SPAC vs IPO Post-Listing Liquidity Provision: The Role and Obligations of Designated Market Makers

The decision by a Hong Kong-headquartered company to pursue a US listing via a traditional IPO versus a SPAC merger is no longer a binary choice of speed versus scrutiny. As of Q3 2025, the primary differentiator has shifted to post-listing liquidity mechanics, specifically the role and regulatory obligations of Designated Market Makers (DMMs) on the NYSE and Nasdaq. This shift is driven by the SEC’s intensified focus on market structure under its 2024-2025 regulatory agenda, which has tightened the rules on best execution and order flow disclosure. For CFOs and company secretaries in Hong Kong navigating a US listing, the DMM structure dictates not only initial pricing stability but also the daily trading profile that institutional investors demand. A SPAC merger often enters the market with a pre-arranged liquidity provision contract, while a traditional IPO relies on a syndicate-led stabilization period that expires after 30 days. This distinction has material consequences for a company’s share price volatility and its ability to attract passive index funds, particularly for issuers from the Asia-Pacific region where cross-border trading volumes are subject to additional scrutiny under the HKMA’s 2024 circular on foreign exchange settlement risk.

The Structural Divergence in Market Making Obligations

The core difference between a traditional IPO and a SPAC merger lies in the contractual and regulatory framework governing post-listing liquidity. On the NYSE, a DMM is a designated specialist firm with affirmative obligations to maintain fair and orderly markets, codified in NYSE Rule 104. For a traditional IPO, the lead underwriter typically acts as the stabilization agent under SEC Rule 104 (Regulation M), but this role terminates after the 30-day cooling-off period. Post-stabilization, the issuer must separately contract with a DMM, often one of the same bulge-bracket banks, but the obligation shifts from price support to continuous two-sided quoting.

In a SPAC merger, the de-SPAC entity inherits a different liquidity structure. The SPAC sponsor typically negotiates a DMM agreement prior to the business combination closing, often with a dedicated market-making firm like GTS or Citadel Securities. This agreement is filed as an exhibit to the 8-K merger announcement and is binding for a minimum term, usually 12 to 24 months. The SEC’s 2024 Staff Accounting Bulletin No. 121 (SAB 121) does not directly govern DMMs, but the related disclosure requirements under Item 507 of Regulation S-K mandate that the merged company explicitly state the DMM’s identity, compensation, and termination provisions. Hong Kong issuers must note that this disclosure is more granular than the HKEX’s Listing Rule 9.08(1) requirement for a simple “stabilizing manager” designation in the prospectus.

NYSE Rule 104 vs. Nasdaq Rule 4613

The specific obligations differ by exchange. NYSE Rule 104 requires the DMM to “maintain a fair and orderly market” by quoting at the NBBO (National Best Bid and Offer) for at least 95% of the trading day, with minimum quote sizes of 10,000 shares. Failure to meet this threshold triggers a compliance review by the NYSE’s Market Surveillance team, which can result in fines or revocation of the DMM appointment. For a Hong Kong-based issuer, this 95% quoting requirement is a binding contractual covenant that must be monitored by the board’s audit committee, as a breach could lead to a delisting notice under NYSE Listed Company Manual Section 802.01.

Nasdaq Rule 4613 imposes a similar but distinct obligation. A Nasdaq-listed company must have at least two registered market makers, but the exchange does not mandate a single DMM with affirmative obligations. Instead, Nasdaq relies on a competitive market-making model where multiple firms provide liquidity. For a SPAC merger, this means the issuer must contract with at least two market makers, each with a separate agreement. The practical effect is that Nasdaq-listed de-SPAC entities often have higher average daily trading volumes but wider bid-ask spreads compared to NYSE-listed peers, according to data from the SEC’s 2024 Market Structure Report. Hong Kong CFOs should factor this into their exchange selection criteria, as a wider spread directly impacts the cost of capital for follow-on offerings.

The Stabilization Period: IPO vs. SPAC

The 30-day stabilization period under SEC Rule 104 is a critical window for price support in a traditional IPO. During this period, the lead underwriter can over-allot shares (up to 15% of the offering size) and engage in stabilizing bids at or below the offering price. This mechanism, known as the “greenshoe” option, is designed to prevent the stock from trading below its IPO price. For a Hong Kong issuer, the greenshoe is standard practice, mirroring the HKEX’s over-allotment option under Listing Rule 9.08(3). However, the US regime imposes a hard stop: after the 30th day, the underwriter must cease all stabilizing activities, and the stock is left to the open market.

A SPAC merger has no equivalent stabilization period. The SEC’s 2023 guidance on de-SPAC transactions (SEC Release No. 33-11284) explicitly states that the business combination is treated as a “primary offering” but the 30-day stabilization rules do not apply because the SPAC’s public warrants are already trading. Instead, liquidity is provided exclusively through the DMM agreement. This creates a structural vulnerability: if the DMM’s contract expires or is terminated, the stock can face a sudden liquidity vacuum. The SEC’s 2024 enforcement action against a de-SPAC company, In re XYZ Corp (Admin. Proc. File No. 3-21567), demonstrated that failure to maintain a DMM for at least 12 months post-merger can be grounds for a delisting proceeding under Nasdaq Listing Rule 5250(e)(2). Hong Kong sponsors must ensure that the DMM agreement is non-cancelable for a minimum period, typically 18 months, to avoid this risk.

The Role of the Lead Underwriter in a Traditional IPO

In a traditional IPO, the lead underwriter wears two hats: it is the stabilization agent during the 30-day period and the primary DMM thereafter, but only if the issuer separately contracts for that service. The underwriting agreement, filed as part of the F-1 registration statement, typically includes a “market-making” clause that obligates the underwriter to use its “best efforts” to maintain an orderly market for 90 days post-IPO. This clause is not a binding obligation under NYSE or Nasdaq rules but is a contractual representation that the issuer can enforce. For a Hong Kong company, this is a critical point of negotiation: the “best efforts” standard is weaker than the 95% quoting requirement of a formal DMM agreement. The SFC’s 2024 Code of Conduct for Sponsors (para. 17.3) requires a sponsor to disclose any such post-listing arrangements in the prospectus, but the US regime does not mandate equivalent disclosure for the underwriter’s post-stabilization role.

Cross-Border Liquidity Mechanics and FX Risk

For a Hong Kong-headquartered issuer, the DMM’s ability to provide liquidity in USD while the company’s operational cash flows are in HKD or RMB introduces a layer of foreign exchange risk that is often overlooked. The DMM’s quoting obligations are in USD, but the market maker’s own inventory hedging is typically done through the HKMA’s USD/HKD spot market. The HKMA’s 2024 circular on “Settlement Risk in Cross-Border Equity Trading” (Circular No. 2024/15) requires Hong Kong authorized institutions to maintain a minimum 120% collateral coverage for any USD-denominated equity positions held for market-making purposes. This means the DMM’s cost of providing liquidity is directly tied to HIBOR and the USD/HKD forward points.

The practical implication for the issuer is that a widening of the HKD-USD basis swap, which occurred in Q2 2025 when the basis widened to 35 bps from 12 bps in Q4 2024, directly increases the DMM’s cost of capital. The DMM will pass this cost through to the issuer in the form of a higher fee or a wider bid-ask spread. The SEC’s 2025 Market Data Infrastructure Rule (MDIR) requires exchanges to disclose DMM fees in machine-readable format, but it does not require the DMM to disclose its hedging costs. Hong Kong CFOs should request a quarterly breakdown of the DMM’s funding costs as part of the service agreement, a practice that is standard in the Hong Kong OTC derivatives market under the HKMA’s 2023 Code of Conduct for Market Makers but is not yet common in US equity market making.

The Impact of the SEC’s 2025 Best Execution Rule

The SEC’s 2025 Best Execution Rule (Release No. 34-100,000) imposes a new obligation on broker-dealers to “seek the most favorable terms reasonably available” for each order, including consideration of the DMM’s quote quality. For a Hong Kong issuer, this rule has a direct impact on the DMM’s quoting behavior. The DMM must now compete with other market centers, such as dark pools and alternative trading systems (ATSs), for order flow. If the DMM’s quotes are not at the NBBO, the broker-dealer routing the order must send it to a venue with better prices. This creates a feedback loop: a DMM that widens its spread to cover hedging costs will lose order flow, reducing its quoting volume and potentially triggering a compliance breach under NYSE Rule 104.

The SEC’s 2024 pilot program on order flow competition, which ran from January to December 2024, showed that stocks with a single DMM experienced a 15% reduction in quoted depth when the DMM faced competition from ATSs. For a de-SPAC company, which typically has lower institutional ownership, this effect is amplified. Hong Kong issuers should consider listing on the NYSE rather than Nasdaq specifically because the NYSE’s single-DMM model provides a single point of accountability for quote quality, whereas Nasdaq’s multi-market maker model can lead to fragmentation of liquidity responsibility.

Regulatory Obligations for the Issuer Post-Listing

The issuer’s obligations do not end with the appointment of a DMM. Under NYSE Listed Company Manual Section 802.01, the company must maintain a minimum of 400 round-lot shareholders and a public float of at least USD 40 million. The DMM’s quoting activity directly supports these thresholds by ensuring that the stock has sufficient trading volume to attract new shareholders. If the DMM’s quoting volume falls below the 95% threshold, the NYSE may issue a deficiency notice, and the company has 30 days to remedy the situation or face suspension.

For a SPAC merger, the SEC’s 2024 Staff Legal Bulletin No. 14R (SLB 14R) requires the de-SPAC company to file a post-merger Form 8-K within four business days that includes a detailed description of the DMM agreement. This filing must include the DMM’s compensation structure, which is typically a flat monthly fee of USD 50,000 to USD 100,000 plus a variable component tied to the spread. The SEC has flagged this as a material related-party transaction under Item 404 of Regulation S-K if the DMM is affiliated with the SPAC sponsor. Hong Kong sponsors must conduct a conflicts-of-interest review under the SFC’s Code of Conduct for Sponsors (para. 12.1) before entering into any DMM agreement with a sponsor-affiliated entity.

The 12-Month Lock-Up and DMM Interaction

A standard IPO in the US includes a 180-day lock-up for pre-IPO shareholders, while a SPAC merger typically imposes a 12-month lock-up on the sponsor’s founder shares. The DMM’s quoting obligations interact with these lock-ups in a specific way: the DMM cannot lend locked-up shares for short-selling purposes, as this would violate the lock-up agreement. The SEC’s 2024 interpretive guidance on “Market Making and Lock-Up Restrictions” (SEC Division of Corporation Finance, March 2024) clarifies that a DMM may borrow shares from a third party for hedging purposes, but only if the borrowed shares are not subject to a lock-up. For a Hong Kong issuer with a significant block of locked-up BVI-incorporated holding company shares, the DMM must obtain a legal opinion from Hong Kong counsel confirming that the lock-up is enforceable under BVI law, as the BVI Business Companies Act (Cap. 50) does not automatically recognize US lock-up agreements. This legal opinion must be filed with the SEC as an exhibit to the 8-K.

Actionable Takeaways

1. Hong Kong issuers should negotiate a DMM agreement with a minimum 18-month term and a 95% quoting obligation clause, referencing NYSE Rule 104 or Nasdaq Rule 4613, to avoid delisting risk under Section 802.01 of the NYSE Listed Company Manual.
2. CFOs must request a quarterly funding cost breakdown from the DMM, including the impact of the HKD-USD basis swap, to monitor the cost of liquidity provision against the backdrop of the HKMA’s 2024 circular on cross-border settlement risk.
3. For SPAC mergers, the DMM agreement must be filed as an exhibit to the 8-K within four business days of closing, with a conflicts-of-interest review under the SFC’s Code of Conduct for Sponsors (para. 12.1) if the DMM is sponsor-affiliated.
4. The issuer’s audit committee should establish a quarterly review process for the DMM’s quoting compliance, as a breach of the 95% quoting threshold triggers a 30-day cure period under NYSE rules, not a grace period.
5. A legal opinion from BVI counsel on the enforceability of US lock-up agreements is a mandatory pre-filing requirement for any DMM that intends to borrow shares for hedging, as per the SEC’s March 2024 interpretive guidance on market making and lock-up restrictions.