This week, the Capital Markets Authority (CMA) disclosed it would license a new class of market participants — broker dealers — with the view of improving liquidity on the Nairobi Securities Exchange (NSE).
The proposed market makers would participate in the market at all times, buying stocks while selling securities.
Market makers make a return by earning a spread between the bid representing what one is willing to pay for a security, and the ask, which is what someone is willing to accept as payment.
In effect, the market makers would hold a sizable portfolio of listed securities for trading ensuring quick trading at fair prices.
This means that for every seller, a market maker would be an off-taker while, for every buyer, the market maker would also be in a position to match the requirement for securities.
Market makers assure liquidity meaning, technically, no willing buyer would lack a supply of securities while willing sellers would have a guaranteed buyer.
Broker-dealers usually have two-way quotes to the market and are usually willing to buy and sell a security at a competitive price under all market conditions.
“As an authorised dealer, one should be able to sell to a buyer, and for every seller, you should be able to buy from them at a reasonable price. What we have been thinking of is to be able to have three categories of market intermediaries; a broker dealer, an investment bank and a standalone dealer,” noted Capital Markets director of policy and market development Luke Ombara.
Market makers usually compete with other participants to execute trades with the intense competition resulting in better outcomes for investors.
Besides ensuring market liquidity and depth, market makers' presence usually streamlines the execution of trades, reduces fluctuations in prices and identifies demand and supply gaps.
By doing so, market makers ensure markets function reliably and remain resilient even during times of market turbulence.
Bear run
For instance, when retail investors may sell off stocks in a bear run, resulting in a market slide, market makers would swoop in to support the stock market by taking up positions exited.
Market making largely relies on significant trade volumes given that bid-ask spreads for competitive and efficient markets are usually narrow.
US-based Citadel Securities is among the largest market makers in the world and the largest designated market maker on the New York Stock Exchange.
