Do market makers always ensure that warrants are fairly priced? What are the minimum spreads they required to make?

The process of market making is that the warrant issuer will appoint the designated market maker (usually a securities firm) to provide the buy and sell quotes for their warrants. For example Macquarie Bank Limited (the issuer) issues warrants on the Singapore market and appoints Macquarie Securities (Singapore) Pte. Limited (the market maker) to provide liquidity in the warrants by placing buy and sell quotes into the market. The process of market making generally requires a computer software application that semi-automates the quotation process. The system calculates the price of the warrant at any one time using an options pricing model which generally takes into account the following 6 main factors to generate the price:

1) Share price
2) Exercise price
3) Expiry Date
4) Implied volatility
5) Expected dividends
6) Interest rates

As any of these factors change (the most common being the share price) the system recalculates the new price and adjusts the bid and offer to the new level. As mentioned this process is only semi automated and requires continual and significant interaction by one or more people at all times. The bid and offer quotes (price and volume) provided by the market maker are very much dependent on the prevailing market for the underlying stock.

It is important to note that apart from market makers, a warrant market will often have other investors who are actively buying and selling the warrants. The forces of supply and demand from both the market makers and the other market participants will generally determine what the fair market price for a warrant is at any one time. If there are no other participants, the market maker will provide liquidity to the market.

A warrant issuer must specify the maximum spreads and minimum volume they will provide in each of their warrants. These can be found in the warrant listing documents. Generally, issuers will try to keep their spreads as tight as possible to remain competitive. There are some exceptions where a market maker is not required to make a bid or offer, for example when trading in the underlying share is suspended or when a warrant becomes worthless.

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While Macquarie Capital Securities (Singapore) Pte Limited ("MCSSPL") provides the information in good faith and derived from sources believed to be reliable, MCSSPL does not represent or warrant the completeness, reliability, accuracy, timeliness or fitness for any purpose of any of the material and it accepts no responsibility for the accuracy, completeness or timeliness of the information.

This internet site is produced by 'Macquarie Warrants Singapore - Macquarie Capital Securities (Singapore) Pte Limited (Registration No 198702912C)', holder of a capital markets services licence under the Securities and Futures Act, Chapter 289 of Singapore. The information on this internet site is directed and available to residents of Singapore only and is not provided to any person who is a resident of the United States or any other country. Any material provided on this internet site, including any indicative terms are provided for information purposes only and do not constitute an offer, a solicitation of an offer, or any advice or recommendation to conclude any transaction (whether on the indicative terms or otherwise). We recommend you obtain financial, legal and taxation advice before making any financial investment decision. The price of warrants may go down as well as up and there is a risk that an investor may lose some or all their investments. Past performance is not indicative of future performance.

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