Illustration: Chen Xia/GT

Editor's Note:

The Beijing-based National Equities Exchange and Quotations (NEEQ) announced Tuesday that China's share transfer system for small and medium-sized enterprises, also known as the New Third Board, would launch a market-making system for trading shares Monday. The move is aimed at easing a long-standing liquidity bottleneck that has stifled the development of the over-the-counter (OTC) exchange. The Global Times interviewed three experts to get their views on the topic.

An official surnamed Lin from the NEEQ,

It is an effective way for the New Third Board to improve its market service function by implementing the market-making transaction mechanism. It will promote the OTC market to develop in a much healthier way. Both the enterprises and investors will benefit a lot from this.

The market-making transaction mechanism can help accelerate equity liquidity in the New Third Board market. Under the previous equity transaction mechanism, it's difficult for both sides of the transaction to make a deal because they rely only on one-on-one negotiations. Even if they close the deal, it is costly because of the lengthy negotiations. The result is low efficiency and small trading volumes.

Under the market-making transaction mechanism, however, it will be much easier for both sides to strike a deal. The market makers will continuously give a bilateral-quote so that investors can buy and sell at any time, without negotiating with their counterparties.     

This more convenient way of conducting transactions will be a great help in enlarging the trading volumes thus building up liquidity in the OTC market. In turn, the enterprises will be able to improve their financing efficiency and public investors will have more investment opportunities.

The NEEQ has also made a series of regulations for market makers. The most important one limits the bid-ask spread to within 5 percent, so that the market makers cannot take advantage of their position to gouge their trading partners.

Dong Dengxin, director of the Financial Securities Institute at Wuhan University of Science and Technology,

The major problem with the self-assessment transfer mechanism currently adopted by China's equity transfer system is information asymmetry. It usually takes a long time to close a deal, requiring rounds of one-on-one share price negotiations between the investor and company. Sometimes, the investors don't know anything about the company's performance, and the bidding is arbitrary, so it doesn't really represent the true value of the company. Therefore, the old-fashioned transfer mechanism doesn't allow the market to work as it should.

Adding marker makers will largely change the status quo. These market makers will thoroughly investigate the performance of the traded company, and it will assess the company's stock price based on its ability to earn profits. Then the market makers will take on the role of intermediary to buy and sell the company's equities.

The market makers' most valuable contribution is assessing value, which will make the equity transfer system more market-driven. Plus, by continuously profiting on the difference between the purchase and sale prices, market makers can substantially vitalize the transactions on the equity transfer system, bringing more liquidity. In return, the improved fundraising environment will attract more qualified companies to be traded in the system.

In addition, any company that adopts the market-maker system is required to deal with at least two market makers. Therefore, the competition between different market makers will to some extent guarantee a fair price.

She Minhua, an analyst from Zhong De Securities,

The market-making transaction mechanism will encourage investors to more actively trade these stocks, so as to provide more liquidity for the New Third Board.

For securities companies who have become market makers, this mechanism can bring them new business opportunities to increase their profits. But it remains to be seen how much securities companies will be able to benefit from the change.

For one thing, the New Third Board market is still in an early stage of development. Although some people optimistically anticipate that there will be more than 1,500 companies listed on the New Third Board by the end of this year and perhaps 10,000 companies at some point in the future, a question remains whether it will be realized in the short or medium term.

It also remains difficult to determine if securities companies will see higher turnover ratios, or how much higher those ratios might be. So we still need to be cautious about the profit estimates, which so far have been based on the explosive growth of companies and high turnover on the New Third Board.

Under the market-making transaction mechanism, securities companies also need to use their own funds to buy equities and realize their profits through bid-ask spread. So if they cannot sell the equities in time, it will limit their market-making scale and monopolize their funds. So this market-making transaction mechanism will be a great test for their capabilities to analyze the market, price equities and utilize their funds.

bizopinion@globaltimes.com.cn