In the liquidity providing the market maker (Liquidity Provider, LP) commits to continuously provide bid and ask prices for a listed company's share. The maximum difference between the bid and ask prices offered by the Liquidity Provider is four per cent of the bid price and the volume of the offers is at least four round lots. Furthermore, the offers must be valid in the opening auction and for at least 85 per cent of the continuous trading period without evening trading. The Liquidity Provider may also commit to stricter conditions.
The new model benefits the investors, the issuers and the trading members alike. The aim is that the investors' costs will decrease because of the reduced difference between bid and offer prices. This increases the trading volume and decreases the risk. Increased trading volume in turn brings more buyers and sellers, improving the liquidity even more.
Furthermore, the liquidity providing is as a concrete tool for a listed company to enhance the efficiency of trading in its share and to serve the shareholders. In addition, the company will benefit from increased visibility due to enhanced market. The model benefits most the less traded companies. For the trading members the new model will bring new business opportunities by providing the possibility to operate as a Liquidity Provider.
- We are constantly making efforts to provide market participants with the best facilities for well-functioning trading. The efficiency of the markets and pricing is one of the most essential factors of well-functioning share trading for all participants. The trading members and the issuers alike have expressed their interest in improving the liquidity and the interest in the listed shares by utilising the new liquidity providing model, says Jouni Torasvirta, Head of OMHEX's Cash Markets in Stockholm and Helsinki.
Helsinki Exchanges concludes an agreement on liquidity providing with a trading member. In turn, the trading member enters into a Liquidity Provider agreement with a listed company. The share having a Liquidity Provider will be marked with the designation LP in the official price lists of Helsinki Exchanges. Information on the trading members providing the service is available at www.hex.com. The new Guidelines of Helsinki Exchanges on market making enter into force on April 20, 2004.
A similar liquidity providing model was introduced at Stockholmsbörsen in May 2003. According to a study conducted in the autumn 2003, the average difference between bid and ask prices decreased from 7.0 per cent to 2.7 per cent and the number of transactions increased by 75 per cent on average in the shares with a liquidity provider.
