Liquidity, share buy backs and the limits of a small market

Over recent years, Malta has seen a noticeable increase in share buy-back programmes (buy-backs) by listed companies. This is a welcome development. Buy-backs are a legitimate and well established capital markets tool, and their renewed popularity points to a maturing listed environment in which issuers are making more active and informed use of the options available to them.

Companies carry out buy-backs for a variety of reasons. Sometimes the aim is to return capital to shareholders. In other cases, buy-backs support employee share schemes or long term incentive plans, or ensure that shares are available to meet obligations arising from corporate actions. Recent buy-back programmes by Maltese issuers have reflected different combinations of these rationales.

It is also no secret that buy-backs can be used to support liquidity. In a small market such as Malta’s, even relatively modest volumes can have a material impact on price formation, and the presence of a standing buyer may contribute to a more orderly trading environment. From both an economic and market stability perspective, this is laudable.

The difficulty lies not in the economic rationale of buy-backs, but in their regulation.

From a regulatory standpoint, issuers implementing buy-back programmes generally seek to rely on the so called “safe harbour” under the EU Market Abuse Regulation (MAR). In broad terms, the safe harbour provides that, where certain conditions are met, including price and volume restrictions, disclosure obligations and timing guardrails, buy-backs are presumed lawful and will not be treated as market manipulation or insider dealing. For issuers carrying out buy-backs, this offers valuable protection against potentially serious market abuse risks.

One of the more technical, but significant, conditions relates to volume. Under the safe harbour rules, purchases on any trading day may not exceed 25% of the average daily trading volume of the shares on the relevant market. On large and liquid exchanges, this threshold is usually workable. On the Malta Stock Exchange, however, daily volumes are often so thin that compliance with the limit becomes practically unachievable. As a result, Maltese issuers often operate within the safe harbour only on a “best efforts” basis, rather than fully within its strict parameters. This means that Maltese issuers do not fall squarely within the safe harbour and the protections which it affords.

Another, more acute, issue arises when an issuer that has repurchased its own shares later seeks to sell them, an essential step if buy-backs are to support liquidity.

Under the safe harbour regime, issuers are generally prohibited from selling shares during a buy-back programme unless specific safeguards are in place. This reflects the framework’s cautious approach to issuers trading in their own shares due to the inherent market abuse risks that arise, namely insider dealing and market manipulation risk. While insider dealing risks in this case can be more easily managed, the main concern is market manipulation.

Under MAR, market manipulation is defined broadly and includes any behaviour that gives false or misleading signals as to supply, demand or price, unless it is justified and carried out in line with an “accepted market practice”.

An accepted market practice is a form of conduct that, although seemingly manipulative, is permitted under MAR provided it has been formally recognised by a competent authority. Such recognition confirms that, when carried out transparently and within defined parameters, the behaviour is regarded as legitimate in the relevant market. Crucially, no accepted market practice has been established in Malta to date. The regulatory “safety valve” envisaged by the accepted market practice regime is therefore absent in Malta.

As a result, conduct that falls within the broad definition of market manipulation is treated as such by default, even where it is commercially rational and well-intentioned.

The consequence is that issuers attempting to use buy-backs to support liquidity face two structural constraints. The first being the inability to fall squarely within the 25% daily volume limit under the safe harbour as described above. Secondly, there is no accepted market practice that would allow issuers to sell the shares which they would have bought back without any regulatory risk. Consequently, buying shares to support liquidity, and later selling them, creates genuine market abuse risk, even where the buying and selling out is carried out with the best of intentions.

This risk is in nobody’s interest and ultimately dampens activity on the secondary market and negatively impacts the broader objective of developing Malta’s capital markets.

There are, however, constructive solutions.

The most immediate lies at the local level. The Malta Financial Services Authority (MFSA) has the power to establish accepted market practices under MAR. Exercising this power would provide much needed legal certainty and would allow properly structured liquidity arrangements to develop in a controlled and transparent way. The idea of an accepted market practice for liquidity contracts has been discussed before, including at a Malta Stock Exchange conference in 2023. That discussion needs to be reignited.

An accepted market practice would not create a regulatory free-for-all. Rather, it would establish clear and transparent parameters within which issuers can support liquidity in their shares, while recognising the realities of a small market and giving issuers confidence that responsible conduct will not later be recharacterised as misconduct. It would also provide a more suitable framework for enhancing liquidity alongside efforts to attract additional market makers. While an accepted market practice is no silver bullet for Malta’s liquidity challenges, it would nonetheless represent a meaningful step forward and a tangible demonstration of the jurisdiction’s commitment to fostering healthy and vibrant capital markets.

There is also a broader EU level policy question. As the EU rightly seeks to strengthen and integrate its capital markets, proportionality cannot be an afterthought. It is difficult to justify why a Maltese issuer listed on a small domestic exchange should, in practical terms, be subject to the same constraints as a large bank trading on Europe’s most liquid venues. The principle of subsidiarity exists for a reason.
One obvious candidate for reform is the 25% daily volume limit and the difficulty which Maltese issuers have in adhering to it. Adapting it, or at least recalibrating how it applies to illiquid markets, could significantly improve the workability of buy-back programmes without undermining the integrity of the market abuse framework.

If Malta is serious about making its capital markets more attractive to both issuers and investors, these issues cannot be ignored. Buy-backs are rising for good reason. It is now for regulators, locally and at EU level, to ensure that the rules governing them reflect economic reality rather than inadvertently suppressing it.

Disclaimer: This article was first published in the ‘Sunday Times’ on 02/08/2026.