Exchange market size

Exchange market size is for all trading related purposes a synonym for normal market size. It is set for each each listed security. The main importance of the normal market size is for market maker quotes on quote driven trading systems. A market maker is obliged to continually quote bid and offer prices that are firm for deals up to the exchange market size.

It is obviously impossible for market makers to offer quotes that would be firm up to an unlimited size. For a quote driven system to provide the liquidity it should, investors should be able to rely on market makers to take reasonably ordinary (i.e. not unusually large) quantities of a security at the quoted price.

The exchange market size is a simple transparent mechanism that reconciles these requirements.

When trading more than the exchange market size in a security through a quote driven trading system, the mechanism changes. For most trades, the broker will contract a market maker (or market makers) in order to ask for a quote that is good for the larger quantity. If the quantity is only a little more than the normal market size, the price may not change, but market makers are likely to offer worse prices as the deal size gets bigger.

As the size of the number of securities being bought or sold gets larger it becomes harder to get a good price. Very large blocks may be sold over a period of time rather than in one go, or by finding buyers or sellers outside the trading system.

The change in terminology in London from normal market size was required to make it clearer that the exchange market size is used for trading with new EU rules applying to reporting requirements that were previously based on the normal market size.

In the EU, very large deals, above the standard market size, are exempt from some requirments to to report transactions to the exchange, and best execution requirements are also looser.

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