What is the impact of market makers on less liquid stocks?

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Market Makers Enhance Liquidity for Less Traded Stocks

Market makers play a crucial role in improving the efficiency of the stock market by providing increased liquidity, particularly for stocks that are traded less frequently and exhibit lower liquidity. This function is achieved through their continuous engagement in quoting bid and ask prices, which helps to absorb temporary imbalances between supply and demand. The expanded framework by Bursa Malaysia aims to further bolster these capabilities, fostering a more robust and attractive capital market.
Continuous Quoting and Price Discovery

Market makers are obligated to continuously provide both buy (bid) and sell (ask) prices for specific securities. This constant presence in the market ensures that there is always a counterparty available for investors looking to trade, even in stocks with otherwise thin trading volumes. By narrowing the spread between the bid and ask prices, market makers reduce transaction costs for investors and facilitate smoother price discovery.
Absorbing Supply and Demand Imbalances

In markets with low liquidity, even small orders can significantly impact stock prices. Market makers stand ready to buy when there are more sellers than buyers and sell when there are more buyers than sellers, thereby absorbing these temporary imbalances. This action prevents excessive price volatility and ensures that trades can be executed at prices closer to their intrinsic value, making the market more stable for less liquid instruments.
Facilitating Hedging and Risk Management

The expanded framework by Bursa Malaysia specifically aims to improve market makers' ability to manage their own risk. By providing greater flexibility in quoting prices and responding to market demands, market makers can more effectively hedge their exposure to price volatility in the underlying securities. This enhanced risk management capability is essential for market makers to continue providing vital liquidity, especially in volatile conditions or for complex derivative products.

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What is the impact of market makers on less liquid stocks?

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