Market Mechanism

of
New Business Model
- Business Development Department
Market Makers (MMs) shall be allowed
to Quote with the help of the reference
price i.e. External Price Link (EPL).
Quantity represents intention of both
Buy and Sell Quotes for a particular
contract. Unatched !uantities are
editable but it results in e!ual chan"e in
!uantities of both BID & ASK.
MMs can choose the Spread on EPL
Price and can show their intentions for
B#$ % &S' Quotes for different
contracts( howe)er range of spread will
be fixed by the Exchange. *hus+ !uotes
with the least spread "ets the priority and
results in best a)ailable price. ,owe)er+
spread can be edited unless e-ecuted.
&fter Price Priority the ti!e of the intention for B#$ % &S' Quotes is the second priority while atchin"
orders. .or e-aple+ in the table abo)e+ MM/ and MM0 both ha)e shown intention with the sae spread i.e. / but
MM0 had shown the intention before MM/+ hence MM0 "ets the priority before MM/. #f the spread or e)en
!uantities are odified+ the !odification ti!e will be effecti"e for #i!e Priority.
$arket $echanis! %ith the exa!ple of &'LD (ontract
- Background to the model
MMs Quantity Spread Time
MM1 5 2 t1
MM2 10 5 t2
MM3 8 3 t5
MM4 5 4 t7
MM5 5 0 t4
MM6 2 4 t6
MM7 3 1 t3
MMn Qn Sn Tn
(o!petiti"e Ad"antage) MMs !uotin" copetiti)e prices are likely to ha)e their orders
e-ecuted sooner rather than later. *hey can deal with the h*ge n*!ber of participants (all the
clients % MM affiliated with the e-chan"e) under Price1*ie Priority principle.
(lients also get co!petiti"e +*otes because of lowest spread by lar"e nuber of MMs.
E!ual chan"e in !uantity in both sides (B#$ % &S') ensures balanced $arket Depth
(2olue) in e)ery situation.
#n the scenario of MM intention bein" atched fro one side only+ i.e. either B#$ or &S'+ the
e!ual nuber of intentions will be blocked fro the opposite side for the cancelation only till
the MM has open position3s fro first side( this further ensures balance between two sides of
Market $epth.
Benefits
$arket $echanis!
-BID/ASK Price Calculation and Visibility of Liit !rders in Mar"et De#t$
MMs Quantity Spread Time
MM1 5 2 t1
MM2 10 5 t2
MM3 8 3 t5
MM4 5 4 t7
MM5 5 0 t4
MM6 2 4 t6
MM7 3 1 t3
MMn Qn Sn Tn
#n the Market $epth+ only , Best BID and ASK Prices are
displayed+ howe)er the identification of any $$ for any
particular !uote will not be disclosed.
#f MM4 chooses 5 Spread+ 5 tick will be added on EPL &S'
Price and 5 tick will be deducted fro EPL B#$ Price and the
resultin" price "i)es B#$ and &S' Price for MM4.
6ther B#$ and &S' Prices for other MMs are also calculated in
the sae way.
7lients8 Liit orders will also be )isible in the Market $epth+ if
the Liit prices fall within the best 9 B#$ and &S' !uotes.
7lients8 B*y Li!it order will be "isible in BID side and Sell
Li!it in ASK side. (e.". 7lient takes : Buy Liit order at ;s.
/59<<.<< and the !uoted Buy Liit Price falls in best 9 B#$ and
&S') .
Note: Contingency Pip will be considered
as and when the Clients/MMs place the Limit Orders
Benefits
-isibility of clients. Li!it 'rder in Market $epth will ensure higher le"el of
transparency/
(lients. Li!it 'rder in Market $epth increases "ol*!e of Market $epth which
results in higher li+*idity.
(lients. Li!it 'rders will also co!pete with $$s. EPL +*otes which akes
!uotes !ore co!petiti"e and narrows the spread.
MMs Quantity Spread Time
MM1 5 2 t1
MM2 10 5 t2
MM3 8 3 t5
MM4 5 4 t7
MM5 5 0 t4
MM6 2 4 t6
MM7 3 1 t3
MMn Qn Sn Tn
$arket $echanis!
-Structure of Mar"et De#t$
0st Priority 1nd Priority 2rd Priority 3th Priority ,th & 4 th Priority 5th Priority
#n the Market depth+ !uotes of the Market Makers and clients will be sorted
in the followin" way=

&S' Price will be sorted in ascending order i.e. lower to hi"her

B#$ Price will be sorted in descending order i.e. hi"her to lower

6ighest BID is the best BID and lowest ASK is the best ASK+ which
represents the best a)ailable price ($arket Price) too.

Market Maker !uotin" iniu spread will "et the priority of order
e-ecution.

,owe)er+ clients Buy Liit (hi"hest bid) and Sell Liit (lowest ask)
will also "et the priority of order e-ecution.

If two or !ore than two !arket participants 7$$ or client8 ha"e the
sa!e +*otes then the ti!e of orders placed will be "i)en the priority
thereafter.
9isk $anage!ent= MMs can use wider spread to safe"uard their
positions in unfa)orable arket conditions.

:on;Disclos*re of $$s<(lients= #n the arket depth+ the identification of

any MMs37lients for any particular !uote is not disclosed which ensures
confidentiality and anonyous Quotin" .
Benefits
Buy Sell
Qty. 2
Buy Sell
Qty. 2
#f any client takes $arket 'rder or their contingent
'rder gets triggered+ then order of the client will be
!atched to the best a"ailable +*otes of the $$s or
clients li!it orders. 7onse!uently BID or ASK
+*antities will be ad=*sted accordingly in the $arket
Depth/
.or e-aple if any client takes : lots of Sell order then
the !uantity of Best B#$ will be reduced by : !uantity.
*he "alidity of the MM8s open positions will depend on
the Matched 6rder of the 7lient. (E.". #f a client takes
#ntraday Buy order then MM+ who the order atches
with+ will "et the #ntraday Sell open position.)
$arket $echanis!
- C$an%e in Mar"et De#t$ w$en Clients #lace orders
Before
After
#f a"ain+ another client takes / lots of Sell 6rder
then the !uantity of best B#$ will be deducted
collecti)ely fro first and second best B#$ prices i.e.
> fro first and reainin" 5 lot will be reduced fro
ne-t best B#$ Price. ;eainin" best B#$ Price of :
lots will be best B#$ Price thereafter. (unless ore
copetiti)e !uotes are placed)
#ncase of contin"ent orders+ the orders will be
e-ecuted for atched !uantity and price (!uoted or
ne-t a)ailable) only+ any reainin" !uantity of
contin"ent orders will stay pendin" till Market Price
attains the set contin"ent price.
$arket $echanis!
- Contd&&
Buy Sell
Qty. 4
Buy Sell
Qty. 4
Before
After
Market Price
BID ASK
41497.5 41497.5

#f 7lient8s Buy Liit order is in the Market $epth

then her3his order will be e-ecuted either if Buy
Liit price atches with &S' Price or another
7lient3MM takes sell position while Buy Liit
order in the Best Priority (Price and *ie both)
and the sae will be applicable for Sell Liit
order too.
,ere+ in the e-aple 7lient8s Buy Liit order is in
Market $epth and the !uoted price is /5/?4.9< with
4 !uantity.
#f Buy Liit Price atches with the &S'
Price then the atched !uantity i.e. 9 will be
deducted fro both B#$ and &S' side and
the reainin" : Buy Liit order will be
pendin" for the client.
#f a"ain another 7lient3MM takes 5 sell
order at the tie of Best Priority of Buy
Liit then one !uantity will be reduced
fro B#$ side only and reainin" 5 will be
pendin" thereafter.
Buy Sell
Qty. 1
Buy Sell
Qty. 1
$arket $echanis!
- Contd&&
Sell Buy
Qty. 1
Sell Buy
Qty 1
$arket $echanis!
- !rder Matc$in%
& (lient takes a B*y position on ASK Price and Sell on
BID Price.
@hen a client takes a Buy Market 6rder or his3her
contin"ent order is tri""ered+ then=
*he client "ets open Buy position and s3he can
settle his3her position on arket B#$ Price+ P3L
will also be calculated accordin"ly.
&t the sae tie+ the respecti)e MM3client also
"ets open Sell position and it can also close its
position on arket &S' price+ based on order
atchin". So the sae MM ay not "et the Buy
and Sell of the sae client.
*here will be a difference in the total floatin"
profit % loss+ which is the *nreali>ed spread
and it will be e+*al to the pre"ailing spread.
?nreali>ed Spread will be ad=*sted for $#$
(alc*lations.
Note' If any MM wants to transfer its further risk and benefit back to the market, MM needs to
make sure its intention should not be in best for relevant BID/ASK side If its intention is
best in relevant side , then MM can re!"uote hi#her s$read to #ive the $riority to other
MMs/clients for best BID/ASK before transferrin# risk/benefit to other MMs/clients After that
MM can a#ain re!"uote the best s$read for the $riority of e%ecution
$arket $echanis!
- (is" Miti%ation
Sell Buy
Qty.
$$ can !itigate the risk by closing the
*nfa"orable positions any tie durin" tradin" hours.
Sell 'pen position of the MM will be
closed on $arket Ask Price and B*y
'pen Position will be closed on $arket
Bid Price+ as siilar to client.
#n such conditions+ further 9isk and
Benefit will be transferred to the next
best $$ <client with the best B#$ and
&S' Prices but e!ual no. of intentions of
particular MM will be cancelled fro the
other side.
$$@s !argin will be 9< A of Product
ar"in and their E+*ity 6it le)el is 0, A of
?sed $arginB (o!!ission (reainin" one
side)/
*here wonBt be any ipact on client8s
open position.

Sell Buy
Qty. 1
$arket $echanis!
-(is" Miti%ation
#n the sae way clients also can close
their position if they are *nwilling to take
f*rther risk or benefit/
#f a client places an order to settle its
e-istin" 6pen orders+ the orders atches
with best a)ailable fill+ whereas the
counter position at MM or clients+ who
the client initiated open order with+ shall
reain till an opposite position atches
a"ainst its MM intention3 clients liit
order.
Sell Buy
Qty. 1
9isk #ransfer) &s there will be any $$s in the arket( one $$ can
e)en transfer his open positions back to the !arket by closin" its open
positions for risk !itigation. #f no orders are atched within the
MMs37Ms3clients circle+ the orders will be cleared at the 7learin" ,ouse.
6rder !atching is possible aon" (lient to (lient (lient to $$ &
$$ to $$ which "i)es hi"her li!uidity in the arket.
Benefits
MM/Clients Position Qty. !en P"i#e
Settle$
P"i#e
D%ily Settle&ent
P"i#e
P"o'it/(oss
)n"e%li*e$
S!"e%$
Client B+y/Sell 1 41510.00 41602.50 ,250
0
MM5 Sell/B+y 1 41510.00 41610.00 10000
MM4 Sell 1 41610.00 41607.50 250
MM6 B+y 1 41602.50 41607.50 500
$arket $echanis!
-P/L calculation on Mar" to Mar"et )M*M+
*he UnrealiCed spread will be >ero for $ark to $arket (alc*lation and at the tie of .inal
Settleent+ because there will be sin"le $aily Settleent Price (M*M Price)3.inal Settleent
Price.
Bank accounts of all ($s & $$s will be adDusted by adding<ded*cting daily profit and
loss calculated based on daily settle!ent price.
&ll the floatin" P3L and financial adDustents are done on Mark to Market
(M*M) basis i.e. floating P<L along with settled positions. P<L will be
realiCed in concerned accounts e)ery tradin" day. #n case of profit+ one can
use the earned profit e)en before closin" the position also. Mar"in and
Stora"e cost will also be transferred accordin"ly.
*his practice pre"ents acc*!*lated d*es of any arket participants to be
forwarded to the ne-t tradin" day.
Benefits
MM can show any n*!ber of intentions in any contract at !*ltiple ti!es re"ardless of a)ailable
fund( but when these intentions are atched+ intentions with ins*fficient f*nds can also be !atched
which will result in cancellation of the re!aining intentions and closing of open positions with
ins*fficient f*nds. ;eainin" intentions of concern side will be cancelled to ake another MM8s price
in priority and to close the positions initiated with insufficient funds.
&t the tie of cancellation of reainin" intentions of MM+ intentions fro both B#$ and &S' side will
be cancelled for the particular contract e-cept the opposite intentions of his open positions CExcl*ding
'pen Positions of Self #radeD+ but the tie priority will be chan"ed to the current tie.
7lients8 orders will ha)e no effect in the abo)e process.
*he entire process will be done i!!ediately.
$arket $echanis!
-Incase of insufficient fund wit$ MM
Sell Buy
Qty. !
Sell Buy
Qty. !
$arket $echanis!
-Incase of insufficient fund wit$ MM, -.a#le
#n this e-aple+ $$1 has s*fficient f*nds only for 1 lots b*t has shown
the intentions of 3 and its price is in priority/
#n this case if the client takes > Buy 6rders then initially all three orders of
the 7lients will be atched with MM: and MM: will ha)e / B#$ and 5
&S' intentions in the first priority.
MM: doesnBt ha)e sufficient funds for one open position so that one open
position should be li!uidated but to close that position MM: itself is in
priority.
So+ the reainin" 5 order will be canceled to "i)e the priority to another
MM.
6nce another MM will "et priority+ the position with insufficient funds will
be li!uidated and the further risk and benefits will be transferred to MM>
who is in the first priority thereafter.
&t the tie of cancellation of reainin" intentions of MM+ intentions fro
both B#$ % &S' sides will be cancelled for the particular contract e-cept
the opposite intensions of his open positions CExcl*ding 'pen Positions of
Self #radeD+ But the tie priority will be chan"ed to the current tie.
$arket $echanis!
-Li/uidation is based on 0I0! et$od

Li+*idation is based on EIE' !ethod

.or e-aple+ if a MM has two open Buy positions % any client places a B*y order
*nder sa!e $$ a<c + which eans a Sell position to that MM+ then first B*y open
position get li+*idated and Profit and Loss will be booked accordin"ly % !argin
beco!es free for the li!uidated positions.
Close$ Position Qty. !en P"i#e Settle$ P"i#e Settle$ P/(
B+y 1 41410.00 41607.50 1,750
$arket $echanis!
-(eali1ation of s#read in MM account
I' MM" closes its open sell position t-"o.in/ 0%#1 to t-e &%"1et2
t-en t-e P#$ %ill &e reali'ed e3%#tly as floatin( %n$ t-e '+"t-e"
"is1 %n$ 0ene'it .ill 0e t"%ns'e""e$ to MM4. !en sell !osition .ill
0e #lose$ on M%"1et As1 P"i#e %n$ si&il%"ly o!en 0+y !osition .ill
0e #lose$ on M%"1et Bi$ P"i#e.
Spread %ill &e reali'ed in % MM4s %##o+nt .-en % MM (ets &ot)
Buy and Sell orders '"o& #lients/MMs #i"#le.
5./. MM6 -%s t.o o!en Sell !ositions %n$ -%s %lso /ot t-e 0est BID
intention in &%"1et $e!t- %n$ i' %ny #lient t%1es 2 lot &%"1et Sell
o"$e"s2 t-en o!en !ositions o' MM6 /ets s6+%"e$ o'' on BID P"i#e
0e#%+se #lient t%1es sell o"$e"s on t-e s%&e2 .-i#- "es+lts in t-e
s!"e%$ "e%li*%tion in MM4s %##o+nt. i.e. MM4s !"o'it .ill 0e in#"e%se$
0y t-e s!"e%$ 7%l+e %n$ (oss .ill 0e $e#"e%se$ 0y t-e s%&e.
Spread Benefit= Market Makers are allowed to *se gi"en range of spread
to +*ote the prices+ which results in good spread benefit for the MMs.
*he strate"ic selection of copetiti)e and coparati)e spread helps to
!axi!i>e the ret*rn and !ini!i>e the risk for the MMs.
$argin 9elease facilities) &s MMs are !uotin" Bid and &sk prices
siultaneously( in case of e-ecution of both buy and sell !uotes+ the initial
ar"in "oes free for the particular !uantities which allows MMs to
increase their trade lots.
Benefits
Thank You
Mercantile *+c)an(e ,epal $imited
Alli%n#e To.e"2 8o+"t- 8loo"2 C-%"1-%l2 Dilli0%*%"2 K%t-&%n$+29e!%l.
:e0site; ....&e3ne!%l.#o& 5<M%il; 0$=&e3ne!%l.#o&
P-one; >,77<1<4011542/43/44 8%3; >,77<1<4011545/46
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Disclaier ' The features are subject to change in order to best meet the needs of the market.