Matters:
In order to implement the opinions on the implementation of the pilot registration system for the establishment of the science and innovation board in Shanghai Stock Exchange and further promote the reform of the pilot registration system for the establishment of the science and innovation board, on January 7, 2022, the CSRC drafted the pilot provisions on the stock market making trading business of the science and Innovation Board of securities companies (Draft for comments) (hereinafter referred to as the market making provisions).
Ping An View:
The market maker mechanism was introduced into the science and innovation board through pilot, and the system construction of the science and Innovation Board continued to be improved. There are 17 provisions on market making, mainly including six aspects: market maker access conditions and procedures, in-process and post supervision. As for the access conditions, in addition to having perfect business plans, professionals, technical systems and other conditions, the securities companies participating in the pilot at the initial stage also need to meet two conditions in terms of capital strength and compliance risk control ability: 1) the net capital in the last 12 months has been no less than 10 billion yuan; 2) The classification rating in the last three years is above class A (inclusive). By the end of 2021, there were 28 securities companies with classification rating above class A for three consecutive years, 45 securities companies with net capital of no less than 10 billion in 2020, and 26 securities companies meeting the above conditions.
The introduction of market maker trading mechanism will help to increase market activity and stabilize market fluctuations. For companies with low attention, market makers can take the initiative to make the market to ensure the transaction and increase market liquidity. For stocks with inactive trading and sudden changes in trading volume, when the stock price may rise or fall sharply, market makers can participate in market making, curb market speculation and reduce market volatility. The provisions on market making points out that securities companies can buy stocks in the secondary market as the source of market making securities, but concentrated and large-scale buying will disturb the price of individual stocks and even affect the operation of the market. Moreover, buying in the secondary market is also limited by the shareholding ratio of laws and regulations. In order to enrich the source of market making securities, the market making provisions clearly specify that self owned stocks, stocks borrowed from China Securities Finance Corporation or other stocks with the right to dispose can be used.
The opening of the market making pilot of the science and innovation board not only provides new development opportunities for securities companies, but also puts forward higher requirements. Nasdaq, Hong Kong Stock Exchange and other mature markets have implemented the market maker system. Although China’s new third board, stock options and other markets have introduced the market maker system, it is still in the initial stage compared with overseas mature markets. With the continuous advancement of the pilot of China’s registration system, the market maker system has been further developed by taking the science and innovation board as an opportunity. The heavy asset business structure of Chinese securities companies is also expected to change significantly, from self-supporting to market maker and agency business in the past, so as to improve the certainty of performance. The market making system puts forward higher requirements for the capital strength and inquiry and pricing ability of securities companies. On the one hand, market makers need to participate in trading with their own funds and securities, requiring securities companies to have certain capital strength and securities inventory; On the other hand, the price formation mechanism of market makers’ quotation requires securities companies to have strong inquiry and pricing strength.
Investment suggestion: benefiting from the continuous promotion of capital market reform, the expansion of business scope and optimization of business structure of securities companies, they will play a more professional and important role in the capital market. Market making business also puts forward higher requirements for the capital strength, pricing, internal control and compliance of securities companies. Leading securities companies with stronger comprehensive strength may have more competitive advantages. It is suggested to pay attention to Citic Securities Company Limited(600030) , China International Capital Corporation Limited(601995) .
Risk tips: 1) large fluctuations in the equity market; 2) Macroeconomic recovery is less than expected; 3) The progress of capital market reform was less than expected.
