Mandatory Market Making under high stress conditions

The Sapere submission, written by Toby Stevenson, Corina Comendant and Rohan Trill, examines whether to implement a permanent “circuit breaker” mechanism for mandatory market making in New Zealand’s electricity futures market during high volatility periods, following market stress events in 2024. The Electricity Authority consulted on three options:

1. let the urgent code amendment expire and revert to status quo,
2. make the urgent amendment permanent, or
3. modify the amendment. The Authority preferred Option 1 as the default, requiring Option 2 to demonstrate clear superiority.

Sapere proposes an alternative fourth option featuring a traffic light system. When market conditions move from “green” to “amber” (indicating high stress based on levels of price volatility), the Authority would assess whether to provide relief to market makers from their obligations. If relief is granted, the system moves to “red” and activates a volatility control mechanism (VCM) whereby specifications such as bid ask spreads would be relaxed to predetermined levels until the period of stress passed.

The key question addressed is whether long-term consumer benefits from mandatory market making are enhanced or diminished by introducing a circuit breaker with statistical volatility triggers. Sapere argues that a circuit breaker is a superior approach to enforcing business as usual market making specifications during periods of high stress i.e. periods of extreme price volatility.