Insider Spotlight
While market makers operate behind the scenes, they play a critical role in keeping markets active and tradable. Their presence can mean the difference between a stock that investors can easily buy or sell and one that sees little activity for days.
What is a market maker?
A market maker is a broker-dealer or trading firm that continuously posts both buy and sell quotations for a security. Rather than waiting for a natural buyer and seller to appear at the same time, the market maker stands ready to transact on either side of a trade.
For example, if an investor wants to sell shares but there are no immediate buyers, a market maker may purchase those shares. Conversely, if an investor wants to buy and there are no sellers available, the market maker can sell from its inventory.
The market maker earns revenue primarily from the spread — the difference between its buying and selling prices.
Why liquidity matters
Liquidity refers to how easily an asset can be bought or sold without significantly affecting its price.
A liquid stock typically has many buyers and sellers, allowing trades to be executed quickly and at predictable prices. An illiquid stock, by contrast, may experience large price swings even when relatively small orders are placed.
The Philippine market has long grappled with liquidity concerns. While a handful of blue-chip stocks trade actively, many listed companies record low daily turnover, making it difficult for investors to enter or exit positions efficiently.
How market makers help
Market makers improve liquidity in several ways.
First, they provide a continuous source of buying and selling interest, ensuring investors can transact even during quiet trading periods.
Second, they help narrow bid-ask spreads. In less liquid stocks, the gap between the highest buying price and lowest selling price can be wide. Market makers are typically required to maintain quotations within prescribed spread limits, reducing trading costs for investors.
Third, they support price discovery. By continuously updating quotes in response to market conditions, they help ensure prices more accurately reflect supply and demand.
Why PSE is expanding the framework
The PSE’s existing market-making rules largely apply to Exchange Traded Funds. The proposed amendments would create a broader framework covering Global Philippine Depository Receipts and potentially individual stocks and other exchange-traded products.
The exchange also plans to establish accreditation standards, performance obligations, and incentives for market makers, including possible fee concessions and connectivity support.
The goal is straightforward: attract more market-making activity, improve liquidity across more securities, and create a more efficient market where investors can trade with greater confidence and lower friction. — Daxim L. Lucas| Ed: Corrie S. Narisma
