Conclusion of the market making review – further findings published

Following consideration of independent analysis commissioned by the Electricity Authority Te Mana Hiko (Authority), we have decided not to consider any further changes to market making settings at this time.

The Authority engaged the Lantau Group (TLG) to evaluate the level and impact of “market taker” (scratch) trades and whether they are affecting the Authority’s market making policy objectives namely:

• to support the formation of a robust forward price curve; and
• to improve the availability of risk management contracts.

TLG found that 23% of trades have the characteristics of scratch trades but analysis indicates that, at this level, these trades do not materially detract from the Authority’s key policy objectives.

It found:

(a) no evidence of a systematic scratching strategy, with market makers generally taking on risk by holding a one directional position at the end of each trading day

(b) high compliance with the 3% bid-ask spread requirement and strong market maker presence during trading windows supporting price discovery

(c) no observable link between scratch trading and within session price volatility

We will continue to monitor the market and may consider this matter again as part of our next review of market making arrangements in mid-2028.

Background

Feedback from some financial intermediaries and independent retailers on the market making review raised a concern that the Authority’s compliance settings do not distinguish between trades that provide or remove liquidity, specifically:

(a) “market maker trades” refer to resting orders that remain available on the exchange and contribute to liquidity; and

(b) “market taker trades” (also referred to as aggressive or scratch trades) initiate trades and remove liquidity.

They submitted that allowing “market taker trades” to count towards obligations could enable surface-level compliance without meaningful risk transfer, potentially reducing the volume available to other participants and increasing volatility and risk premia in over-the-counter markets.

We had signalled in our recent decision paper, “Market making review: strengthening price discovery in the forward electricity markets”, our intention to undertake further consultation on how compliance with market making obligations for baseload contracts is assessed and commissioned TLG to help better understand the issue. We are no longer proceeding with consultation, given TLG’s findings.

View TLG report.