Market Maker for SME IPO

Market makers are registered members of the stock exchange (stockbrokers) who undertake the buying or selling of securities in the stock market at specified prices at all times.

Market makers help listed companies in improving the liquidity and better price discovery of the stock. They simply infuse liquidity to thinly traded stocks. They also monitor the trading in the script and report it to exchange in case of any irregularities.

Market making is done in stocks, futures, and options.

Market makers display buy/sell prices for a number of shares. Once an order is received from the buyer, the market maker sells from its own holdings to complete the order.

Market makers are paid for the risk they take. They are also allowed to place 2-way orders (buy and sell) at the same time. For example, they can place in the range Rs 100 – 102. They will buy stocks at 100 and sell them at 102. They keep the profits made.

Market makers for the particular security are recommended by the merchant banker (lead manager) to the exchange at the time of filing DRHP for IPO or at later point of time. The lead manager of the issue and the issuer (promoters of the company) choose the market markers.

Market making was first introduced in 2012 in India. List of approved market makers is available on the website of BSE and NSE.

How is Market Making help SME IPO?

Most SME platform listed stocks struggles with liquidity. Many investors stuck with an SME stock in case of absence of buyers.

Market Making is a facility where the market maker is required to provide eligible 2-way quotes in securities listed and traded on the SME platform.

Market maker helps with the liquidity issues of an SME stock. Market making is mandatory in respect of all securities listed and traded on SME Exchange.

Merchant bankers ensure market making through brokers of SME segment for a minimum period of 3 years from the date of listing of security issued.

Market making is carried out only by eligible trading members (brokers) registered as market makers with the exchange where security is listed.

There shall be a minimum of one and maximum of five designated Market Makers for every security traded on the SME segment.

Benefits of Market Making

1. Market Makers improve the liquidity for the company stocks. This results in better pricing of shares.
2. Better liquidity in the stock help invstors in to selling their holding easily at any point in time.
3. Market making encourge new investors to buy the stocks as Market Maker offering assured liquidity.
4. Market makers compete among themselves which results in better pricing for investors.
5. Market makers also collect and analyze the data about the given stock which helps both investors as well as the company.
6. Promoters holding is not eligible to be offered to the market makers.

Who can become Market Maker?

Following are the eligibility criteria for Market Makers at NSE:

1. Only trading members of the Capital Market Segment of NSE are eligible to apply for registering as market makers.
2. At the time of application and at all times while being a Market Maker, the Market Maker should meet the minimum net worth of Rs. 1 crore.

Market Makers Roles & Responsibilities

As per the guidelines provided by NSE, the roles and responsibilities of market makers are:

1. The Market Maker shall provide eligible two-way quotes for security from the date of listing of security.
2. An eligible two-way quote shall mean a bid and an offer simultaneously for a minimum of one trading lot and within the defined maximum bid-offer spread for the security. The defined bid-offer spread for each security shall be published by the exchange from time to time.
3. Execution of the order at the quoted price and quantity must be guaranteed by the Market Maker, for the quotes given by him.
4. During the compulsory market making period, the market maker shall not buy securities from the promoters.
5. The minimum depth of the quote shall be Rs.1,00,000.
6. The Market Maker has to be present for 75% of the market time for each trading session of the normal market.
7. Market Maker has to ensure arrangement of minimum inventory on the date of allotment.

Who pays to market makers?

Market makers get an incentive to recommend the securities to the investors and thereby creating a market for the lesser traded options.

For IPO's, the issuer company pays to Market Makers with help from the lead managers.

Exchanges also provide incentives for market making.

Answered on 2023-02-10