes, the firm must display the order in its quote. (Order Handling Rule)
- Internal Matching Function (Cross Transaction): Internal Matching allows a Market Maker to proceed the so-called "cross trade" with customers based on the Best Execution rule.
- Negotiation Function: Electronic negotiation increases the speed and efficiency of firm-to-firm negotiation for large sized trades.
- Routing Function: This function assists Market Makers in gathering order flow from non-Market Makers (broker order entry firms).
- Auto-Execution Function:This is essentially the same functionality as the current auction book. Market participants can get immediate auto-executions against quotes and orders displayed on the central book (for Hybrid stocks), or against quotes only (Pure- Market Making stocks).
- In principle, the Nasdaq Japan Market will require a minimum of three Market Makers for each stock. For the time being, only two will be required.
- Market makers have certain obligations including the continuous quote requirement, but are rewarded with transaction fee discounts and the ability to hold a proprietary order book
