The liquidity of a share is one important parameter impacting its attractiveness, as it is part of an investor’s investment decision.
What is liquidity and how is it measured?
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 fact sheet.
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 overall willingness to invest in that share.
How can liquidity be improved?
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 buy-backs|
LIQUIDITY PROVIDER PROGRAM
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. The Nordic Exchange provides this service 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. Learn more about the service below:
How does it work?
In a 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 by stepping into the role of the missing desired investor. The liquidity provider will provide liquidity both as a buyer and seller and provide liquidity also in 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.
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 19 percent 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 percent.
Features of the Liquidity Provider service
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.
How to enter into a Liquidity Provider Program
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.
Other Factors Affecting Liquidity
May be influenced via Investor Communications, Analyst Coverage and Index Inclusion.
Share Price Level
May be influenced via Stock Splits or Reversed Stock Splits.
May be influenced by Dividend Strategy, Share Buy-backs and Spin-offs.
List of Issuers with Liquidity Providers_ as of 2019-09-01 Download List of Issuers with Liquidity Providers_ as of 2019-09-01
Liquidity Provider Minimum requirements - 190603 Download Liquidity Provider Minimum requirements - 190603
Liquidity Enhancement Fact Sheet 2019 Download Liquidity Enhancement Fact Sheet 2019
Liquidity Provider Contact List Download Liquidity Provider Contact List
Overview of Liquidity Provider Program Download Overview of Liquidity Provider Program
Template Liquidity Provider Agreement Download Template Liquidity Provider Agreement