SME IPO Consultant
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A Market Maker is an entity that works with an Exchange to increase liquidity in the stock market. They do this by participating in the transactions on the Exchange as both buyers and sellers.
Market Maker Definition
SME IPO Market maker is a trading member (broker) who agrees to make markets i.e. provide liquidity for the securities that get listed on SME platforms i.e. BSE SME and NSE Emerge.
The market maker guarantees to buy or sell the shares at prices just below or above the market price. Market makers display buy/sell prices for a certain number of shares. As soon as an order is received from the buyer, the market maker sells from its own holdings to complete the order. The process begins on the day the IPO is listed or on the first day of trading.
For example, if an investor places an order to buy or sell a security, the market maker can step in to ensure that the order is executed if there are no other immediate buyers or sellers.
Market Makers always offer to buy shares for slightly more than the market price and sell them for slightly less. They do not buy or sell exactly at the market price. They place 2-way orders (buy and sell) at the same time. For example, they can place orders in the range of Rs 100 – 102. They buy shares at 100 and sell them at 102 and keep the profits made.
Market Maker role in IPO
The roles and responsibilities of a SME IPO Market Maker include the below:
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Roles & Responsibilities |
Details |
|---|---|
|
Provide 2-way quotes |
Must provide both buy and sell quotes 75% of the time each trading day and ensure continuous visibility on the trading screens without extended breaks. |
|
Inform blackout periods |
Notify the exchange in advance of blackout periods when quotes are unavailable. Maintain transparency regarding the availability of quotes for market participants. |
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Maintain sufficient stock |
Maintain adequate stock inventory to meet trading requirements. Use their own stock to execute orders promptly at quoted prices. |
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Minimum quote amount and trading size |
Minimum quote size is ₹1,00,000. |
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Guarantee execution at quoted prices |
Ensure that orders are executed at the quoted price and quantity without deviation. |
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Maintain bid-ask spreads and circuit filters |
Adhere to the spreads given by SEBI for different price bands. Manage circuit filters to prevent extreme price fluctuations. Adjust the rates as and when required but end the responsibility when the prices are 1% below the circuit limits. |
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Change quotes eligibility |
Allowed to revise quotations even if no transactions take place at the prices displayed. Obligation to maintain correct pricing and market integrity at all times. |
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Support price stability |
Contribute to stabilizing prices under volatile market conditions. Facilitate orderly trading and maintain market liquidity. |
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Adhere to Exchange guidelines |
Begin quoting prices immediately after listing. Comply with all stock Exchange rules and regulations. A market maker must serve in this capacity for three years. |
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Prohibition on direct stock purchases |
A market maker should not buy shares from promoters during the market making period. |
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Consequence for non-performance |
If obligations are not met for three consecutive days, automatic deregistration from market-making duties for that stock will occur. |
Market Maker Requirements
An entity can apply to Exchange for market maker registration provided :
- It is a trading member of the exchange.
- It has a minimum net worth of Rs. 1 crore. This net worth amount should be maintained at all times. i.e. even after it becomes a market maker.
Market Maker registration
A market maker is required to be registered with the exchange. The applicant is required to upload the application form along with required documents on the desired exchange platform (BSE/NSE - ENIT portal).
Documents required for market making registration :
- Market maker application form.
- SEBI registration certificate of trading member.
- Net worth certificate from chartered accountant.
- Company board resolution to act as market maker.
- Experience certificate of 2 designated directors of the trading member.
Note : The above are generic documents and may slightly differ based on exchange.
Once the exchange approves the application form, the trading member gets their market maker registration number. However, this does not give them the right to start market making. Market making is security/stock specific and the exchange needs to be informed about the security for which the market maker will make the market.
The issuer company appoints the market maker in consultation with the merchant bankers and signs the market maker agreement.
Benefits of Market Maker in SME IPO
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Benefits of Market Maker in SME IPO |
Explanation |
|---|---|
|
Enhanced Liquidity |
Market Makers ensure the constant availability of buyers and sellers by quoting buy and sell prices for SME IPOs, increasing liquidity and enabling smoother trading. |
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Increased Investor Appeal |
Market Makers increase the attractiveness of SME IPO Company for institutional investors through liquidity and price stability, which can increase demand and valuations. |
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Price Stability |
Market Makers stabilize the share prices of SME IPO Company with consistent bid and ask prices, which is crucial for managing volatility in the initial phase of trading. |
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Reduced Price Fluctuations |
Market Makers mitigate sudden price fluctuations, ensure orderly trading conditions and reduce the risk of significant fluctuations that could deter investors and destabilize the market. |
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Long-Term Support |
Market makers' commitment to supporting SMEs for three years post-IPO enhances investor confidence by fostering a stable and well-supported market environment. |
Market Maker reservation portion
Every SME IPO should have a minimum 5% of its issue size reserved for the market maker. I.e. a market maker has to take a minimum 5% of the IPO issue size in its account to provide market making facilities.
Based on the inventory in its account, a market maker can provide buy and sell quotes. It can provide buy quotes upto a certain threshold post which the market maker is first required to reduce the stock from its account and re-enter to provide fresh buy quotes.
Market maker inventory thresholds
|
Issue Size |
Buy quote exemption threshold(including mandatory initial inventory of 5% of the Issue Size) |
Re-Entry threshold for buy quote (including mandatory initial inventory of 5% of the Issue Size) |
|---|---|---|
|
Upto Rs. 20 crores |
25% |
24% |
|
Rs. 20 to Rs. 50 crores |
20% |
19% |
|
Rs. 50 to Rs. 80 crores |
15% |
14% |
|
Above Rs. 80 crores |
12% |
11% |
Let us understand the above in simple terms.
- If the issue is upto Rs. 20 crores, the market maker can provide buy quote only till 25% of issue size, i.e. upto till the value of shares held by them reaches Rs. 5 crores. Beyond that, he cannot buy more holdings.
- After this point, he can only provide sell quotes to reduce the inventory. Once he reaches upto 24% of issue size i.e Rs. 4.8 crores of stock he can again provide buy quotes and buy more stock upto Rs. 0.2 crores.
- There is no restriction on providing sell quotes at any point of time till the market maker has stock in his inventory.
- Similarly, the calculations can be applied across each issue size to understand the exemption and re-entry points.
Note :
- The threshold percentages depend on the size of the IPO to ensure market stability and liquidity management.
- The above percentages are inclusive of the mandatory market maker reservation portion of 5%.
- If a Market Maker depletes its holdings through the market-making process, the Exchange will notify SEBI after verification.
Market Maker selection
Choosing the right Market Maker for your SME IPO is crucial for the success of the offering and the subsequent trading of your company's shares. One stock can have maximum of 5 market makers.
SME IPO companies should choose a market maker that is best suited to their specific needs, to ensure solid support and stability during the IPO and subsequent trading phase. To find the best market makers for SMEs, several important factors need to be considered.
Factors to consider when choosing a Market Maker for an SME IPO
|
Factor |
Description |
|
Experience and Expertise |
Evaluate the market maker's experience in handling IPOs, especially in your industry or sector. |
|
Reputation and Track Record |
Assess the market maker's reputation in the financial markets and their track record with past IPOs. |
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Market Making Capabilities |
Consider their ability to provide liquidity and support trading in your company's shares post-IPO. |
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Real-time adaptability to market conditions |
In volatile markets, market makers must swiftly adapt by analyzing real-time trends, trade volumes, and news sentiment. Access to up-to-date data enables them to stay competitive and agile, responding quickly to evolving market conditions. |
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Technology and Trading Platform |
A reliable market maker uses automated algorithms and advanced software for precise, efficient order execution. managing high trade volumes to enhance liquidity provision and maintain market operation seamlessly. |
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Understanding of Your Business |
Ensure that they understand your business model, industry dynamics, and growth prospects. |
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Commitment to Investor Relations |
Evaluate their support in managing investor inquiries and maintaining market confidence post-IPO. |
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Regulatory Compliance |
Confirm their adherence to regulatory requirements and ability to navigate listing rules effectively. |
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Costs and Fees |
Understand their fee structure including underwriting fees, commissions, and other charges. |
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References and Recommendations |
Seek feedback from other companies or advisors who have worked with the market maker previously. |
List of Market Makers in India
Here is a list of market makers in India, along with the number of IPOs in which they were involved. This list also contains information on the IPOs that led to listing gains and their subscription data.
Both the BSE SME and the NSE Emerge maintain separate lists of their respective Market Makers, which are important resources for SME companies seeking trading support and liquidity in the stock markets.
- Market Makers List: BSE SME
- Market Makers List: NSE Emerge
Difference between a Market Maker and a Broker
|
Points |
Market Maker |
Broker |
|
Role |
Acts as a counterparty in trades, buying and selling securities to provide liquidity and maintain orderly markets. |
Facilitates transactions between buyers and sellers by executing orders for clients on the Exchange for a fee or commission. |
|
Function |
Quotes bid and ask prices for securities, ensuring there are always buyers and sellers available in the market. |
Executes orders placed by clients as per respective instructions. |
|
Inventory |
Maintains a buffer of securities, using their own capital to facilitate trading and manage risk. |
Does not hold a buffer of securities, instead, they execute client orders by matching them with counterparties in the market. |
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Compensation |
Earns profits from the spread between bid and ask prices. |
Earns commissions for executing client orders and providing advisory services. |
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Regulation |
Adheres to specific market-making regulations, including maintaining sufficient funds and stock thereby complying with trading rules. |
Regulated by financial authorities to make sure they follow laws and rules for brokerage services and protecting clients. |
SME IPO Consultant
Key Takeaways
- Market makers are essential for SMEs in their IPOs for providing the liquidity, stability and efficiency needed to successfully navigate the public market.
- Market makers ensure smoother trading, reduce price volatility and increase investor confidence by providing continuous bid and ask prices.
- Market makers must adhere to certain regulations, including maintaining an appropriate level of inventory and managing inventory according to the size of the IPO to ensure orderly market conditions.
- Market makers differ from brokers. In market making, they actively manage their own inventory and provide liquidity, while brokers act as intermediaries for customer transactions without holding inventory.