The Nasdaq First North Auction Model ' An Alternative Way Of Tackling Liquidity Issues

Published date30 June 2023
Subject MatterCorporate/Commercial Law, Corporate and Company Law, Shareholders
Law FirmBorenius Attorneys Ltd
AuthorJuha Koponen and Teo Virtanen

Nasdaq Nordic announced on 29 March 2023 that they will introduce an auction model to support less liquid shares on Nasdaq First North Growth Market ("First North"). The new auction model aims to tackle liquidity issues that, according to Nasdaq, can be particularly harmful to retail investors.

Controversially, retail investors will most likely not understand the change and how liquidity issues may cause them harm. Even so, possible liquidity improvements should benefit most investors.

What is an auction model and how does it work?

The introduced auction model will be implemented in First North and the new rules will be effective starting from 18 January 2024. From that point onwards, the shares of the affected companies will be moved to a new auction segment in which trading will no longer be continuous but limited to five auctions per day: an opening auction, actions at 11.00, 13.00 and 15.00, and a closing auction. This model will pool the trades together similarly to what is currently happening in all Nasdaq listed shares in opening and closing auctions . The difference will be that there will be no trading between the auctions. If you miss the opening auction, the next chance will be at 11.00 (CET).

The trades will be matched using an equilibrium price, which means that trades will happen at the price that maximizes the number of shares at the time of the uncross . While this all may sound confusing, it is actually fairly simple, and it is not necessary for the investors to understand the mechanics to benefit from an improved liquidity.

Since the matched trades are pooled together and executed at the same price at the same time, it is more likely that trades will be matched at the price that reflects the most recent supply and demand. Consequently, the market price will be less prone to price fluctuations caused by single orders. The negative side is that the trading will no longer be continuous, and the trades will only match 5 times a day (which is the reason why we can expect improved liquidity during those times). So, less trading at a more reliable price level.

What can companies do to avoid being moved to the auction segment?

The introduced model will only affect companies that already have a really poor liquidity. Only companies with more than seven percent average spread for two consecutive quarters may be moved to the auction segment. Thus, it will not necessarily be a bad thing to have the company shares moved to such segment. Even so, there...

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