Stockholmsbörsen launched the liquidity provider system in May 2003. The study of the system was conducted by Dan Weaver of Rutgers University, Carsten Tanggard of Aarhus School of Business and Amber Anand of Syracuse University, who studied trading in the shares of 22 companies prior to and after the companies had commissioned a liquidity provider. The study shows that:
- The average percentage spread decreased by more than 50%
- The order-book volume rose by more than 40%
- Intra-day volatility¹ was reduced
- The number of transactions rose by an average of 75%
- The average order size almost doubled
- Indications that the reduced transaction costs have resulted in higher share prices
"Naturally, we are extremely pleased that we have facilitated an improvement in the prerequisites for share investment, particularly in those shares that were previously less liquid. As a result of the liquidity provider initiative, we have improved the quality of share trading and reduced the investors' risk and transaction costs, while increasing the potential for providing a correct valuation of listed companies," says Torsten Örtengren, Head of Listing at Stockholmsbörsen.
Stockholmsbörsen focuses continuously on creating the best possible conditions for efficiently functioning trading among all of the parties in the market. All of the parties, not least the investors, regard the liquidity of share trading as one of the principal factors in this respect. Satisfactory liquidity results in lower investment costs and, from the investors' viewpoint, simplifies the process of both buying and selling shares, thus reducing the risk. In an international perspective, share liquidity on Stockholmsbörsen is very good. However, certain companies, mainly smaller ones, have experienced lower liquidity. To date, 11 members have concluded agreements with Stockholmsbörsen under which they undertake to serve as liquidity providers, while 45 listed companies have enlisted the services of a liquidity provider.
"Interest among members in becoming liquidity providers has exceeded our expectations, as has the companies' interest in commissioning liquidity providers. Companies with healthy share liquidity have also elected to utilize liquidity providers in order to further improve the conditions for investment in their shares, which we regard as very positive. We now hope that the media will show an increased interest in including the LP designation² in their price lists, so that investors are aware of which companies have liquidity providers," says Torsten Örtengren, Head of Listing.
¹Intra-day volatility express changes in share price during a trading trade. ²LP=Liquidity provider. Although this designation is included in the price lists provided by Stockholmsbörsen, it is not included in the pricelists provided by certain parts of the media.
