Facilitating Market Dynamics: The Role and Appointment of Market Makers in Kenya’s ETF Landscape

In the ever-evolving landscape of financial markets, the concept of market makers plays a pivotal role in ensuring liquidity, minimizing price gaps, and fostering a robust trading environment. As Kenya embraces the growth of its Exchange Traded Fund (ETF) market, understanding the appointment and responsibilities of market makers becomes essential.

What is a Market Maker?

A market maker is a financial institution or individual that facilitates the trading of financial instruments by creating a market for buyers and sellers. In essence, market makers ensure that there is a continuous flow of trading by quoting both buy and sell prices for a particular security, such as an ETF. Their role is crucial in minimizing price discrepancies, enhancing liquidity, and contributing to the overall efficiency of the market.

Appointment of Market Makers in Kenya’s ETF Market:

The Capital Markets Authority (CMA) in Kenya has outlined specific regulations regarding the appointment and responsibilities of market makers in the ETF market. Here are key aspects of the appointment process:

1. Liquidity Creation:

  • The primary role of a market maker in Kenya’s ETF market is to create liquidity by providing two-way price quotes. This helps eradicate substantial price gaps and ensures a liquid market for all participants.

2. Mandatory Appointment:

  • Before an ETF is listed, the issuer is obligated to appoint a market maker. The appointed market maker commits to quoting buy and sell prices for ETF units on a daily basis.

3. Written Agreement:

  • The issuer and the appointed market maker enter into a written agreement that clearly outlines the terms of market making for the ETF. This agreement is crucial for transparency and regulatory compliance.

4. Agreement Submission:

  • The market maker is required to submit a copy of the market making agreement to both the CMA and the listing exchange before the commencement of market making activities.

5. Communication of Activity:

  • Prior to the listing approval, both the issuer and the market maker communicate the commencement and, if applicable, the termination date of the market making activity for the ETF.

6. Incentive Mechanism:

  • To encourage active market making, a listing exchange may establish an incentive mechanism. This mechanism, based on a clear formula, serves to reward the most active market makers. The transparency of this formula allows for independent verification.

In conclusion, the appointment of market makers in Kenya’s ETF market aligns with global best practices, emphasizing the importance of liquidity and market efficiency.

The collaboration between issuers and market makers, guided by regulatory frameworks, contributes to a vibrant and investor-friendly ETF trading environment. As Kenya’s financial markets continue to evolve, the role of market makers remains integral to sustaining a dynamic and resilient marketplace.