Market makers are introduced into the pilot of science and innovation board, and the market making business of securities companies is expected to become a new profit point.
Recently, the CSRC made it clear that in the initial stage, the pilot method was adopted to introduce the market maker mechanism into the science and innovation board, allowing some securities companies with standardized corporate governance, sound internal control mechanism, stable operation and strong anti risk ability to carry out market making trading business. Analysts believe that with the implementation of the market maker system in the science and innovation board, the market liquidity and transaction activity are expected to improve. Large securities companies with rich securities sources and strong institutional customer base are expected to benefit first.
Market making business has become an important revenue source for major investment banks in the United States. At present, China has only gradually introduced the market making system in the inter-bank bond market, the new third board and the science and innovation board, and it is still in the early stage of development. According to Gf Securities Co.Ltd(000776) calculation, it is estimated optimistically that the total market making income of public REITs, ETFs, OTC derivatives, the new third board and the science and Innovation Board will reach 54.095 billion yuan in 2023, which may become the second curve of income growth of securities companies in the future.
science and technology innovation board liquidity further improved
On May 13, the CSRC officially 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), which will introduce the stock market maker mechanism into the science and innovation board. At present, the solicitation of opinions on the pilot market making system of science and innovation board is in progress.
China Galaxy Securities Co.Ltd(601881) securities science and innovation board research director Wu Yanjing said that the science and innovation board has been open for nearly three years. As of May 16, 2022, the science and innovation board has attracted a total of 420 science and technology enterprises to go public, with a total initial fund-raising of nearly 600 billion yuan and a total market value of more than 4.6 trillion yuan. On the whole, since this year, the science and innovation board has good liquidity, and the total turnover accounts for 4.14% of the daily average turnover of the whole a; Growth (revenue growth rate in 2021) ranks first in all sectors.
In her view, under the background of the normalization of the registration system IPO in the future, the market capacity of the science and Innovation Board will continue to expand, and the tight liquidity of some individual stocks will gradually appear. Overseas practice shows that the market maker system is an important means to increase the liquidity of individual stocks and curb sharp price fluctuations. As early as August 2014, China has introduced the market maker system into the new third board, which has also accumulated experience for the smooth implementation of the market maker system of the science and innovation board.
Boc International (China) Co.Ltd(601696) non banking analyst Zhang Tianyu also mentioned that the pilot threshold of market makers on the science and innovation board is high, which puts forward higher requirements for the capital strength, compliance risk control and technical system of securities companies. Including capital strength, the net capital in the last 12 months has been no less than 10 billion yuan; In terms of compliance risk control, the classification rating in the last three years is above class A (inclusive); In terms of technical system, it needs to pass the technical system evaluation test of Shanghai Stock Exchange. Public data show that only 26 securities companies meet the above net capital and classification rating requirements at the same time.
This also means that the pilot focuses on large securities companies with strong comprehensive strength, rich securities sources on the science and innovation board and strong institutional customer base. On the one hand, large securities companies have strong capital strength and more IPO business volume on the science and innovation board, with more sufficient and abundant capital and securities sources; On the other hand, large securities companies have earlier integrated comprehensive institutional service business, leading industries in institutional brokerage, custody, sales, research and other institutional businesses, stronger customer base, and more perfect institutional service system and trading technology system.
Needless to say, large securities companies have a more complete internal control and risk control system, and the scale effect also helps large securities companies disperse business risks.
market making is expected to stimulate the rise of bond business performance
In view of the pilot market making of the science and innovation board, Shanxi Securities Co.Ltd(002500) non banking analyst Liu Li believes that, on the whole, the market making business of the science and innovation board, as an innovative business, has relatively limited profit contribution in the short term and provides potential growth space in the long term. We still need to continue to pay attention to the supporting rules of the Shanghai Stock Exchange.
However, Chen Fu, chief analyst of Gf Securities Co.Ltd(000776) Non Bank of China, combined with overseas experience, said that at present, the heavy asset business of Chinese securities companies is mainly self operated business, which needs strong financial support, and the heavy asset business dominated by directional strategy fluctuates greatly affected by the market. Since the deepening reform of the capital market in 2019, the orientation of the heavy asset business has changed. Among them, the market making of non directional business can smooth the performance fluctuation and improve the liquidity of the market, which may become the profit growth point of securities companies in the future.
It is reported that the development of market making business has thickened the profit space of American investment banks, and the market making income of American securities companies has become its income pillar. In 2021, JPMorgan’s market making revenue reached US $16.3 billion, followed by Goldman Sachs and Morgan Stanley, with market making revenue of US $15.4 billion and US $12.8 billion respectively. Goldman Sachs is the mainstay of market making business in the United States. Its market making revenue accounts for more than 25% of the total revenue in recent six years, and has become the main source of revenue for Goldman Sachs.
Back in China, at present, the Bank Of China Limited(601988) inter bond market, the new third board and the science and innovation board have gradually introduced the market making system, but it is still in its infancy. In addition to the high threshold of foreign exchange market and less participation of securities companies, other fields have been involved: 2 ~ 8 securities companies have made market for the first batch of public offering REITs; Improve liquidity and become the main track of public ETF competition; There are 33 securities companies trying to make a market in the inter-bank bond market.
Gf Securities Co.Ltd(000776) split the income of market making business, and assume the growth rate of market scale, the proportion of market making scale and other factors, so as to calculate the market making business space in China. Finally, it is expected that in the range of conservative to optimistic, the market making of public REITs, ETFs, OTC derivatives, new third board and science and innovation board in 2023 will bring a total revenue of 38.510-54.095 billion yuan to securities companies, and 61.787-88.838 billion yuan by 2025.
In addition, the growth path of American market making giants can also provide a new thinking path for the market making development of Chinese head institutions. The American market maker giants represented by wotu finance build high market making barriers through high-frequency trading technology to stabilize their market making position. At the same time, they expand revenue channels by providing external technical services, so that they can invest more in the technology research and development of the core trading system, forming a “snowball” effect.
In today’s burst of financial technology, the efficiency of software and the speed of hardware have gradually become the core competitiveness, which requires huge initial investment and builds a solid barrier to new competitors. “Therefore, by seizing the opportunity of the first year of market making of the science and innovation board, the head securities companies rely on their own capital and flow advantages to develop core market making trading technology. In the future, they can still obtain a steady stream of income through external technical support, which can not only make up for the huge initial technology investment to a certain extent, but also smooth the fluctuation of market making income.” Chen Fu said.
