Last Friday, the CSRC released the official draft of the pilot market making trading business of the science and innovation board, marking the official implementation of the market making system of the science and innovation board. This fills the gap of no market making trading of a shares, effectively improves the liquidity and price discovery function of the science and innovation board, thickens the capital intermediary income of securities companies, and accelerates the transformation of head securities companies from channel investment banks to trading investment banks.
Subsequently, securities companies that meet the access conditions can apply for the pilot qualification of market making on the science and innovation board. Which securities companies will ultimately benefit? According to the mandatory requirements of “net capital not less than 10 billion yuan for 12 months” and “classification rating not less than Class A in recent three years”, a total of 26 securities companies meet the standards.
Superimposed with the provisions of “encouraging recommendation institutions to provide market making services”, “using their own stocks” and the high threshold requirements for market making transactions, the head securities companies with many recommendation projects and rich securities sources on the science and Innovation Board will eventually benefit. Among the 26 securities companies, “three in one China” and Guotai Junan Securities Co.Ltd(601211) the number of sponsors, follow-up investment, floating profit and other indicators rank among the top. At the same time, there are abundant securities sources and outstanding securities lending ability, which is expected to give priority to winning in the market making pilot.
implementation of market making system of scientific innovation board
The market making system of science and technology innovation board was officially implemented. Last Friday, the CSRC issued the pilot provisions on stock market making trading business of securities companies on the science and Innovation Board (hereinafter referred to as the “market making provisions”). There are 17 provisions on market making, mainly including market maker access conditions and procedures, securities sources, internal control and so on.
The significance of introducing the market making system based on the current call auction trading on the science and innovation board is reflected in at least three aspects:
First, strengthen the liquidity of the science and innovation board and strengthen the function of market price discovery.
The so-called market maker system is to make transactions with sellers and buyers in the market by continuously quoting the purchase price and selling price. Securities companies earn the purchase and sale price difference or bear losses, and there is no direct transaction between investors.
CICC and the Bank of Africa said that through market makers’ bilateral quotation services and supporting arrangements such as margin trading, it will help to strengthen the liquidity of the market; And strengthen the function of market price discovery through the professional pricing model and research ability of market makers; In addition, it also helps to improve market stability and alleviate the sharp price fluctuation under insufficient liquidity or emotional trading.
Minsheng Securities said in the research report that the market making system was introduced into the new third board in August 2014. Since then, the trading volume has increased rapidly, and the market making turnover accounted for more than 50% by February 2015. Since 2022, the average daily turnover rate of the sci-tech innovation board is 0.83%, which is lower than the average level of Shanghai Stock Exchange. The average daily turnover rate of the sci-tech innovation 50 index is 1.86%, which is significantly lower than the gem index (2.51%) and other major indexes. The market maker system is expected to increase the turnover of the science and innovation board.
Second, it fills the gap of the no market making trading system of a shares, and is expected to be promoted to other sectors of A-Shares after its operation is mature.
In China, the market maker system previously existed only in the fields of bonds, commodities, ETFs and the new third board, while the main board, science and innovation board and Beijing stock exchange all adopted the bidding trading mechanism.
CICC said that from overseas experience, the New York Stock Exchange and Nasdaq adopt the trading system of call auction in parallel with market makers. Among them, newly listed companies in the Nasdaq market require market makers to participate in trading, which helps to improve innovation and the liquidity of small and medium-sized enterprises.
It is reported that the New York Stock Exchange designates a market maker for each stock, and there are at least four or more market makers for each stock on NASDAQ.
Third, increase the capital intermediary income of securities companies and effectively reduce the fluctuation of proprietary investment.
Orient Securities Company Limited(600958) believes that market making in the equity market is of great significance to securities companies, which will not only enrich the choice of de directionalization of proprietary business, but also effectively reduce the volatility of proprietary investment performance and improve the stability and toughness of the overall performance of securities companies.
The bank also mentioned that the income source of market making securities companies is mainly bid ask spread income, which helps to improve capital utilization efficiency and thicken the risk neutral capital intermediary income. Referring to international investment banks, market making income has long been an important source of income. Goldman Sachs and Morgan Stanley contributed 26% and 21% of the total revenue of equity and ficc market making business in 2021 respectively.
Shenwan Hongyuan Group Co.Ltd(000166) said that the reform of the market maker system will boost the transformation of the business model of China’s securities industry and accelerate the transformation of head securities companies from channel investment banks to trading investment banks.
which head brokers will benefit
The CSRC solicited public opinions on the “market making provisions” in January this year, and the official draft is basically consistent with the draft for comments. In the next stage, the CSRC will guide the Shanghai Stock Exchange to formulate and issue supporting business rules. After the rules are issued, qualified securities companies can apply to the CSRC for the pilot qualification of stock market making trading business on the science and innovation board.
Market making business is a business with high threshold on the whole, which has high requirements for the professional ability and capital strength of securities companies. Which securities companies will have the opportunity to participate in the market making business of science and innovation board? According to the provisions on market making, focus on the perspectives of net capital, classified rating, science and Innovation Board recommendation projects, bond sources, etc.
First, in terms of business access qualification, in addition to having perfect business plans, professionals and technical systems, the pilot securities companies in the initial stage are required to have a continuous net capital of no less than 10 billion yuan in recent 12 months and a classified rating of class A or above in recent three years.
According to the preliminary screening of CICC and non bank of China, a total of 26 securities companies meet the requirements, including head securities companies and small and medium-sized securities companies. Among them, there are 8 securities companies whose net capital (as of the end of 2021, the same below) exceeds 50 billion, namely Citic Securities Company Limited(600030) , Guotai Junan Securities Co.Ltd(601211) , Shenwan Hongyuan Group Co.Ltd(000166) , Huatai Securities Co.Ltd(601688) , Galaxy Securities, Guosen Securities Co.Ltd(002736) , China Merchants Securities Co.Ltd(600999) , China Securities Co.Ltd(601066) ; There are four securities companies with net capital ranging from 30 billion to 50 billion, namely China International Capital Corporation Limited(601995) , Everbright Securities Company Limited(601788) , Orient Securities Company Limited(600958) , Ping An Securities.
Orient Securities Company Limited(600958) said that although there are 26 securities companies that meet the two quantitative conditions, there will be fewer securities companies that actually meet the threshold of market maker by superimposing qualitative criteria and considering the need for sufficient capital to meet the objective needs of large-scale market making business.
Second, the CSRC encourages the sponsor institutions with pilot qualification to provide market making services for the stocks recommended by them during the period of continuous supervision. This means that securities companies with more sponsorship projects on the science and Innovation Board may benefit.
According to the statistics of the 12 securities companies mentioned above by the financial Associated Press reporter, Citic Securities Company Limited(600030) , China Securities Co.Ltd(601066) , Huatai Securities Co.Ltd(601688) , China International Capital Corporation Limited(601995) , Guotai Junan Securities Co.Ltd(601211) with the leading advantages of investment banking business, the number of recommended underwriting projects, the number of follow-up investment and the amount of investment rank first on the science and innovation board, and there are huge floating profits, with the rate of return of more than 35%. In addition, the yields of Guosen Securities Co.Ltd(002736) , Everbright Securities Company Limited(601788) are 177% and 85% respectively.
Third, in terms of securities sources, securities companies can buy stocks in the secondary market, use their own stocks, borrow stocks from securities companies or other stocks with the right to dispose; Calculate the risk control index with reference to the standard of self owned stocks. In principle, the market making shareholding shall not exceed 5%.
Securities companies with outstanding securities lending capacity will have more abundant securities sources, and the head securities companies will benefit more. In the first half of 2021, Citic Securities Company Limited(600030) , Huatai Securities Co.Ltd(601688) , China Securities Co.Ltd(601066) , China International Capital Corporation Limited(601995) financed securities exceeded 10 billion, accounting for 67% of the total disclosure scale Citic Securities Company Limited(600030) , Huatai Securities Co.Ltd(601688) , China Securities Co.Ltd(601066) , Guotai Junan Securities Co.Ltd(601211) refinancing into securities totaled more than 10 billion yuan, accounting for 78% of the total disclosure scale.
Shanxi Securities Co.Ltd(002500) believes that as an innovative business, the market making business of scientific innovation board has relatively limited profit contribution in the short term and provides potential growth space in the long term. Risk control compliance ability has become the threshold index for pilot selection. At present, the classification evaluation system of securities companies still focuses on “supporting the superior and limiting the inferior” and gives limited consideration to differentiation. The head securities companies have a higher probability of winning in the pilot selection, significant first mover advantage and more stable operation.
Anxin non bank believes that considering the higher requirements of market making on the capital strength, pricing ability and risk control ability of securities companies, it is expected that the head securities companies will benefit more. At present, the valuation of securities companies is only 1.3 times Pb, which is at the bottom of history, while the valuation of head securities companies is close to or less than 1 times Pb, which has fully reflected the market’s expectation of the downward growth of securities business performance. Looking forward to the follow-up, under the relatively loose liquidity and the dividend of capital market reform policies, the securities sector has a strong momentum of valuation repair.
