Citizen Investment Trust launches market’s first stock dealer company; how will entry of stock dealer company affect the market?

The Nepalese securities market currently has 50 authorized brokers through whom all transactions in the market take place. Recently some commercial banks received approval to undertake broker activities through subsidiary companies. However, a stock broker is solely an intermediary acting on the instructions of the investor in return for a commission.

Citizens Investment Trust (CIT) has launched its stock dealer company "Nagarik Stock Dealer". The company is expected to regulate all investments of the stock market and efficiently undertake the activities of market marker thereby broadening the scope of investment. Paid up capital of the company is Rs.5 Arba out of which 30% or shares worth Rs.1.50 Arba will be issued to the general public.

CIT has an investment of Rs.2.50 Arba (51% stake) while Nepal Telecom and Nepal Reinsurance Company have investment of Rs.50 Crore (10% stake) and Rs.45 Crore (9% stake) respectively.  CIT will enjoy the first mover’s advantage for a brief period until other stock dealer firms enter the market.

The role and flexibility of a stock dealer is much broader than that of a broker. A dealer is a person or an institution that trades business on their own behalf and transacts securities on their own account. Unlike brokers, dealers have complete freedom regarding their buy and sell decisions. It has often been seen that after gaining experience, brokers become dealers at a later stage. Dealers are important figures in the market. They make markets in securities, underwrite securities, and provide investment services to investors.

That means dealers are the market makers who provide the bid and ask quotes you see when you look up the price of a security in the market. The dealers contribute towards controlling the volatility by curbing unexpected gains and losses in the market through their buy/sell decisions. They also help create liquidity in the markets and boost long-term growth. Since the volume of trade through dealers is huge, it implies constant inflow of liquidity in the market thereby reducing the recurring liquidity crunch.

In terms of the Nepalese securities market, since NEPSE is still at a very nascent stage, the presence of a stock dealer in the market is expected to regulate and develop the market. Entry of a new player in the market will spark the interest of the investors resulting in inflow of investment in the securities market. A dealer can also enable shifting investment from non-productive sectors to sectors with strong growth potential and encourage entry of new companies in the securities market. The online trading system already has the required features to accommodate market makers, as per NEPSE.

For the investors, it will be easier to buy or sell securities. The investors will be able to design their own investment pattern after referring the pattern of the dealer firm. The dealer will create a more safe and investment friendly environment for individual and institutional investors by reducing the risk in securities market. The investors will be safe guarded against abnormal gains and losses. The presence of a dealer would make it easier for a new entrant to enter the securities market.

The integration of the functions of a broker and dealer gives rise to a new player in the market, broker-dealer. The broker-dealer acts as agent for their clients to transact shares and has the flexibility to hold securities in their own account.