Market maker boosts liquidity; balances bids, offers: Analysts

Tadawul trading screen

Appointing a market maker is driven by weak trading activities on some stocks, analysts told Argaam, highlighting its significance in boosting liquidity through narrowing the gap between offers and bids, while enhancing companies’ attractiveness and investor confidence.

Analysts expected a higher number of companies with lower turnover to appoint market makers to attract more investors and increase liquidity.

The Capital Market Authority (CMA), in December 2022, approved the “Regulations of Market Making and Market Making Procedures”, previously proposed by the Saudi Exchange (Tadawul), in a bid to facilitate trading activities and boost stock market liquidity, Argaam reported. 

Role of Market Maker

The market maker plays a vital role in increasing the trading volume and reducing price gaps between offers and bids for securities, rendering the market more active and attractive, said Mohammed Alkassem, Head of Brokerage at Al Rajhi Capital.

This will enhance investor confidence, making it easier for traders to participate and take advantage of the available investment opportunities, he added.

After the CMA approval of the market-making regulations in December 2022, Al Rajhi Capital started preparations for market-making, receiving an overwhelming response from listed companies that chose Al Rajhi as a market maker, said Alkassem.

This activity came in line with plans to boost Tadawul growth and achieve the objectives of the Financial Sector Development Program and Vision 2030, he noted.

Ghassan AlThukair, Managing Director and CEO of Miyar Capital, indicated that a market maker is CMA-licensed, registered at Tadawul and aims to provide liquidity and set trading prices more efficiently by making sell and buy orders throughout the trading session.

However, such a role is not risk-free, as it may incur massive losses in case of a steep price decline, so a market maker should develop hedging strategies, he added.

Financial analyst Saud Al-Mutairi stated that a market maker seeks to boost the traded volume of a certain stock. Thus, the market maker enhances market liquidity and improves its efficiency. A market maker aims to create a continuous balance between offers and bids, and trim the gap between buy and sell prices.

In a phone call with Argaam, the economist added that a market maker continues to place orders to buy and sell the securities of a listed company during the session to drive trading liquidity on that company. It also places orders at close prices to drive trading on the stock and increase liquidity.

Economic analyst Saad Thagfan also noted that a market maker’s role is to attract more liquidity by creating offers and bids for listed securities, while enhancing the gap between them.

Vital Role of Market Maker

AlThukair noted that a market maker drives stocks by offering them for sale and buying at a low spread, which stimulates traders to buy and sell this stock. Thus, a market maker can make a profit.

He explained that if there is a low liquidity stock, when the best bid and offer prices are placed at SAR 15 and SAR 15.50, respectively, the spread will remain high. Orders will also remain pending for a long time. The market maker’s role is to offer 1,000 shares at SAR 15.30 and ask for 1,000 shares for SAR 15.20. He will narrow the price gaps, enhance trading and encourage traders to adjust their orders accordingly.  

However, such a role is not risk-free, as it may incur massive losses in case of a steep price decline, so a market maker should develop hedging strategies, AlThukair added.

Expected rise in number of companies

AlThukair indicated that more companies are expected to appoint a market maker to provide the minimum liquidity required to attract certain categories of investors (local and foreign funds as well as high-net worth individuals) and include stocks in global and local indices.

He stated that an active market is deemed a necessity if the company increases capital, offers new shares or secures financing facilities to fund expansions.

Additionally, an active market may be needed if a shareholder wants to divest a stake, or sell an entire ownership in a company, and would further help the stock to trade at its fair value.

The companies expected to appoint a market maker over the coming period include Arabian Internet and Communications Services Co.  (solutions), Arab Drilling Co., Elm Co., Theeb Rent A Car, Saudi Research and Media Group (SRMG), Arabian Contracting Services Co.  (Al Arabia), Alkhorayef Water and Power Technologies Co. (AWPT), and Jahez International Company for Information System Technology (Jahez).

Al-Mutairi concluded that a rise is expected in the number of companies that appoint market makers, especially those, which have not yet decided a stock split, citing that stock split processes undermine the role of market makers.

According to data available with Argaam, Al Moammar Information Systems Co. (MIS), Cenomi Centers, and Thob Al Aseel Co. announced appointing a market maker over the previous period.