Sebi eases rules for market making in illiquid equity cash segment

MUMBAI: Capital market regulator Securities and Exchange Board of India (Sebi) on Wednesday eased rules for market making in illiquid equity cash segment. The move is aimed at encouraging stock exchanges to offer this scheme for the cash segment, which will help retail investors gain exit from illiquid stocks.

Under the scheme, market makers are given incentives for a specified period of time to bring in liquidity and generate investor interest in securities that have limited trading activity. Market makers are brokers who take the risk of holding shares with themselves to facilitate trading.

Retail investors are finding it difficult to exit many stocks due to extremely low or even nil trading volume on a daily basis. The Sebi has now extended the period for market making in a stock or index from six months currently to three years.

Globally, the practice is to make liquidity enhancement scheme (LES) mandatory for any new products. In India, such a scheme was first allowed only in 2011. There are more than 2,000 illiquid stocks on the leading exchanges and a majority of the trading volumes is concentrated in index options segment in equity derivatives.

The Sebi had introduced call auction method to generate volumes, but that has been criticised by brokers as it drives away players due to many operational flaws in the scheme.

Sebi has said stock exchanges may be allowed to use 25% of their net profit to pay market makers. Earlier, 25% of net worth of stock exchange could be paid to market makers.

Stock exchanges will have to get the structure of their schemes approved by their respective boards, Sebi said.

The Sebi had mandated earlier that liquidity enhancement scheme “may be continued till such time as the security achieves mean impact cost of less than 2% for an order size of Rs 1 lakh on the stock exchange during the last 60 trading days”.