Liquidity Provider

A liquid product has a tradable market with tight bid and ask prices and sufficient size, in which there are opportunities to buy and sell derivative warrants. The provision of liquidity is an important feature of derivative warrants because it allows investors to buy and sell derivative warrants that may otherwise be illiquid (that is, have insufficient supply or demand). Issuers may provide liquidity in respect of their products through a designated liquidity agent (called a “liquidity provider”). In Hong Kong, liquidity providers are commonly known as “market makers”.

Each issuer must appoint one liquidity provider, who must be an Exchange participant, for each of its products.

Most derivative warrants do not have public holdings on their first listing dates. A liquidity provider provides quotations for a particular derivative warrant to support a tradable environment for that product. Such quotations take into account the prevailing market conditions affecting the underlying asset, such as hedging costs and liquidity, spread and volatility of the underlying. Liquidity providers provide liquidity by inputting orders into the trading system of the Exchange when they receive “quote requests”. They do so according to the committed service level set out in the relevant listing document. These standards typically include:

(a)  the maximum response time – i.e. the maximum time it will take to submit a pair of quotes after a request is received;

(b)  the maximum spread between the bid and ask price;

(c)  the minimum quote size; and

(d)  situations in which a quote will not be provided.

Under certain circumstances, liquidity providers are required to provide “active quotes” (that is, even where no request has been submitted by investors) by actively inputting orders into the Exchange’s trading system.

Each liquidity provider is currently identified by a 4-digit broker ID code of 95XX, 96XX or 97XX. The relevant listing documents of an issuer set out the exact obligations of its liquidity provider.

In circumstances where the outstanding quantity of a derivative warrant in the market increases, the liquidity provider may be less active in providing quotes for such derivative warrant. This is because the key role of a liquidity provider is to facilitate liquidity when there is limited or no market liquidity on the derivative warrant (such as when the products are newly listed on the Exchange with limited or no trading by market participants or investors) and to support a tradable environment for the  derivative warrant. If a derivative warrant is not eligible for active quotes due to the fact that there is more than 50% of its aggregate number outstanding in the market, then there may not be any active quote from the liquidity provider. You can find out the outstanding quantity of derivative warrant as of the previous trading day on the HKEX’s website.

Where the number of market participants for a particular product grows, the “market force” increases, and the product becomes less dependent on the liquidity provider as the sole source of liquidity. By implication, the role of the liquidity provider becomes less important when there is a higher number of particular derivative warrant outstanding because this means there are more investors trading in the product, leading to a natural market.

No. Liquidity providers are not required to support prices of derivative warrants. In practice, like other market participants, a liquidity provider is free to buy and sell at any price.

Each series of derivative warrant will have only one liquidity provider appointed for such series.

You can obtain the liquidity provider’s name and contact details in two ways:

(a)  Visit the HKEX’s website: The designated HKEX’s website lists all the liquidity providers for all derivative warrants listed on the Exchange.

(b)  Check the relevant listing documents of the derivative warrant.

Simply contact the liquidity provider directly during trading hours on a trading day at its designated phone number. 

Through the liquidity provider, the issuer takes into account the prevailing market conditions affecting the underlying asset (e.g. hedging costs and liquidity, spread and volatility of the underlying) in the quotations provided to the market.

Not necessarily. Trading derivative warrants is similar to trading stocks listed on the Exchange. Any investor’s bid or ask price may be accepted and traded upon by other investors. You may also place orders just like trading in listed stocks. However, there may not be sufficient interest in trading such derivative warrants.

If the appointed liquidity provider is no longer an Exchange participant, it cannot continue to provide liquidity. The issuer must appoint another liquidity provider in its place.

The Industry Principles set out the best practices on liquidity provision standards for listed derivative warrants, which issuers are required to follow and cannot opt out.

The Industry Principles are general guidance for issuers and are not binding commitments nor do they give rise to enforceable obligations. For example, they do not give investors any specific rights against any issuer.

Occasional failure to comply with the Industry Principles will not in itself render an issuer or its liquidity provider liable to any sanction or enforcement action. That said, compliance with the Industry Principles is relevant to the Exchange’s assessment of an issuer’s suitability to list derivative warrants. The Exchange will actively monitor issuers’ performance and request for explanations why an issuer has not complied with certain Industry Principles.