Market Makers in the Indian Stock Market: A Comparative Perspective with Global Peers

Market Making in India

India's main equity trading is concentrated on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

Main equity segment: No official MM/DMM-natural Market making is voluntary in nature, but essential

• Market liquidity in large-cap and mid-cap stocks (Nifty 50, Sensex, and similar constituents) is provided voluntarily.
• No official SEBI-designated MM for any single entity to act as a market maker for a specific security.
• Instead, tight spreads and robust depth emerge from intense competition among HFT firms, proprietary trading desks, algorithmic traders, domestic institutions, and foreign portfolio investors. 
• Also, India’s growing retail participants are now another reliable source of ‘natural’ market liquidity. 
• This competitive, technology-driven MM model closely mirrors standard practices in many global electronic exchanges, except the NYSE, where DMM is official for every stock.

Illiquid or Newly Listed Stocks (Limited / Case-by-Case); Voluntary in nature, but essential

• Formal Market makers are not routinely appointed for all illiquid or new main-board/IPO listings, but they function in targeted situations. 
• Exchanges occasionally run Liquidity Enhancement Schemes (LES) or appoint designated market makers for specific illiquid securities to improve market depth.
• For main-board IPOs, market making is voluntary. However, in rare cases (e.g., certain re-listings or stressed situations), exchanges may facilitate liquidity support.
• Periodic Call Auction for Illiquid Securities: NSE/BSE uses call auctions rather than continuous market making for very illiquid stocks or even normal liquid stocks before the official opening (pre-opening session)

F&O (Equities, Commodities & Currency) Markets: De Facto / Voluntary in nature

• In the F&O (futures & options) segment — especially on NSE (which dominates equity derivatives) — market makers exist informally but are highly active. 
• Participants: Brokers/Prop. Desks, large institutions, and HFT firms (both local & global) act as ‘natural’ market makers, especially for illiquid options

SME platforms (NSE Emerge and BSE SME): Mandatory MM/DMM-regulatory & compulsory in nature

• SEBI enforces compulsory market making under Regulation 261 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR).
• Such MMs/entities generally ensure pre-IPO to post-IPO listings arrangements (primary markets) and subsequent normal trading in the secondary market, ensuring adequate liquidity and an orderly price movement.  

Primary Rules for SME segments Market Makers

• Mandatory appointment: The issuer, via the lead manager, must appoint at least one (frequently two) SEBI-registered stockbroker as market maker(s) before listing. The market maker must be an exchange member and cannot be promoter-affiliated.
• Quoting rules: Two-way quotes (bid and ask) must be maintained for at least 75% of the trading session each day.
• Minimum market depth: Each quote & quantity must support a value of at least ₹1 lakh 
• Inventory (stock holding) requirement: Market makers are generally expected to hold genuine inventory, often around 5% of the post-issue equity, to demonstrate commitment.
• Duration: The obligation runs for a minimum of three years from the SME IPO listing date.
• Net worth thresholds: Scaled requirements apply (per NSE circulars, e.g., October 2024): starting at ₹1 crore for up to 5 SME companies, rising progressively to ₹5.5 crore or higher for portfolios exceeding 45–50 companies.
• Additional safeguards: Strict spread guidelines, circuit compliance, and penalties for non-performance

Conclusions

Market making ─ in any form ─ regulatory or voluntary, compulsory or natural, is pivotal to an orderly modern capital market and financial stability. India’s MM model is hybrid in nature ─ the voluntary, competition-led model in the main securities segment delivers strong natural liquidity through technology and incentives, aligning closely with global peers (except US-NYSE). The compulsory MM regime in the NSE/BSE SME platform (exchange segment), however, remains distinctive — imposing strict quoting, depth, inventory, duration, and capital requirements to mitigate illiquidity and volatility in a retail-heavy, emerging segment. 

 In brief, except for SME & ETF, there are no compulsory SEBI regulations on market-making activities in the Indian capital market. Any pseudo market-making activity in all regular segments is de facto (performed voluntarily by competing participants) in nature rather than de jure (regulated and required). But in reality, brokers are ensuring natural market making through their Prop-Desks ─ to ensure sufficient liquidity and orderly price movement for their own existence in the business.  This aligns with global practices for large or established listings, where competition drives liquidity rather than mandates.

Robust capital market supports CAPEX, enterprise funding, and economic resilience worldwide. India's dual model offers valuable lessons in adapting global best practices to emerging-market needs. In a country like India, where the cost of borrowing funds for SMEs are very high compared to their global peers; fair access to the capital markets is essential for quality SMEs, despite the overall cost of listings and compliance that may still be high compared to their scales. But still, it’s a win-win for both entrepreneurs and investors.