Derivatives · Pro · 4 min

Issuer, market maker, quoting

You can explain how issuers create, quote and hedge structured products, what that means for spreads and fair prices, and how to check a quote.

One bank, both prices

When you buy a share on an exchange, the seller is another market participant, often one of many. When you buy a certificate or warrant, the seller is almost always the bank that created it. That same bank also decides the price at which it will buy it back.

That setup is not hidden, and it is not automatically unfair. But it shapes your costs and your result. This lesson explains how issuers price, quote and hedge their products.

Create, quote, hedge

Creation. An issuing bank designs a product, such as a bonus certificate or a turbo, by combining building blocks: often a bond-like component and option components. It sets the terms and publishes them.

Quoting. The issuer usually acts as market maker for its own products and posts an issuer quote, a bid and an ask, on the exchange during trading hours. As the lesson on market makers explained, market makers earn from the spread and adjust it to their risk. For structured products, the quote depends on:

the underlying's price,
implied volatility and interest rates,
dividends expected on the underlying,
the issuer's own pricing and margin.

Hedging. After selling you a product, the issuer typically hedges its risk with the underlying and options. Its profit comes mainly from margins built into the product's price and from the spread, not from your losses as such.

Consequences for you:

Spreads change. When the underlying's market is closed, or volatility jumps, hedging is harder, and issuers often quote wider.
Pricing differs between issuers. Similar products can be priced quite differently. BaFin's market studies on certificates looked closely at costs and how they are explained to investors.
Liquidity depends on the issuer. If the issuer stops quoting, for example in a crisis, selling can become hard.

0.5 vs. 2.0 spread

A fictional bonus certificate on a European share index:

At 11:00, with the index trading, the issuer quotes 100.00 bid and 100.50 ask. Spread: 0.5.
At 21:00, the index's exchange is closed. The issuer still quotes, but at 99.00 bid and 101.00 ask. Spread: 2.0.
A similar certificate from another issuer, with almost the same terms, trades at 99.60 ask during the day.

Buying the first certificate at 21:00 would have cost 1.40 more than buying the second one during the day.

Common mistakes

Trading when the underlying's market is closed. Spreads are usually wider.
Assuming all issuers price the same. Compare similar products.
Ignoring the built-in margin. It is part of every structured product's price.
Forgetting that liquidity depends on one bank. If it stops quoting, exits get hard.

The takeaway

For certificates and warrants, the issuer usually quotes both bid and ask. Its spread, pricing and hedging decide much of your result.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the step in which the bid and ask you trade at are set.

Tap the chart.

For most certificates and warrants, the issuer acts as market maker for its own products.
2Why can a certificate's spread widen when the underlying's market is closed?

Without a liquid underlying market, hedging is harder and pricing less certain.
3What does an issuer usually do after selling you a certificate?

Issuers typically hedge with the underlying and options. Their profit comes from margins built into the price.
4How can you check whether a certificate's quote is fair?

Comparing similar products and the underlying helps spot wide spreads or expensive pricing.

of 4 correct.