Some of the recommendations of GP Gupta Committee on market-making make eminent sense. The idea of market-making is a good one considering the illiquidity in many stocks, particularly the smaller capitalised ones. In many cases and for various reasons there is only an infrequent and sometimes a one-sided demand for stocks (that too in very small quantities) which denies the existence of a market to the shareholders. Market-making will address that problem. It is also to the credit of the committee that the concept is being sought to be introduced on a voluntary basis. So only those stocks which have potential but are completely illiquid will be taken up for trading and not stocks irrespective of the potential.But the issue of whether or not brokers should make a market in certain stocks should be linked to their capital adequacy. Operating norms should be stringent since market-making is open to speculation, especially since there are no limits on spreads on shares trading below Rs 10 per share. In arapidly developing market with a geographically spread out electronic network there is no real need for market-makers since the current method followed is that of an order matching system, which is very efficient in itself. Worldwide exchanges are moving into the order matching system.
But if the system is introduced then providing brokers with a line of credit will be crucial. This is especially true because in some illiquid stocks there could be only buyers or only sellers for a sustained period of time in which case the build-up of inventory will strain resources. Even though the viability of the market still has to be established conclusively it could open a window for institutional investors to step into small to medium capitalised stocks, but which do not have many two-way trades.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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