Try to sell 500 shares of a small NEPSE company on a quiet afternoon and you learn what illiquidity feels like. The last trade shows a tidy price on your screen. Then you look at the order book and there is almost nothing there. A few scattered bids well below the last price, a couple of asks well above it, and a wide, empty gap in between. To sell right now, you either drop your price to meet a lowball bid or you sit in the queue and wait, sometimes for days. A market maker on NEPSE is meant to fix exactly this moment. The Securities Board of Nepal (SEBON) has said it wants one, and the idea deserves a closer look than the cheerleading it is getting.
Here is the position this piece takes up front. A market maker system would genuinely improve NEPSE, because the exchange has a real liquidity problem outside its handful of popular stocks. But a market maker is a plumbing fix, not a value fix. It can make a thin stock look tradable without making it worth owning, and it can paper over the single most useful warning sign a small investor has: the absence of real buyers. Welcome the liquidity. Do not confuse it with demand.
What SEBON has actually proposed
Start with the status, because it is easy to overstate.
The market maker system is one line item in SEBON’s ten-year Capital Market Development Blueprint, unveiled in mid-July 2026 under chairman Gopal Prasad Bhatta. According to reporting by Nepalnews and Bajarko Chirfar, the blueprint bundles the market maker plan with a wider set of reforms for fiscal year 2083/84 and beyond: T+1 settlement, intraday trading, securities lending and borrowing, short selling, and a Central Counterparty. On the market maker specifically, the policy language is thin. SEBON says it aims to “develop a Market Maker system and an Authorized Participant system” to control extreme price fluctuations and keep the market stable, and that market makers would provide constant liquidity by standing ready to buy or sell, as reported by Bajarko Chirfar on July 15, 2026.
That is roughly all that has been said. There is no market maker regulation yet, no eligibility list, no fee structure, no obligations spelled out. Compare that with short selling, where SEBON has already published a detailed consultation paper. The market maker system is at the level of intent, not design. So when you read that NEPSE is “getting market makers,” read it as a stated goal inside a ten-year plan, not a system arriving next quarter.
The blueprint itself is ambitious to the point of being a stretch. It targets a market capitalization to GDP ratio above 150 percent by 2036, daily turnover of around NPR 30 arba (NPR 3,000 crore), more than 500 listed companies up from 297, and institutional investors rising to over 40 percent of turnover, according to Nepalnews. A functioning market maker system is one of the tools meant to get there. Whether the tool ever gets built the way the plan describes is a separate question, and Nepal’s record on capital market reform timelines is not encouraging.
What a market maker actually does
Strip away the jargon and a market maker is a professional counterparty that agrees to always quote a price on both sides of a stock.
In a normal NEPSE trade, you need someone on the other side who wants the opposite of what you want. You want to sell, so you need a buyer, right now, at a price you both accept. In a liquid stock like a big commercial bank, that person is always there. In a thin stock, they are not, and that is the whole problem. A market maker steps into that gap. It commits to continuously post a bid (a price at which it will buy) and an ask (a price at which it will sell), for a set quantity, throughout the trading session. If you want to sell and no other buyer is around, you sell to the market maker. If you want to buy and no seller is around, you buy from the market maker.
The market maker does not do this as a favor. It earns the spread, the gap between its buy price and its sell price. Say it quotes a bid of NPR 198 and an ask of NPR 202 on a stock. It buys from sellers at 198 and sells to buyers at 202, pocketing NPR 4 per share on the round trip. Do that thousands of times a day across many stocks and the spread becomes a business. In exchange for that profit, the market maker carries real risk. It is constantly holding inventory it did not choose, and if the stock moves hard against its position before it can offload, it loses money. The spread is its compensation for warehousing that risk and for guaranteeing that someone is always there to trade.
The Authorized Participant system SEBON mentions in the same breath is a close cousin, tied mainly to exchange traded funds. An Authorized Participant is the entity allowed to create and redeem fund units so that a fund’s market price stays close to the value of what it holds. Both mechanisms exist for the same reason: to keep prices continuous and fair when natural buyers and sellers are scarce. For NEPSE, which has almost no ETF ecosystem yet, the market maker piece is the one that matters first.
Why NEPSE needs this more than most markets
This is where the case for market makers is genuinely strong, and it is worth being specific about the disease before praising the cure.
NEPSE liquidity is concentrated in a narrow band of stocks. On any given day, a large share of total turnover flows through a small group of names: the biggest commercial banks, a few favored hydropower and microfinance stocks, and whatever is briefly in fashion. Below that top tier, trading thins out fast. Many listed companies go through sessions with tiny volumes, and some barely trade at all. If you hold one of those, your problem is not just that the price is low. It is that you cannot reliably convert your shares into cash at anything close to the quoted price when you actually need to. We walk through this dynamic in detail in how NEPSE liquidity works and why it matters, and it is the single most underrated risk small investors carry.
Thin markets do more than trap sellers. They make prices unreliable. When only a few hundred shares change hands, a single motivated buyer or seller can swing the price several percent, which means the last traded price tells you very little about what the stock is really worth. It also makes manipulation easier. In a stock that trades a handful of lots a day, a coordinated group can push the price around with modest money, paint a misleading chart, and lure in retail buyers chasing the move. A market maker, by keeping a steady two-sided quote with real size behind it, narrows the spread, dampens those wild swings, and makes the quoted price mean something closer to a fair price. That is a real public good, and NEPSE, with its long tail of illiquid stocks, would benefit from it more than a deep market ever would.
There is a second benefit that matters for the blueprint’s own goals. Institutions will not commit serious money to stocks they cannot exit. Illiquidity is a big reason mutual funds, pension money, and foreign investors stay bunched in the same few large names. If market makers can make the mid tier of the market tradable, they widen the universe those institutions can actually invest in, which is exactly what SEBON says it wants when it talks about lifting institutional participation past 40 percent of turnover.
The catch: liquidity is not demand
Now the part the launch coverage will skip, and it is the reason this article exists.
A market maker makes a stock tradable. It does not make the stock wanted. Those are different things, and the difference is where retail investors get fooled. When a market maker is quoting a thin stock, the order book suddenly looks alive. There is a firm bid and a firm ask, the spread is tight, trades print regularly. To an untrained eye, that looks like interest, like the stock has a following. It does not. Much of that activity may be one obligated counterparty doing its job, buying because it promised to buy and selling because it promised to sell, not because anyone has formed a view that the company is a good investment.
This is why the market maker system connects directly to how you read the tape. The floorsheet, NEPSE’s record of who traded what, is the tool that lets you tell real demand from mechanical liquidity. When you learn to read a NEPSE floorsheet properly, you stop taking a busy order book at face value and start asking who is actually on both sides. In a market maker environment, that skill becomes more important, not less. A tight spread and steady prints on a small stock might mean genuine investor interest has arrived. Or it might mean a market maker is providing the only liquidity in the room while natural buyers stay away. The price will not tell you which. The pattern of trades, the concentration of counterparties, and the volume behind each move will get you closer.
Here is the practical trap. Before a market maker, an illiquid stock at least announced itself honestly. The empty order book was a warning: nobody wants this, be careful. A market maker removes that warning. The stock now trades smoothly at a price, and the price looks stable because someone is contractually smoothing it. An investor who mistakes that engineered calm for real confidence can buy into a company nobody actually believes in, comforted by a tidy chart that a market maker drew. The liquidity is real. The demand behind it may be a fiction.
What has to be built, and what to watch
Even granting that market makers belong on NEPSE, the design details decide whether the system helps or just adds a new way to be misled. None of these are settled yet, so treat what follows as the checklist to hold SEBON to, not a description of what exists.
Who gets to be a market maker, and with whose money. Market making needs deep capital and real risk appetite, because the market maker must hold inventory and absorb losses when a stock moves against it. In Nepal, the natural candidates are brokers, merchant banks, and possibly large mutual fund managers. Watch whether SEBON sets capital requirements strong enough that a market maker can actually honor its quotes in a falling market, rather than pulling its bids exactly when investors most need them. A market maker that vanishes during a panic is worse than none, because people were counting on it.
What the obligations are. A real market maker system spells out the rules: the maximum spread allowed, the minimum quantity that must be quoted, the share of the session the quotes must stay live, and the penalties for walking away. Loose obligations produce a market maker in name only, one that quotes wide spreads and tiny sizes and disappears when things get hard. Tight, enforceable obligations are what make the liquidity dependable. This is the detail to read first when the regulation finally appears.
How conflicts are policed. A firm that is both broker and market maker, or that runs a fund and makes markets in the same stocks, sits on a pile of conflicts. It could favor its own book, front-run client orders, or use its market making privileges to prop up a price it is otherwise exposed to. Real-time surveillance and hard walls between these roles have to exist before the system launches, not after the first scandal. The same surveillance gap hangs over the other reforms in the blueprint, and we lay out the broader execution risk in what SEBON’s ten-year plan actually changes for investors.
Which stocks are covered. Market makers are most useful in the mid tier: real companies whose shares trade too thinly for comfort. They are least useful, and most dangerous, if they are used to manufacture the appearance of life in genuinely troubled or dormant companies. Watch whether the eligible list is aimed at improving honest liquidity or at dressing up stocks that should be left to trade on their own thin merits.
The verdict
A market maker system is one of the more sensible ideas in SEBON’s blueprint, precisely because it targets a problem NEPSE actually has. Outside a few dozen popular names, this is an illiquid market where quoted prices are unreliable, exits are uncertain, and small manipulations move stocks too easily. Continuous two-sided quotes from well-capitalized market makers would narrow spreads, steady prices, and open up the mid tier of the market to the institutions the blueprint is trying to attract. On the principle, SEBON is right to want this.
The warning is narrower and just as firm. Do not read liquidity as a buy signal. A market maker’s entire job is to make a stock tradable regardless of whether anyone believes in it, which means the smooth order book and steady price you see after the system launches will no longer tell you what they used to. The empty order book that once warned you off a bad stock will be gone, replaced by engineered calm. Your defense is not to trust the tape less in general, but to read it better: watch the floorsheet, watch who is really on both sides, and remember that the presence of a price is not the presence of demand. If the market maker system is built with strong capital rules, tight obligations, and real surveillance, NEPSE becomes a fairer place to trade. If it is built loosely, it becomes a place where thin stocks wear a costume. Either way, the number on your screen deserves more skepticism after this reform, not less.
This is analysis, not financial advice.
