New market-making regime to begin with Shanghai’s STAR Market
Published: Oct 30, 2022 10:03 PM
Shanghai Stock Exchange Photo:CFP

Shanghai Stock Exchange Photo:CFP

A new mechanism for market-making will be officially launched on Monday on the NASDAQ-style STAR Market in Shanghai, the first of its kind in a domestic stock exchange.

The introduction of the market-maker mechanism is envisioned to enhance stock liquidity and strengthen market resilience as part of a wider push to build a more sophisticated capital market, market operators and watchers said. They said the new mechanism will augur well for inactive small-cap stocks and accordingly ease fundraising woes for small businesses.

On Saturday morning, the Shanghai Stock Exchange (SSE) organized 14 market-makers to carry out a clearing test of market making on stocks listed on the STAR Market, according to the China Securities Journal.

The market makers took part in an across-the-board trading test for a selection of 50 stocks - or 42 after removing duplicates. The 14 market-makers provided quotes in an active manner and their quotes for the selected stocks all turned out to be effective, the report said, and the test results were in line with expectations.

The bid trading test began at 9:15 am and finished at 11:30, including an opening call auction session and a closing call auction session. The Saturday test ran through the counter system, risk control system and the exchange trading supervision, among other systems, per the report.

The final comprehensive test serves as a prelude to the official commencement of market making on the STAR Market.

In an announcement on Friday, the SSE said that the launch of market making on the tech-heavy board was scheduled for Monday, citing the approval of the country's securities regulator.

The market maker mechanism is a significant component of the trading system applied to the STAR Market and other emerging boards as it intends to avoid the fallout of inadequate liquidity, Dong Shaopeng, an expert advisor for the China Securities Regulatory Commission, told the Global Times on Sunday.

The availability of market-making on the STAR Market is a major measure that aims for continued improvement of the muscles of the STAR Market as a testing ground for reforms, the SSE said in the announcement.

The move will unleash market vitality and enhance market resilience. It will also lower trading costs and increase market pricing efficiency, the exchange said, describing the Monday launch as yet another instance of building a capital market with Chinese characteristics.

The exchange vowed a steadfast stance on the STAR Market's positioning as a platform for hard technologies, meaning core technologies that require long-term R&D and continuous commitments. The SSE aims to better serve high-level technological self-efficiency and self-strength, the announcement read.

Small-cap stocks that fly under the radar of most investors and analysts, in particular, might get a shot in the arm, as market-making allows them to be more readily accessible to investors, observers said.

Still, as Dong pointed out, it remains to be seen how big a boost the new mechanism will give to the market at large.