Chinese brokerages will start making markets next week on China's New Third Board, its leading over-the-counter (OTC) exchange but one long derided as a dead-end market populated by small little-known, opaquely managed firms.
The move has revitalized interest and trading volumes have exploded, but analysts warn of significant risk.
Most of the 66 Chinese brokerages so far approved to make markets - a business that requires deep cash reserves and sophisticated risk management skills - have little experience.
Market makers quote both a buy and sell price and guarantee share availability by holding shares themselves in inventory, which requires careful real-time management.
For brokerages it means extra profits, while China's policymakers hope the liberalization will boost liquidity in an exchange that can provide capital for small innovative firms, needed for the next phase of economic expansion.
But, analysts fear that brokerages inexperience coupled with inadequate disclosure by listed companies could led to trouble for an exchange already saddled with image problems.
"Like all OTC markets - including... America's Bulletin Board and Pink Sheets - China's Third Board suffers from inherent fundamental flaws," said Peter Fuhrman, chief executive at China First Capital.
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"Liquidity and valuations are persistently low and disclosure is spotty. If it was designed to be a solution to the problem of erratic mainstream IPO policy and approvals on China's main Shenzhen and Shanghai stock exchanges, the Third Board must be judged a major disappointment."
Regardless of critics, trading volumes on the exchange soared almost 700 percent in May when Chinese media first reported the advent of market-makers, ChinaScope Financial data shows. Foreign investors are unable to trade on the exchange.
A Reuters analysis of daily data from the National Equities Exchange and Quotations (NEEQ), which runs the New Third Board, shows that August volumes are set to surpass May's record. Transactions worth 1.16 billion yuan ($188.63 million), as of Aug. 19, were nearly double July's total, while the volume of shares traded has more than tripled month-on-month.
Small cap celebration
Smaller private companies in China are the country's biggest aggregate employers and generators of gross domestic product (GDP), but they have difficulty getting bank loans and even more difficulty getting regulatory approval to list on major markets or issue bonds.