The Malta Stock Exchange recently published the rules that will govern the operation of market making when this is launched in October 2013. The role of market making is new to the Maltese financial services environment and will help to increase the level of liquidity on the market. The reason for the current relative lack of liquidity is due to the small size of the Maltese capital market, and the fact that when new securities are launched onto the Maltese market through an initial public offering, the investor base tends to be heavily retail in nature with a relatively low individual investment, leaving the larger capacity institutional investors a smaller portion of the investment opportunity.
In 2012, only 1.22% of all equities listed on the Malta Stock Exchange were actually traded
This in itself is not a bad distribution and allotment strategy, since the distribution of ownership of one’s capital or debt among a broad Maltese retail demographic helps to foster confidence in the market, and also helps maintain economic stability as has been evidenced recently in the sovereign debt and credit crisis.
However, it is a fact that the Maltese retail investor also clearly upholds the Maltese culture of “buy to hold”, and not to trade, resulting in relatively low subsequent trading activity. Suffice to say that in 2012, only 1.22 per cent of all equities listed on the Malta Stock Exchange were actually traded, and only 4.79 per cent of all listed corporate debt was traded on the Exchange.
On the other hand, just over 12 per cent of the listed Government stocks, which are very popular with the retail as well as institutional investors, were traded in 2012, indicating a greater appetite for trade in this popular instrument.
These turnover percentages are rather low when compared to other EU states, even after allowing for our smaller size.
A market maker could choose to take on this role for one or more financial instruments, with an obligation to maintain a continuous bid and offer price, subject to a minimum order quantity. Thus, as long as an instrument is supported by a market maker, an investor seeking to buy, or sell, securities will find a ready market for these instruments. Of course, the current platform already allows for trades to take place whenever there is a match between the asking and the offer price on the market. The problem is that this tends to result in a number of unsatisfied offers and bids, depending on the instrument.
The market maker stands to generate new business since he ends up being the trader of choice when dealing outside the “normal trade price” range, thus satisfying wider ranges of demand and supply, as the case may be.
This is good news for investors, who will be able to trade in market making-supported instruments, at prices that will be bound by a maximum spread. It is also good news for issuers, since the price of their issued bonds, as well as equities, will be subject to the forces of demand and supply in a more liquid and therefore stable market, and the value (market capitalisation) of an issue will therefore be less prone to the fluctuations that tend to result in an illiquid market.
The design of the operating structure, such as the criteria upon which the spreads and minimum volumes have been built, and how the Exchange would keep this market making structure updated with developments in the marketplace, is based on the Maltese environment, since while similarities between markets exist, no market is identical to the other.
It is also a platform that can be used to launch Exchange Traded Products, such as Exchange Traded Funds and Exchange Traded Commodities. This is because they are traded and settled under a stock exchange structure at spot market prices and not at “end of day” prices.
This latest development is part of the strategy of the Malta Stock Exchange to develop the local market, enhance its platform capability and provide the Maltese investor community with internationally-recognised and proven products.
cpace@borzamalta.com.mt
Cliff Pace is product and business development manager at the Malta Stock Exchange.