A trader can sell a security A to a market maker to get the best price. A transaction is made when a trader finds a market maker that sells security A at the lowest price. Usually, market makers are registered brokers. However, not all registered brokers are market makers. To be a market maker, a broker must have a genuine interest in making a market for a security. The role of market makers is demonstrated through the following activities:
- Maintain market flexibility for a security once it is issued to the market.
- Increased ability to trade a security profitably due to price competition between different market makers for the same security.
- Attract investors' attention to a type of security that is not listed on the market.
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- Increase market flexibility for a security by increasing the number of market makers.
Bond market makers can be said to play the role of bond brokers and dealers. They earn profits from these activities. First, as bond brokers, market makers can earn from brokerage fees. Second, as bond dealers, they earn money from price differences. Bond prices depend on interest rates, prices increase when interest rates decrease and vice versa. However, bond market making activities involve higher risks than stock brokerage activities. Acting as a market maker requires high requirements and high costs: (i) holding a large amount of bonds and cash, (ii) high-tech infrastructure, (iii) a team of highly skilled and professional staff. Moreover, when bond prices fall, there is often a risk of default.
Market makers will also suffer losses. The information that market makers obtain is raw data, so they can have an advantage, but they can also suffer losses when inside information appears. Market makers must buy when prices rise and sell when prices fall. The possibility of losses in this market will be very large when bond prices are heavily influenced by investor psychology. In inefficient financial markets, investor psychology is the guiding factor influencing decisions to buy or sell bonds. Market makers are the ones who help balance supply and demand when false information appears. Members of the bond market include commercial banks, securities companies, insurance companies, investment funds, financial companies and other intermediary financial institutions. However, the most powerful market makers are still commercial banks and securities companies. Securities companies are professional traders in the stock market. They have advantages in brokerage and trading of securities, so they can build close relationships with investors, whether organizations or individuals, thereby increasing the liquidity of investment bonds. With the boom of the stock market in 2006 and early 2007, all securities companies were attracted by commissions and profits from stock trading, they seemed to be no longer interested in buying and selling and trading bonds. When the TP market is separated from the stock market, they hope to diversify their securities portfolio, thereby contributing to the development of market makers. But at present, we have not established a system of market makers. Up to now, in Vietnam, only Vietcombank (VCB) and IncomBank (ICB) operate as professional bond brokerage and underwriting companies. Two other state-owned commercial banks are VBARD and BIDV, several joint stock banks and foreign banks such as CitiBank, HSBC, Deutsch Bank, Standard
Chartered Banks is also in the initial stages of implementing this activity (Source: www.vdf.org.vn/Doc/2008/VDFConf_WIPTuVie.pdf ). Furthermore , the lack of derivative instruments in the bond market such as swaps, options, forward contracts, and futures contracts means that Vietnam does not have true market makers.
2.4.3. Lack of specialized credit rating organizations
One of the reasons why investors do not dare to invest heavily in the Vietnamese market as we expected is the lack of a credit rating company in the capital market. Currently, credit rating companies have not developed, so investors invest mainly based on their own feelings, analysis or information flows they have. As the market size expands, an individual cannot analyze and synthesize a huge amount of information, the market appears to have the necessary factors to develop a bond credit rating system. Based on the results that credit rating companies bring, new investors have the tools to evaluate, choose investment portfolios, forecast business development and make investment decisions. Through the credit rating, investors will better understand the financial strength of companies, easily evaluate financial institutions that have business relationships or are interested in buying shares on the stock market of these companies. Investors always want to know about the risks of buying a bond before they decide to buy it. As a bond investor, it is only natural that you want to be sure that you will get your interest paid back on time and that you will receive your principal back when the bond matures. It is almost impossible for an individual to conduct the necessary research on the bond market, but a rating service can do it. Bond issuers rarely make their ratings public. Therefore, investors should seek information from the rating services themselves, the financial press, brokers, or financial advisors.
One danger that bondholders often face and that they cannot foresee is that a rating agency may downgrade a company or government’s rating over the life of a bond. This would happen if the financial condition of the bond issuer deteriorated, or if the rating agency perceived that a certain business decision would have a negative outcome. If such a downgrade occurs, investors would immediately demand a higher yield on the bonds currently on the market. This means that the bond’s price would fall in the secondary market. It also means that if the issuer wants to issue a new bond, it would have to be offered at a higher coupon rate than the market to attract buyers. In short, the credit rating agency’s function is to eliminate the information gap between borrowers and lenders. According to an expert from the World Bank (WB), the key to the development of the bond market is the establishment of credit rating organizations. When reputable credit rating organizations are established, evaluating businesses according to international standards will create trust for investors. That is an indispensable factor in the development of the capital market. In countries with developed financial markets such as the US, UK, and Australia, hiring credit rating organizations to provide services is performed periodically by businesses such as hiring annual financial report audits, providing credit rating coefficients along with issuances is considered an indispensable requirement. Countries in the region (except Laos and Cambodia) have established credit rating companies for about 15 years. The ASEAN bloc has also established the Forum of Credit Rating Enterprises as an industry business organization of Southeast Asian countries. The Asian Association of SMEs was established with the assistance of the Asian Development Bank (ADB) (Source: vietbao.vn/Kinh-te/Thuc-te-dinh-muc-tin-nhiem- doanh-nghiep-o-Viet-Nam/55157039/88/).
In Vietnam, the concept of credit rating is still very new. Currently, the whole country has only a few units operating in the field related to credit rating such as: Enterprise Credit and Rating Joint Stock Company, Credit Information Center (CIC - under the State Bank) and Enterprise Credit Rating Center (CRVC - under Vietnamnet Software and Communications Company). But in reality, these units are not yet credit rating organizations in the true sense, because their main activity is still only providing information related to enterprises without performing credit rating according to international standards. Although auditing companies have made great efforts to diversify their services, with scarce resources as they are today, the target market of these companies is still only providing auditing services for listed companies or consulting on equitization and enterprise valuation. This information is very important to banks and investors, but it is only meaningful at the time of rating. If corporate credit ratings were performed periodically, at least monthly or quarterly, they would certainly be more useful to users. Currently, CIC only provides credit rating services upon request, which are not yet popularized to the public due to the high cost. In Vietnam, there is currently no professional credit rating company, and the legal framework for the operation of these companies has not been established. In the absence of a legal framework and a young capital market, there are still many difficulties in developing a professional credit rating system (Source: www.vdf.org.vn/Doc/2008/VDFConf_WIPTuVie.pdf ).
In fact, most of the companies issuing bonds are the largest in their industry. Their financial conditions are much better than the industry average. In addition, some of them are guaranteed by the government, so the risk of their inability to pay is much higher.
They are very low. On the other hand, the Vietnamese market is considered quite easy-going when it is ready to accept large bond issuances of enterprises without having to evaluate the creditworthiness of enterprises. Therefore, most enterprises in Vietnam have not paid due attention to creditworthiness for their enterprises. The Bank for Investment and Development of Vietnam (BIDV) is the first enterprise to be rated by an international and prestigious credit rating organization such as Moody's, which is also the rating organization for the Vietnamese Government.
However, to develop a market in which all types of enterprises can issue bonds, it is necessary to establish a standard for credit rating or corporate bond rating. Especially, in the trend of globalization, when a business is listed on a foreign stock market, its bonds must be rated according to international standards.
2.4.4. Awareness of businesses and investors about bonds is still limited.
Vietnamese enterprises have not yet fully realized the advantages and importance of capital mobilization through bond issuance. Currently, some state-owned enterprises still enjoy preferential treatment in borrowing from banks, so they do not want to issue bonds. In addition, professional organizations operating in the securities sector have not really developed, issuing enterprises have not enjoyed the services provided by these organizations, have no confidence in the effectiveness of bond issuance, and enterprises are afraid to issue bonds, leading to limited supply in the primary market and dull transactions in the secondary market. In the period of 2006-2007 when the stock market was hot, joint stock companies felt that it was easy to mobilize capital by issuing shares and benefit from having more surplus capital. Another reason is that in recent times, capital mobilization by issuing shares has become more popular.
easier than borrowing money from banks or issuing bonds. Even for companies that have not yet been established, just a plan to establish on paper, it is easy to sell out all the issued shares in a short time. Ordinary investors are easily attracted by shares sold at 2 or 3 times the face value. Obviously, such widespread issuance of shares poses great risks for investors.
After issuance, shareholders can hardly control what the company uses the capital for, whether it is in accordance with the committed capital mobilization plan or not. Some companies have issued shares and then deposited the money in the bank, the bank interest is more than enough to pay dividends, the company does not need to do any business. This sounds absurd but it is true. Because the capital surplus (total capital obtained by selling shares at a price much higher than par value), the deposit interest (calculated on this amount) is much higher than the dividends payable to shareholders (calculated on par value). This cannot happen in efficient financial markets, but it happens in Vietnam. The stock price is pushed too high compared to the present value (PV), causing investors to face both business risks and financial risks in the near future when the business fails.
On the other hand, the cost of capital when raising capital by issuing shares is much lower than that of issuing bonds or borrowing from banks. Even when the cost of borrowing is deducted before calculating income tax, the capital surplus still reduces the cost of borrowing after tax, which encourages businesses to issue shares rather than bonds. Therefore, businesses are indifferent to raising capital by issuing bonds. Only when the value of shares is accurately valued, businesses must choose between issuing shares or bonds in their capital structure to maximize the value of the business, because then the interest rates of shares and bonds will accurately reflect the risks of these securities. However,
When the issuance of stocks is massive, supply exceeds demand, the market begins to saturate and decline as it is now, investors no longer jostle in issuances and auctions to try to buy stocks at all costs, the Vn-Index drops sharply, it is time for businesses to consider raising capital through other channels, including bonds.
By the end of 2007, the number of accounts registered for securities trading reached more than 330,000 accounts, an increase of more than 330% compared to 2006 with 100,000 accounts registered for trading. However, the number of accounts registered for securities trading in Vietnam accounts for less than 0.4% of the country's population, a figure that is much lower than many countries in the region, in Asia and in the world ( Source: saleoff.com.vn/News/Details.aspx?cpi=38&ci=38&t=614). This also shows that the number of people interested in and participating in the stock market is still quite limited. However, not all participants in the stock market in Vietnam can thoroughly analyze financial reports and technical analysis to make their investment decisions. The market participants in Vietnam are considered to be young and invest in herds, so they are easily manipulated and led by foreign investors.
2.4.5. Low competitiveness of bonds
The forms of savings and investment in promissory notes at commercial banks are more convenient and therefore more popular than investing in bonds. Along with lower liquidity, bonds have not attracted idle money from economic organizations and individuals, especially when the capital potential among the population is currently very large.
The interest rate mechanism is the reason why bonds are not competitive. The bond interest rate mechanism is too rigid and cannot keep up with the fluctuation trend of market interest rates. The interest rate of treasury bills is sometimes higher than the interest rate of bonds, and at times the real interest rate after inflation is negative, which has made bonds lose their attractiveness to investors. This can also lead to a situation where the