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What are market makers and what is their role in an SME IPO?

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Market makers help listed firms in increasing stock value discovery and liquidity. The SME IPO is an Initial Public Offering of businesses that keep sales, assets or the number of workers below a specific level known as small and mid-sized companies (SMEs). SMEs get listed on an exchange like NSE emerge

Who are Market Makers

Market makers are licenced stockbrokers who regularly purchase and sell assets on the stock market at predetermined rates. They are registered members of the stock exchange.

Market makers aid listed firms in increasing stock price discovery and liquidity. They only inject liquidity into equities that are not traded as much, to increase their visibility and get trading moving. Additionally, they keep an eye on the trading within the script and notify the exchange of any abnormalities.

Market makers exhibit the purchase and sell prices for various securities on trading platforms. They usually sell from their own assets to fulfil an order, after it is placed by the buyer. Market makers employ trading in stocks, options and futures. The most commonly used in order of market makers are brokerage firms, which provide investors with buy and sell options.

Who can apply to become a Market Maker?

The NSE’s qualifying requirements for market makers are as follows:

  • To register as a market maker, an applicant must be a trading member of the NSE’s Capital Market Segment.
  • The Market Maker must also have a minimum net worth of Rs. 1 crore both at the time of application and at all times while serving as a Market Maker.

How do Market Makers earn money?

 Market makers generate money through the difference between the bid and offer prices for the securities that they trade in. Market makers are paid for the risk of temporarily holding the assets since they bear the risk of a particular stock rapidly losing value between the time that it is bought and sold. For example, if a market maker notices that a certain stock has a bid price of Rs. 10, but an asking price of Rs. 10.2, he/she can buy the stocks for the bidding price and sell them to buyers for a slightly higher price (that they decide based on the stock’s fluctuations). Hence, 0.2 Rs of the difference in prices is where a market maker earns their profit from.

According to the NSE’s standards, market makers have the following tasks and responsibilities:

  • From the day the security is listed, the market maker must provide securities with valid two-way quotations.
  • A bid and an offer made concurrently for at least one trading lot and within the security’s maximum bid-offer spread are considered to be acceptable two-way quotes. The exchange will occasionally publish the specified bid-offer spread for each asset.
  • The Market Maker’s quotation must have a minimum depth of Rs. 100,000.
  • The Market Maker, for each quotation he provides, must ensure the execution of the transaction at the indicated price and quantity.
  • The market maker is not permitted to purchase securities from the promoters during the required market-making time.
  • Each trading session of the standard market requires the Market Maker to be present for 75% of the market time.
  • On the day of allocation, the Market Maker must make sure that there is a minimum amount of inventory set up.

How is Market Making beneficial for the Indian Stock Market?

  • Market makers increase the firm stock’s liquidity. This results in better share prices.
  • Better stock liquidity enables investors to sell their holdings at any moment with ease.
  • New investors are encouraged to purchase equities through market making because market makers provide guaranteed liquidity.
  • Market participants compete with one another, which leads to more favourable pricing for investors.
  • In order to benefit both investors and the business, market makers also gather and evaluate information regarding the stock in question.
  • The involvement of market makers helps create more movement among investors, as well as create a larger number of transactions in the stock market.
  • The promoters’ holdings are not permitted to be divulged to market makers, hence no discrimination in the buying and selling of non-performing stocks can take place smoothly.

What benefits does market-making provide for SME IPOs?

  • The majority of SME platform-listed stocks have liquidity issues. With the help of market makers, many investors can be observed to remain committed to an SME stock, even in the event of a buyer shortage,
  • In the market-making facility, securities listed and traded on the SME platform must have acceptable 2-way quotations provided by the market maker.
  • A market maker can help SME stocks reach certain liquidity thresholds. It is compulsory for the involvement of market makers when it comes to stocks on the SME Exchange, as it helps their trading frequency.
  • Market making through brokers for at least three years from the listing date of SME IPOs is guaranteed by merchant bankers.
  • Only eligible trading members (brokers) registered as market makers with the exchange where the security is listed are permitted to conduct market making.

Every security traded in the SME sector should have a minimum of one and a maximum of five approved Market Makers.

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