Stockholmsbörsen strives constantly to create the best possible conditions for efficient trading for all market parties. Liquidity in share trading is one of the most important factors for efficient trading for all players, particularly investors. Higher liquidity not only means lower investment costs, but also simplifies buying and selling of shares, thus reducing risk. In an international perspective, liquidity in share trading on Stockholmsbörsen is very high. However, there are shares, particularly small cap shares, in which liquidity may be low.
"Share liquidity is of critical importance in reducing both the costs and risk of investments, as well as for obtaining a fair valuation of an exchange-listed company. By introducing a system for liquidity providers, Stockholmsbörsen is creating conditions for more efficient trading with greater liquidity for less frequently traded shares," says Simon Nathanson, vice president of Stockholmsbörsen.
Investment costs are reduced because the banks and brokers providing liquidity establish a maximum spread, meaning the difference between the bid and ask prices. Studies show that trading increases as a share's spread narrows because trading in the share becomes more attractive. Increased trading, in turn, increases the number of buyers and sellers, thus improving liquidity. Companies availing themselves of the liquidity provider will be denoted by LP (Liquidity Provider) in the share price listing as a service to investors.
A member of Stockholmsbörsen that has contracted to comply with certain regulations and minimum requirements as a provider of liquidity may in turn sign an agreement with an exchange-listed company. The liquidity provider is obligated to ensure that bid and ask prices for the share are updated continuously during trading hours. The established bid and ask prices should apply for a specified volume and within a given spread. Stockholmsbörsen has already begun contacting companies with low liquidity in their shares to discuss measures to improve liquidity. Liquidity providers will further improve the prospects for such measures.
The new system with liquidity providers will be introduced starting on May 12, 2003.
