Nasdaq introduces auction trading on First North
Nasdaq has implemented a new trading model for shares with limited liquidity on Nasdaq First North Growth Market. The model came into effect on January 18 and means that stocks with large spreads between bid and asking prices will be traded through auctions instead of continuous trading. One company in the life science sector that is affected by the new model is Cline Scientific.
Listing shares on a public trading venue can in many cases be an attractive way for smaller companies to gain access to the capital market. But it is also associated with a number of challenges, such as the fact that smaller companies often have relatively low liquidity in their shares. That is, there are few investors who place an order at any given time to either buy or sell the stock.
A natural consequence is that the spread, i.e. the difference between bid and asking prices, becomes high, which in turn makes trading more difficult and expensive for an investor.
Guarantee a way to increase liquidity
One way to overcome the problem is to hire a so-called liquidity provider. In this case, a member of the exchange undertakes to continuously set the bid and offer prices of a stock in order to reduce the spread, facilitating better trading. More than 150 companies on the Swedish market currently use liquidity providers.
Nasdaq introduces auction model on First North
However, not all companies are willing to pay for the service and this is where Nasdaq’s new auction model comes into play.
The auction model has emerged from an extensive analysis of trade data and discussions with the various market participants. The initiative is part of adapting the trading mechanisms to current needs and reducing the risk of large price movements caused by small orders in stocks with low liquidity.
Companies whose shares have experienced more than a seven per cent spread over two quarters are now offered to participate in five daily auctions, as an alternative solution to hiring a liquidity provider. The five auctions will be held at the opening at 9:00 CET, followed by three fixed times – at 11:00, 13:00, 15:00 – and at the closing at 17:30.
Cline Scientific is one of the auctioned companies
As of January18, a total of 15 shares on Nasdaq First North Growth Market in Sweden and Finland will be traded using the new auction model. Of these 15, one is active in life science: Cline Scientific. The list of affected companies will be updated continuously. In cases where the auction-traded companies themselves hire a liquidity provider, normal trading in the share will resume.
“We will ensure that we have a close dialogue to support the companies affected by the changes. We are confident that the new model will improve pricing and the trading experience in stocks with lower liquidity while enhancing the quality and integrity of our markets,” Nikolaj Kosakewitsch, Head of European Equities & Derivatives at Nasdaq, wrote in connection with the announcement of the new auction methodology.
