To complement the SGX-Nasdaq listings bridge, should market making be compulsory?

SINGAPORE’S equities revival has been a striking development with the Straits Times Index outperforming many other markets over the past 18 months. Much of the credit belongs to the steady, deliberate efforts under the Equities Market Development Programme (EQDP), spearheaded by the Monetary Authority of Singapore and the Singapore Exchange (SGX).

The latest EQDP development came last week in the form of an announcement that plans for the SGX-Nasdaq bridge are on track. It provided details on how regulations are to be aligned and how companies will list on the Global Listings Board.

There was, however, one noticeable omission: whether or not market makers must be appointed for Nasdaq companies seeking a dual listing on SGX. Nasdaq’s current listing rules require companies to employ at least three market makers to ensure sufficient liquidity in their shares while SGX’s rules do not. (Market makers offer liquidity to the market by quoting buy and sell prices for the securities they trade.)

Liquidity provision should not be seen as an isolated policy tool but instead the final link in the EQDP value chain.

After improving how companies list, how they are governed, how they are analysed and how they communicate with investors, the next logical link in the value chain is to ensure that their shares actually trade in an orderly and efficient manner.

In this regard, making sure buyers can exit at fair prices is essential. Investors may be willing to buy into the Singapore growth story, but without ample market-wide liquidity, many will hesitate.

Market manipulation and liquidity

One obstacle to mandating market making here is whether it opens the door to manipulation or the creation of a false market.

Another is uncertainty over how exactly liquidity is provided since different market makers adopt different strategies – some make money from the bid-ask spread, while others aim to be price neutral and derive their income solely from the listed companies for whom they provide liquidity.

In order to address these concerns, perhaps a consultation paper is needed. This would allow SGX to surface these issues openly, test different models, provide education for investors and then calibrate its approach carefully.

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It would also give voice to a wide range of stakeholders – listed companies, institutional investors, brokers and retail participants – ensuring that any eventual framework commands broad-based support.

Some may question who ultimately bears the cost – issuers, brokers or investors – and whether such costs might outweigh the benefits.

There are also structural considerations: If market making is eventually mandated for Nasdaq dual listings, why not extend it to the whole market? Or should it be a requirement only for new listings? If so, what about the illiquid small-cap segment? Note that for all the progress made under the EQDP, many small and mid-cap stocks on SGX still suffer from thin trading volumes, wide bid-ask spreads and sporadic price discovery. Should they be required to have market makers?

In the final analysis, note that many concerns can be overcome with proper disclosure. If companies announce that they have employed market makers, then investors will have confidence that they can exit at any time at fair prices. Once this confidence is installed, the final link in the EQDP value chain will be in place. This would surely result in EQDP-generated momentum continuing to build a better market for all.