Securities Daily | Market-making on STAR Market to Launch Soon, as Approved Securities Firms Begin to Build Inventory

Source:Securities Daily, October 20 2022

Market-making on the SSE STAR Market is coming up the stage. Recently, a reporter from Securities Daily learned that a number of approved securities firms have completed business and system preparations, and some have selected market-making targets and begun to build inventory. Before the official launch of the market-making on the STAR Market, only the final clearance test is needed.

"Introducing the market maker mechanism is an important measure to promote the construction of the STAR Market. While improving the liquidity and pricing on the STAR Market, it will help to smoothly connect to the comprehensive registration system reform. Therefore, the introduction of the market maker mechanism on the STAR Market is a milestone event that helps the capital market to achieve stability and long-term development." Pan Feng, managing director of the trading and derivatives business department of Founder Securities, said in an interview with Securities Daily.

Some securities firms have selected the first batch of stocks for market-making

Recently, the Shanghai Stock Exchange announced that the market-making business for stocks on the STAR Market is ready. As of October 14, two batches totaling 14 securities firms have obtained the qualification for market making of listed securities. As the reporter learned, the approved securities companies are gearing up and actively making preparations, and many securities companies have completed the selection of the first batch of stocks for market-making. In addition, there are a number of securities firms that are actively applying for market maker qualifications.

China Galaxy Securities is among the first batch of 8 brokers approved. "The company's market-making business headquarters has completed the preparations for the official launch of the market-making on the STAR Market, and the business process is ready. The company will formally perform its market-making obligations in accordance with the requirements of the exchange and regulatory authorities." Yang Xiaoyan, head of the market-making business headquarters of China Galaxy Securities, said in an interview with Securities Daily that in order to ensure steady business, the company has made comprehensive preparations in terms of organizational structure, personnel, systems, risk control, authorization and rules, including the establishment of a sound system, an independent first-level department for the market-making business, a decision-making and authorization system with clear powers and responsibilities, a comprehensive risk management system throughout the whole process, a complete information isolation and compliance management system, an autonomous and controllable market-making system and market-making strategies, etc.

As the reporter learned, in order to ensure that the market-making business and the proprietary trading business are isolated from each other, China Galaxy Securities has set up an independent first-level department responsible for carrying out the market-making business on the STAR Market, the market-making business headquarters, which is completely isolated from the proprietary trading department.

Shenwan Hongyuan Securities is also among the first 8 securities firms qualified. "At present, the company has passed the on-site inspection exam by the CSRC Shanghai Regional Office in accordance with the requirements in the CSRC's written reply, renewed our securities and futures business license, signed the market-making agreement with the Shanghai Stock Exchange, and completed the selection of the first batch of stocks for market-making. According to the subsequent regulatory requirements, we will actively promote the implementation of market-making filing and market-making SBL mechanisms." The relevant person in charge from Shenwan Hongyuan Securities told the Securities Daily reporter.

Previously, the person in charge of relevant business from Orient Securities told the Securities Daily reporter that the company has set up a market-making team for the STAR Market, and assisted in establishing various market-making related mechanisms for the STAR Market to improve the market-making and risk control system of the STAR Market. It also built a market-making business platform for the STAR Market, participated in the whole network test organized by the exchange for several times, and successfully passed the evaluation test by the SSE. Its market-making team for the STAR Market has conducted research on the screening of market-making targets on the STAR Market, the model of market-making trading strategies, and hedging tools, and has reserved securities sources to fully prepare for the market-making business of the STAR Market.

At present, in addition to the 14 approved securities firms, many securities firms such as Founder Securities and Essence Securities are also actively applying for the qualification of market makers on the STAR Market. According to the reporter, Founder Securities passed the proposal to apply for the market-making business of stocks on the STAR Market at the shareholders' meeting in June.

"At present, the company has made preparations in terms of system and team, and has applied to the regulatory authorities to carry out market-making business for stocks on the STAR Market." Pan Feng said that the company has previously provided market-making business for 95 NEEQ companies and is one of the earliest securities firms in the market to carry out fund market-making business, "We are confident to do a good job in the market-making business of the STAR Market and make due contributions in the reform of the capital market."

Securities firms need to perform comprehensive risk management and control

As the official launch of market-making on the STAR Market is approaching, to ensure the steady progress of market-making, the securities firms interviewed said that market makers need to do a good job in various risk prevention, especially paying attention to inventory risk management.

Yang Xiaoyan said that after the market-making is launched, securities companies need to pay attention to the comprehensive risk management and control, prevent market risks, liquidity risks and operational risks, and do a good job particularly in inventory management, establish and improve exposure hedging approaches. On the basis of strictly abiding by the bottom line of risk control and compliance, they should prevent possible conflicts of interest and tunneling risks. In terms of technical systems, it is necessary to continuously optimize and improve the efficiency of quotations, refine market-making strategies, and give full play to the professional role of securities companies as institutional investors in market stability and liquidity.

"After the market-making is launched, brokers need to pay attention to the pricing model, quotation strategy, inventory strategy and trading management." Pan Feng said that firstly, effective pricing models improve the quality of quotations, and effective pricing depends on the continuous improvement of brokers' research capabilities. Secondly, the quotation is double-quoted within the deviation and price difference range, so as to maintain market liquidity and a certain market depth to prevent the instant impact of large orders on the price. Finally, it is particularly necessary to pay attention to inventory risk management. When market makers provide liquidity for STAR Market stocks, there is a high probability that the trading volume in both directions will not be equal, resulting in inventory exposure and inventory management risks.

"In order to effectively manage inventory risk, market makers can use over-the-counter derivatives or stocks borrowed through China Securities Finance Co., Ltd. for hedging. They can also construct a stock portfolio to control the concentration of a single target and reduce the overall risk of the portfolio." Pan Feng said.

Improve liquidity to boost market vitality

According to data from the Shanghai Stock Exchange, as of October 19, 479 companies were listed on the STAR Market, with a total market cap of RMB 5.79 trillion, a price-earnings ratio of 45.41 times, and a daily turnover rate of 0.925%. Industry insiders interviewed by the reporter believe that introducing the market maker mechanism will help improve the liquidity and pricing power of the STAR market, reduce the impact cost of investors' trading, boost market vitality, and attract more long-term funds.

Pan Feng said that market makers play the role of price discovery and market stabilizing. He said that on the basis of ensuring the overall active trading of the market, market makers can prevent drastic market fluctuations, help improve the price discovery mechanism on the STAR Market, enhance stock liquidity, release market vitality, enhance price resilience, and attract more capital to participate.

In addition, market makers' supplementary securities will also bring incremental funds to the market. Qin Peijing, chief strategy analyst of CITIC Securities, said that when securities companies carry out the market maker business, they need to prepare corresponding securities in advance for market-making transactions, which will improve the liquidity of the market to some extent.

For investors, the market-making business on the STAR Market will provide investors with liquidity, enhance market stability, and safeguard the rights and interests of small and medium investors. Yang Xiaoyan said that, as an important participant in the capital market, securities companies contribute to the market by improving their core competitiveness and profitability, give full play to their advantages in capital, system, personnel and other aspects, and stabilize the "irrational fluctuations" of the market, thereby protecting small and medium investors and guarding the healthy development of the securities market.

For companies on the STAR Market, the market-making mechanism will help to better serve technology companies. Yang Xiaoyan said that by leveraging the professional pricing abilities of institutional investors in valuation, market makers will enhance the value discovery function of the STAR Market, and guide capital to better serve high-tech companies with strong technology and innovation features and R&D capabilities.

The above-mentioned person in charge from Shenwan Hongyuan Securities said that the market-making mechanism of the STAR Market is in line with the registration-based reform, which enriches the trading system of the STAR Market and is of great benefit to the improvement of its liquidity. This mechanism marks the further improvement of the trading system of the capital market, and will also promote the healthy development of the STAR Market. In addition, market makers, as professional institutions, have professional valuation and pricing capabilities. In fulfilling their obligation of bilateral quotation, market makers offer quotations around the valuation pivot. Through inventory management strategies, irrational market fluctuations can be controlled to a certain extent and market prices can be guided to a reasonable range.

This article above is a courtesy translation. For the original piece from Securities Daily (in Chinese), please click