Analysts see limited near-term impact from PSE market-making proposal

By Alexandria Grace C. Magno, Reporter

MARKET PARTICIPANTS welcomed the Philippine Stock Exchange’s (PSE) proposed market-making framework but said its immediate effect on market liquidity may be limited given the small number of products currently covered.

Juan Paolo E. Colet, managing director at China Bank Capital Corp., said the proposed framework provides clear rules governing the accreditation, operation and regulation of market makers, including specific provisions covering exchange-traded funds (ETFs) and global Philippine depositary receipts (GPDRs).

“The proposed general framework is fairly straightforward and offers clear and reasonable rules concerning the accreditation, operation, and regulation of market makers,” he said in a Viber message on June 6.

However, Mr. Colet said the proposal is unlikely to materially improve market liquidity in the near term because of the limited number of products that would initially fall under the framework.

“Since there is only one ETF and no GPDR listed on the PSE at the moment, the new rules won’t have an immediate material impact on market liquidity,” he said.

Mr. Colet added that the framework nonetheless lays out the groundwork for broader market-making initiatives that could eventually cover more actively traded securities.

“Hopefully the PSE is able to release those additional frameworks within the year,” he said, referring to potential market-making rules for common and preferred shares.

The PSE earlier proposed a general market-making framework that would extend coverage beyond ETFs to other exchange-traded products as it seeks to improve liquidity and standardize rules across the market.

Under the proposal, the framework would serve as a unified structure for market-making activities, with product-specific rules to be developed for instruments such as ETFs and GPDRs.

Market making refers to the continuous posting of buy-and-sell quotes to ensure liquidity and facilitate smoother trading activity.

Toby Allan C. Arce, head of sales trading at Globalinks Securities and Stocks, Inc., said the proposal addresses one of the local market’s longstanding challenges.

“The PSE’s proposal to establish a broader market-making framework is one of the more meaningful market structure reforms in recent years because it directly addresses one of the Philippine market’s most persistent weaknesses: inadequate liquidity,” he said in a Viber message.

Mr. Arce said the framework could help improve price discovery, narrow bid-ask spreads and support the development of new exchange-traded products.

“The overall direction is positive because it moves the PSE closer to practices seen in more developed exchanges where liquidity provision is treated as a core market function rather than voluntary activity,” he said.

Still, he noted that the effectiveness of the framework would ultimately depend on whether market makers find the activity economically viable.

“If spread limits are set too tightly relative to volatility or inventory risk, market makers may find it economically unattractive to participate aggressively,” Mr. Arce said.

He added that while the proposal alone is unlikely to resolve broader issues such as low retail investor participation and limited institutional depth, it could provide a foundation for future market development.

Under the draft framework, applicants must be Securities and Exchange Commission-registered broker-dealers and PSE trading participants. They must also have at least P100 million in unimpaired paid-up capital and at least three years of continuous operation as a trading participant.

The proposal likewise sets operational requirements for market makers, including maximum bid-ask spreads, minimum quote sizes, and minimum quoting periods during trading sessions to help ensure continuous liquidity and efficient price formation.

The PSE said the framework forms part of its efforts to support market development as it expands its range of tradable products and seeks to attract greater institutional participation.

Stakeholders may submit comments on the proposal until June 23 before it is finalized and submitted to the Securities and Exchange Commission for approval.