Until a few years ago, not many listed companies took an interest in how their shares were in fact priced, but this is beginning to change. More and more companies now pay a trading member to quote two-way prices in their shares, which means that the investors can be sure to trade when the need arises and also that the difference between the bid price and ask price, the so-called spread, is at a reasonable level.
The article focuses on the results achieved on the Stockholm Stock Exchange following the exchange’s initiative in 2002 to support the liquidity in small and medium-sized companies. At that time the listed companies were given the possibility to have trading members quote prices in their shares. Among the significant improvements in market quality was a narrowing of the spread of 53 percent and many more orders in the trading system.
The results from the study by Tanggaard, Anand and Weavers show that it is worth while entering a liquidity agreement since the share price is directly related to the liquidity in the market. The investment thus has a positive value for the companies, which is one the reasons that they should play an active role in ensuring good liquidity in their shares.
Read the full article ‘Should listed firm’s pay for market quality?’ in Focus no. 103 at the website of the Copenhagen Stock Exchange at www.omxgroup.com.
Questions to the authors may be put to the email address: copenhagen@omxgroup.com until September 20, 2005.
*Note: Carsten Tanggaard comes from Aarhus School of Business, Amber Anand from the School of Management, Syracuse University, New York and Daniel G. Weaver comes from the Rutgers Business School, Rutgers University, New Jersey.
