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An important objective for this new arrangement is to improve liquidity in shares and primary capital certificates that have so far attracted only limited interest. The introduction of a similar scheme in Sweden led to a marked improvement in both the differential between best bid and offer prices (spread) and in the number of trades for securities with a liquidity provider.
The main features of the Oslo Børs liquidity provider scheme will be as follows:
- spread not to exceed 4% of the offer price
- volume quoted in the trading system order book for both bid and offer prices to be at least four round lots
- binding orders to be quoted for at least 85% of the time for which continuous trading takes place during every trading day, except where Oslo Børs approves a temporary exemption from these requirements for specific reasons.
In order to participate in the liquidity provider scheme, a company must sign an agreement with an investment firm approved by Oslo Børs as a supplier of liquidity provider services. All liquidity provider agreements must be disclosed through the Oslo Børs company announcement system. In addition, Oslo Børs will publish details on its web site and elsewhere of the member firms approved as suppliers of liquidity provider services. The stock exchange lists, tables etc. published by Oslo Børs will also identify which shares have a liquidity provider.
Implications for liquidity categories
In October 2004, Oslo Børs introduced new categories for listed shares and primary capital certificates based on liquidity. The launch of the liquidity provider scheme will have an effect on allocations to the liquidity categories.
The quality of the order book, as demonstrated by a low bid-offer spread and certain order volumes, is of benefit to investors and is also a good indicator of a market’s liquidity. Oslo Børs therefore intends to change the criteria for the OB Match category so that shares which do not meet the threshold of at least 10 trades per day but which show a spread performance over the target monitoring period that satisfies the minimum requirements for a liquidity provider arrangement will be included in the OB Match category. Shares where the issuer has entered into liquidity provider agreement with a member firm in accordance with the arrangements set out above will be automatically included in the OB Match category with immediate effect.
Oslo Børs plans to implement these changes to the liquidity categories in mid-March 2005.
