The Capital Markets Authority (CMA) will license broker-dealers in its quest to introduce market makers as a cushion to the slump in the equities market.
Broker dealers will be allowed to buy and sell equities for their own accounts in expected changes to the public offers and listing of securities regulations which are set to be gazetted.
The new class of investors which adds to the standalone dealers and investment banks will introduce market makers where the broker dealer quotes two-sided markets in a security, providing bids and offers.
The new class of investors is expected to provide the market with liquidity by covering the counterparty risk. “As an authorised dealer, when there is a buyer, you should be able to sell to them and for every seller, you should be able to buy from them at a reasonable price,” noted CMA director for policy and market development Luke Ombara.
The listing regulations are expected to accompany licensing requirements including minimum liquidity levels to support transactions.
By purchasing its own stock of shares, a broker dealer is able to actively quote two sides of the markets (buy and sell) and make profit from the difference in the bid-ask spread.
“Broker dealers are a recognised category of intermediaries who will address concerns whereby you find a line of offers with no bids on the other side which is one of the reasons we have had a persistent decline in (stock) prices over time,” Mr Ombara added.
The CMA says it will offer incentives to willing market makers including awards. The move to establish market makers comes amid what has been a tough year for the equities market with the losses being driven largely by outflows from foreign investor portfolios.
In the quarter ended September, the NSE 20 share index declined by 4.2 percent to 1,508.75 points while the NSE all share index decreased by 11.01 percent to 95.22 points.
