Jakarta. The Indonesia Stock Exchange (IDX) plans to introduce liquidity providers in a move aimed at enhancing the liquidity of fundamentally strong stocks that have yet to experience significant price movements.

Michael Tjoajadi, President Director of Schroder Investment Management Indonesia, lauded the initiative, likening it to the bond market's mechanism where market makers act as liquidity providers. "Liquidity providers will help create liquidity and make the market more efficient," Tjoajadi said at the IDX building in Jakarta on Monday.

A liquidity provider (LP) supplies the market with liquidity by making buy and sell orders for financial assets, ensuring sufficient supply and demand to facilitate trades without causing significant price fluctuations. Examples of LPs include Jane Street, Virtu Financial, Goldman Sachs, and J.P. Morgan.

Tjoajadi emphasized the need for strict criteria to ensure liquidity providers can effectively fulfill their roles. "There will definitely be certain criteria that need to be met. Liquidity providers are more needed for less liquid stocks, where the number of investors and their profiles are determining factors," he explained.

He also underscored the importance of a stock's fundamentals in attracting investor interest, highlighting that stocks such as Unilever Indonesia (UNVR) and Multi Bintang Indonesia (MLBI), despite their strong fundamentals, often lack liquidity in the market. "Many good companies have less liquid stocks. This also applies to stocks included in the Sharia index," he noted.

Hendra Wardana, Founder of Stocknow, stated that the primary goal of liquidity providers is to maintain price stability and improve stock liquidity. "With the presence of these 'liquidity saviors,' stock prices become more stable as there are always parties ready to provide liquidity at any time, making the market more efficient and dynamic," Wardana said. This, he added, will boost investor confidence in the domestic stock market.

"Investors will feel safer and more comfortable investing, knowing that there is always adequate liquidity for every transaction, ultimately encouraging greater participation from various investors, both institutional and individual, which will strengthen market structure and support investment growth in Indonesia," Wardana explained.

The regulation regarding liquidity providers on the IDX is expected to be finalized this year. The IDX follows the lead of international stock exchanges that have already implemented similar mechanisms.

In the United States, the New York Stock Exchange (NYSE) and Nasdaq have long adopted the liquidity provider system to enhance liquidity and stabilize stock prices. In Europe, the London Stock Exchange (LSE) and Euronext also use liquidity providers to ensure market efficiency and increase investor confidence. In Asia, the Tokyo Stock Exchange (TSE) and Hong Kong Stock Exchange (HKEX) have implemented similar mechanisms to support the liquidity of stocks and other financial products.

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