Designated Sponsors: Providers of Liquidity
The lead broker/market maker of a Frankfurt Stock Exchange traded security can also be hired by the public company to provide the function of designated sponsor. In a stock with lowtrading volume, it is often difficult for investors to buy or sell because there may not be another buyer or seller willing to trade at that particular time at the price offered. In such cases, buys or sells in the shares oftencauses large market price fluctuations. Basically, the designated sponsor provides investors with immediate liquidity and allows for continuous trading in the security by guaranteeing an appropriate trading margin and, thus, fair prices in XETRA (the electronic trading platform). The designated sponsor does this by entering binding buy or sell prices into the trading system for less liquid securities, thus preventing imbalances between supply and demand. Because the lower tiered segments of the Frankfurt Stock Exchange are often illiquid, the designated sponsor provides an extremely important function by enabling shareholders to execute buy or sell orders at anytime. Moreover, without the designated sponsor function, there is continuous trading on the floor of the Frankfurt Stock Exchange, but only one ‘auction’ per day on XETRA. Designated sponsors ensure that trading continues even when trading volume is low. The service provided by the designated sponsoris valuable and includes advise and support in other areas not mentioned, but the service is not cheap.
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