Shanghai bourse to appoint market makers for SMIC, other stocks on tech board in boon for Citic and rival brokerages

The Shanghai Stock Exchange is set to appoint a group of market makers for US$800 billion of stocks listed on its Nasdaq-like technology board, a move that is likely to spur transactions and profits at the nation’s biggest brokerages.

The innovation comes as the board, known as the Star Market, celebrates its third anniversary on July 22. The board, a brainchild of President Xi Jinping, was mooted to help fledgling start-ups source public funds to drive the nation’s ambitions to become a technology powerhouse and compete with the world’s best companies.

The market-making mechanism could generate a 15 per cent jump in trading volume annually, according to Citic Securities. It could also boost profits of brokerages with market-making capabilities by as much as 12 billion yuan (US$1.8 billion), according to an estimate by Caitong Securities.

“That is going to be an innovative business for brokerages,” Shen Juan, an analyst at Huatai Securities based in Shenzhen. “They will have new sources of revenue and generally help boost the efficiency of asset pricing.”

Market makers provide two-way quotes for securities, typically on their own accounts, profiting from the spreads between bids and offers while providing additional liquidity on the exchange. Without market makers, buyers and sellers are currently matched automatically by the stock exchange based on prices fed into its central computer systems.

The Star Market hosts 437 companies with a combined capitalisation of 5.4 trillion yuan, making up about 6.6 per cent of China’s onshore markets. About 42.5 billion yuan worth of stocks changed hands every day this year, versus 43 billion yuan a day in 2021, according data compiled by Western Securities and Huatai Securities.

The most valuable company on the board is the nation’s biggest chip maker Semiconductor Manufacturing International Corp, which is capitalised at 330 billion yuan. Its biggest and most famous listing would have been Ant Group, before its listing was abruptly foiled in November 2020 in a precursor to a trillion-dollar tech-sector crackdown.

The Star Market 50 Index has fallen 24 per cent so far this year, double the loss in the Shanghai Composite Index. Still, the market-making mechanism is a tonic for the Star Market, just as buying of local stocks among foreign investors has increased in recent months.

The Shanghai Stock Exchange will approve the first batch of 10 securities firms as market makers soon, with about half of them already passing the technical tests, the Securities Daily on Tuesday, citing people it did not identify. Brokerages with net assets of at least 10 billion yuan may qualify.

Market makers will be regularly assessed on a five-grade scale from the highest AA to lowest D. Those rated D for two consecutive months will be disqualified, according to rules published by the exchange over the weekend.

Citic Securities, CSC Financial and Huatai Securities are likely to benefit most from the new trading mechanism because of their capital and size advantages, according to Western Securities. An index tracking 56 mainland brokerages has dropped 21 per cent this year, according to the data by Shanghai DZH.

“Market makers will boost trading activities on the Star Market and will also bode well for industry leaders like Citic Securities,” said Luo Zuanhui, an analyst at Western Securities in Shanghai. “The new business will become a new revenue driver for big players.”