The provision of liquidity is an important feature of Listed Structured Products because it facilitates investors buying and selling. Listed Structured Products that may otherwise be illiquid. The Liquidity Provision Quality can be observed from the following three perspectives.
(a) Bid-ask spread - refers to the difference between the bid price and the ask price. It is one of the costs incurred when the investors trade a stock. In theory, the smaller the bid-ask spread, the lower the transaction cost.
(b) Liquidity - refers to the number of shares offered at both the bid and the ask side by the issuer, reflecting the number of transactions that can be traded at the immediate price. In theory, the larger the number of shares offered, the higher the chance for the investors to complete the trade at one shot, the more flexibility provided to the investors.
(c) Stability - refers to the ability of the issuer to maintain a good Liquidity Provision Quality over time. This stability can be presented in two ways:
(i) the time to maintain a the minimum bid-ask spread (hence, 1 tick). We calculate the percentage of time in a day that the spread of the product maintains with a single tick; and
(ii) the historical chart of each indicator described above across time.
We believe that the Liquidity Provision Quality is important to the investors. It helps improving the investors' trading experience and saving the transaction costs. In theory, the better the LPQ of the product is, the better it is for investors.
(Source: Infocast)
