Liquidity Providers (LPs) act as market makers in the Euronext Cash market model’s order-driven system.

The role of LPs on Euronext’s market is to:

• protect against variations in volatility on the market;
• guarantee transactions at all times at the best price; 
• boost the volume of transactions in the orderbook.

In this way the Liquidity Provider is a market specialist for its stocks, and as a result is often the principal point of contact for the issuing company. The Liquidity Provider agreement for equities is combined with a liquidity contract in many cases*. This links the issuing company to a Euronext market member offering a placing, analysis and advisory service, or specializing in initial public offerings (IPOs).

Liquidity Providers mainly concentrate on small and mid caps, since listed companies with large market capitalization generate greater liquidity. The criteria for liquidity provision on large-cap stocks are more restrictive and liquidity provider agreements are not permitted for any of the stocks in the Euronext 100 index.

When the LP enters into a commercial agreement with Euronext to provide liquidity on any stock or exchange-traded fund (ETF or tracker), it undertakes to quote two-way bid and offer prices with a minimum volume size, gauged either by the number or the value of shares, and within a minimum price range or spread. 

The warrants market is traded via the dedicated product segment, NextWarrants. In this instance it is mandatory that the issuer of the warrant is also the LP for the launch of the product. The same rules apply for certificates and convertible bonds.

The market in trackers, traded on the NextTrack segment of Euronext, requires a minimum of two LPs to launch any product. These LP contracts are specific for each national market. In the bond market LP contracts are based on the national governing rules which differ according to the method of quotation and the issuer, government or corporate. Furthermore, members can take up the option of being bid-only LPs.

Members considering becoming Liquidity Providers must be members of the Euronext country in which they want to provide liquidity, and be authorized to trade in the capacity of either dealer or broker/dealer.

The Euronext Cash Market has recently reviewed its Liquidity Provider (LP) policy and will introduce two LP profiles in the near future. This is to better reflect the activity of LPs on the Cash Market. These profiles relate to LPs on equities only. Euronext will communicate the implementation date and schedule in due course.

Since the introduction of the harmonized Liquidity Provider concept in 2001, Euronext has observed some changes in the behaviour of active Liquidity Providers, with two distinct types of activity. This has enabled us to establish two distinct types of LP, classified by their activity.

Profile 1: “Corporate Broker” profile
In the first category are LPs whose activity is strongly related to that of mid and small caps. These LPs provide listing sponsorship, research and/or promotional services to companies throughout the listing process, in addition to the usual LP trading service once the company has listed. Due to the corporate finance nature of their activity, these LPs will be classified as ‘Corporate Broker profile’ LPs.  The profile of this category remains the same as the current LP profile, and Euronext aims to have a maximum of two LPs per equity.

Profile 2: “Dealer profile”
The second type of LP consists of LPs that provide quotes on the more liquid equities. These LPs perform hedging and arbitrage activities and are therefore focused on blue chips, foreign shares, and multi-listed equities in the Euronext zone (often equities that function as the underlying for options). These LPs will be called ‘Dealer profile’ LPs, after their style of trading (for own account and without any client involvement).

A new Liquidity Provider profile has been developed for these Dealer profile LPs, and these LPs must respect a ‘List of eligible equities for LP activity’, which will be created by Euronext.  Dealer profile LPs will have adjusted requirements and trading fees.

*Liquidity contract: in France, the French Association of Investment Firms (AFEI) offers standard liquidity contracts (tel: +33 (0)1 53 83 00 70).