Liquidity Enhancement
Explore ways to increase volume and improve the quality of trading in less traded shares.
Why is Liquidity Important?
When trading in a liquid stock, it is easier to find someone to trade with independently if you are buying or selling. This reduces the risk of owning the stock or more specifically of not being able to trade out of the position. A liquid stock will also more quickly adapt to a new price level as interest in the stock is larger. The result is that for a liquid share, the price will often reflect the fundamental valuation of the company better. Overall, high liquidity in a share tends to increase the willingness to invest in that share.
Benefits of a Liquidity Provider Program
Research by Nasdaq has shown that companies that engage a liquidity provider to enhance liquidity were able to improve both their liquidity and increase the likelihood of a trade on any given day. Based on Nasdaq analysis, turnover increased by 9% in the months following the introduction of a liquidity provider compared to the period just before. In addition, the number of days with trades increased by 4%. The liquidity of a share is one important parameter impacting its attractiveness as it is part of an investor's investment decision. In the absence of a large pool of investors creating natural liquidity, it is also possible to generate liquidity with the help of a liquidity provider.
9%
Increase in turnover in the months after Liquidity Provider introduced
4%
Increase in number of days with trades
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How can a Liquidity Provider Program Support the Raising of Liquidity?
As part of the Liquidity Provider Program, a trading member ("Liquidity Provider") is contracted to take on the responsibility to ensure liquidity in the company's share by supplementing the existing pool of investors and stepping into the role of the missing desired investor. The liquidity provider will provide liquidity both as a buyer and seller and in the absence of other trading interests. This activity will act as a bridge between buyers and sellers when the liquidity is not sufficient to find counterparts for every trade at every given time. It can act as an accelerator to support other activities for a company that is determined to increase its liquidity in the stock.
Find a Liquidity ProviderOther Factors Affecting Liquidity
Investor Awareness
May be influenced by investor communications, analyst coverage and index inclusion
Share Price Level
May be influenced by stock splits or reverse stock splits
Shareholder Value
May be influenced by dividend strategy, share buybacks and spin-offs
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FAQs
Liquidity is the degree to which a share can be quickly bought or sold in the market without significantly affecting the share price. Several indicators are used to measure the liquidity of a company's share. Three key measurements are turnover, order depth and spread. Learn more about liquidity in our factsheet.
There are several factors influencing the liquidity of a stock and a number of activities may be undertaken to impact them. The liquidity increasing activity most suitable for a certain company depends on the company's situation.
| Liquidity Factor | Measure that may be taken |
|---|---|
| Trade cost | • Liquidity Provider Program |
| Investor awareness | • Investor Communication |
| • Analyst coverage | |
| • Index inclusion | |
| Share price level | • Stock split/Reverse stock split |
| Shareholder value | • Dividend strategy |
| • Share buybacks | |
| • Spinoff |
The minimum requirements for a Liquidity Provider entering into a Liquidity Provider Program relate to commitments concerning presence, volume and spread. Prices must be quoted at least 85 percent of the time during continuous trading. The Liquidity Provider must quote prices corresponding to a defined minimum value, on both buy and sell sides, so that the buy and sell price do not deviate more than a certain percentage.
To enter into a Liquidity Provider Program, the issuer and a trading member sign a Liquidity Provider Agreement that stipulates the agreed terms. These terms can be stricter than the minimum terms required by Nasdaq. The Liquidity Provider then informs Nasdaq about the agreement and the issuer sends a market disclosure.
Related Information
MiFID II Market Making Agreement and Scheme in INET
Nasdaq Nordic offers a Market Making Agreement for members and participants acting as Market Maker as defined in MiFID II.
Learn More