The Nordic Exchange provides the service Liquidity Provider in order to increase volume and improve the quality of trading in less-traded shares. The service involves an agreement where a trading member takes on the responsibility to ensure liquidity in the company's share. Take a closer look at how the service could benefit you.
What is liquidity?
Liquidity is characterized by high turnover, or a high level of trading activity, in a company’s share. High turnover, and thereby liquidity, is the result of the combination of a small spread and a high order depth. The spread is the difference between the bid and ask price, and the order depth is the total volume behind the bid and ask prices.
Why is liquidity important?
Increased interest and trading in a company's share result in a more accurate price formation and valuation of the company, which is important to the company's stockholders. This creates a more liquid market and reduces costs for investors. In shares with low liquidity, there is a liquidity risk, which means that there may be high costs connected to the purchase or sale of the shares and which consequently may make investors somewhat hesitant towards the shares.
How is liquidity measured?
Several indicators are used to measure the liquidity of a company's shares. Three key measurements are turnover, order depth and spread. The spread is significant to investors because it is an indirect transaction cost – the cost between buying and selling at any given time. The tighter the spread, the lower the transaction cost for the investor. The order depth shows how many shares an investor can buy or sell at a given price. A high order depth minimizes the risk for a negative price movement when buying or selling shares. A low spread and high order depth consequently mean lower costs for investors. Not only that, it lowers risk and makes a company's shares more attractive, all things being equal.
The rules for the Liquidity Provider service
According to the minimum requirements, the Liquidity Provider must quote prices corresponding to a defined minimum value, on both buy and sell sides so that the prices do not deviate more than 4% from each other. Although in Denmark the price may not deviate more than 2 % for mid cap shares. The prices must be quoted at least 85 per cent of the time during continuous trading. Company shares that have a Liquidity Provider are marked in the stock listings.
Liquidity Provider list (last update 2016-05-20, updated biannually)
If you are interested in more detailed information about Liquidity Provider, please contact Technical and Trade Support for Sweden or Finland and GCCGemail@example.com for Denmark. Also see the minimum requirements for being a part of the Liquidity Provider concept.