SME IPO Market Making

The SEBI's guideline has mandated every SME IPO to have market-making for at least 3 years after listing of shares on the SME platform. Market making is the process of providing eligible two-way quotes for securities listed on the BSE SME and NSE SME platforms.

Market makers are registered exchange members who buy and sell securities listed on the SME platforms at specified prices. They help SMEs inject liquidity and determine fair share prices. Market makers increase liquidity in less-traded SME securities to increase stock visibility and boost trading activity.

In addition, market makers closely monitor price fluctuations in securities and report the stock exchange of any irregularities or anomalies. Read on to learn who is a market makers, the qualifying criteria that must be met to become a market maker, roles and responsibilities, and the benefits of market making arrangements in SME IPO.

Who are Market Makers?

A market maker is a member firm or an individual who is registered with the stock exchange to buy and sell securities from their own account. Licensed stockbrokers are the most common types of market makers who regularly purchase and sell assets at predetermined rates on the stock exchange.

They exhibit the purchase and sell price of scrip on the trading platform and once buyers place the order, market makers sell securities from their own portfolio holdings. The list of market makers is available on both the BSE and NSE SME exchange.

• List of BSE SME Market Makers
• List of NSE Emerge Market Makers

Market makers' eligibility criteria

All the stock exchange members can act as “Market makers” for the SME IPO issue given that they completed registration and satisfy the exchange eligibility criteria. To become a market maker, an existing member must qualify for the following two conditions;

• An individual or member firm must be a trading member of the capital market segment at the NSE.
• To be a market maker, it is mandatory for them to have a minimum net worth of Rs 1 crore all the time whether at the time of application or all times when they are acting as a market maker.

SME IPO Market Makers Roles and Responsibilities

As per the NSE’s guidelines, market makers perform the following roles, responsibilities, and obligations;

1. Provide 2-way eligible buy and sell quotes for 75% of the time in a trading session.
2. While providing two-way quotations including bid price and ask/offer price, it must be provided for at least one trading lot and within the stipulated bid-offer spread published by the exchange.
3. The quotation specified by market makers must have a minimum depth of Rs. 100,000. Investors with total holdings below Rs 100,000 are allowed to offer their entire stock holdings to the market makers in one lot.
4. It is the duty of the market maker to guarantee the order execution at the quoted price and quantity.
5. Each scrip cannot have more than 5 market makers.
6. During the market-making process, market makers cannot purchase any securities from the company promoters.
7. Market makers must act in that capacity to specify the price quotations for a period of at least 3 years from the day of shares are listed on the SME platform.

Benefits of market making in SME IPO

• As far as SME platform-listed shares are concerned, the majority of SME securities face liquidity issues. Market makers help them by injecting liquidity into stock which helps in better price discovery for securities.
• With improved stock liquidity, investors will be able to sell their holdings with ease at any point in time.
• As market makers guarantee securities liquidity, it encourages prospective investors to buy equities.
• To provide 2-way eligible quotes, market makers collect and analyze all the required information for the scrip.
• Market makers may compete with other market makers for better price discovery of securities.
• Market making encourages investors’ engagement and frequency of trading (buying and selling activities of stock).
• Market making of SME shares from the date of listing to 3 years is guaranteed by merchant bankers.
• Promoter holdings cannot be offered to market makers.