Secondary Market Liquidity for Digital Securities: Market Making and Trading Dynamics

Secondary market liquidity for Saudi tokenized securities has developed steadily since the Tadawul digital securities platform began pilot operations in Q2 2025. Daily trading volume averages SAR 12-18 million across 3 listed instruments, supported by 3 designated market makers — two of which are established Tadawul conventional market makers and one specialized digital asset firm — maintaining continuous two-sided quotes with average spreads of 15-25 basis points. While these figures are modest compared to Tadawul’s conventional market — where average daily traded value reached SAR 4.76 billion in January 2026, up from SAR 3.3 billion in December 2025, across over 400 listed companies on the Saudi Exchange —, the CMA and Tadawul view current liquidity levels as consistent with a nascent market that requires scale — projected to reach 15-20 listed instruments by end of 2027 — to achieve institutional-grade trading depth.

Market Making Framework

Tadawul’s digital securities market making framework operates under CMA-approved rules:

Designated Market Maker (DMM) Obligations:

• Continuous two-sided quotes during exchange operating hours (10:00-15:00 SST)
• Maximum spread: 50 basis points for tokenized sukuk, 100 basis points for equity tokens
• Minimum quote size: SAR 100,000 per side
• Quoting presence: Minimum 80% of trading session duration
• Response time for quote refreshing: Maximum 5 seconds following a trade

DMM Incentives:

• Reduced Tadawul trading fees (50% discount versus standard rates)
• Priority in CMA sandbox graduation for market-making-related digital asset activities
• Access to aggregated order flow data for risk management
• Inventory management flexibility — DMMs may hold up to 10% of any listed digital security’s outstanding supply

Current DMMs: Three entities serve as designated market makers — 2 are Tadawul-licensed conventional market makers extending their operations to digital securities, and 1 is a specialized digital asset market making firm that obtained a CMA license through ELDAP.

Liquidity Metrics

Current secondary market liquidity data (Q1 2026 averages):

The higher market maker participation in equity fund tokens reflects the relatively lower natural demand compared to tokenized sukuk, which benefit from the existing institutional demand for Saudi fixed-income instruments.

Repo and Securities Lending

The development of repo and securities lending markets for digital securities is critical for institutional liquidity:

Digital Securities Repo: The CMA is developing rules for repo transactions involving tokenized securities. A digital securities repo would involve the temporary transfer of token ownership through a smart contract that automatically reverses the transfer at the agreed date and price. This mechanism would provide institutional participants with balance sheet flexibility and funding access using their digital securities holdings as collateral.

Securities Lending Framework: Tadawul is designing a securities lending framework for digital securities that uses smart contracts to automate the lending agreement, collateral management, and return delivery. The framework must accommodate Sharia compliance requirements — conventional securities lending involves interest-based compensation, which is not Sharia-compliant. The CMA-approved Sharia board has proposed a fee-based lending model (ujra) that avoids riba while providing economic equivalent functionality.

Collateral Management: Smart contract-based collateral management for repo and lending transactions would automatically mark-to-market collateral positions, trigger margin calls when collateral falls below agreed thresholds, and liquidate collateral in the event of borrower default — all without manual intervention. The blockchain settlement infrastructure provides the real-time valuation and atomic transfer capabilities required for automated collateral management.

Short Selling: The CMA has not yet authorized short selling of digital securities. When permitted, short selling will operate through the securities lending framework with smart contract-enforced locate requirements — the short seller’s broker must verify and lock a lending agreement in the smart contract before accepting a short sale order, eliminating naked short selling.

Liquidity Drivers and Barriers

Current Barriers

1. Limited instrument count: Three listed instruments provide insufficient diversification for portfolio-level trading strategies
2. Investor base concentration: 47 registered institutional investors in the pilot — a narrow base compared to Tadawul’s 5,000+ institutional participants
3. Settlement infrastructure unfamiliarity: Some institutional investors are still building internal processes for T+0 atomic settlement
4. Retail restrictions: CMA investor protection provisions limit retail access to most current digital securities
5. Operating hours: Current 10:00-15:00 SST trading window does not leverage the 24/7 potential of blockchain settlement

Projected Improvements

1. Scale effect: 15-20 instruments by end 2027 will attract dedicated digital securities portfolio strategies
2. Retail expansion: Progressive opening of investor access to semi-qualified and retail investors
3. Sovereign digital sukuk: Government issuance will create a risk-free benchmark and attract institutional trading volume
4. Cross-listing: GCC cross-border trading agreements will add international liquidity
5. Extended hours: Tadawul is evaluating extended trading hours for digital securities, potentially including after-hours and weekend sessions

Comparison with International Digital Securities Markets

Saudi Arabia’s digital securities liquidity is competitive with international peers given the relative maturity of each platform. The CMA’s aggressive listing pipeline and sovereign issuance plans position Saudi digital securities to potentially overtake peers in secondary market liquidity by 2028.

Market Microstructure Analysis

The digital securities market microstructure on Tadawul reveals several important patterns that distinguish it from both conventional Saudi securities trading and international digital asset exchanges:

Price Discovery Efficiency: Despite the nascent market status, price discovery for tokenized sukuk demonstrates high correlation with the underlying conventional sukuk benchmarks. The average pricing deviation between tokenized and conventional forms of equivalent credit quality sukuk is 3-8 basis points — a premium that reflects the liquidity differential rather than fundamental credit differences. As the convergence roadmap progresses and the liquidity gap narrows, this premium is expected to compress toward zero.

Trade Size Distribution: The current trade size distribution is concentrated in the SAR 50,000-200,000 range, reflecting the institutional QI investor base. The median trade size of SAR 85,000 for tokenized sukuk is significantly smaller than conventional sukuk (median SAR 5 million), demonstrating that tokenization is already enabling smaller-ticket institutional participation. When retail access expands, average trade sizes are expected to decline further toward the SAR 5,000-20,000 range.

Intraday Volume Patterns: Digital securities trading follows the same intraday pattern as conventional Tadawul trading — peak volume during the first 30 minutes of the 10:00-15:00 trading session, a midday lull, and a secondary peak in the final 45 minutes. This pattern suggests that digital securities trading is currently driven by the same institutional participants and trading strategies as conventional securities, rather than a distinct digital-native investor base.

Settlement Analytics: The blockchain settlement infrastructure provides unprecedented transparency into settlement performance. Of the 2,800 average daily settlements processed through the digital securities platform, 99.98% settle within 5 seconds of trade execution. The 0.02% failure rate is exclusively attributable to technical timeouts during brief network maintenance windows, not to counterparty failures — a dramatic improvement over the conventional market’s approximately 0.5% settlement failure rate.

Algorithmic Trading and Market Surveillance

The CMA has established specific rules for algorithmic trading on the digital securities platform:

Algorithmic Trading Registration: All algorithmic trading strategies deployed on the digital securities platform must be registered with the CMA, with documentation of the strategy’s logic, risk parameters, and kill switch mechanisms. This registration requirement applies to market maker algorithms, proprietary trading strategies, and client-directed algorithmic execution.

Speed Controls: Maximum order submission rate is capped at 100 orders per second per participant, preventing the latency arms race that has characterized conventional electronic markets. The CMA explicitly designed this limit to ensure that blockchain settlement infrastructure is not stressed by high-frequency trading patterns incompatible with DLT throughput.

Market Surveillance Integration: CMA market surveillance systems monitor digital securities trading using adapted versions of the algorithms applied to conventional Tadawul markets. Surveillance covers spoofing, layering, wash trading, insider trading, and market manipulation. The blockchain’s transaction transparency actually enhances surveillance capability — every order and trade is immutably recorded with participant identity, enabling post-trade reconstruction that is more comprehensive than conventional order audit trails.

Cross-Market Surveillance: As digital and conventional securities converge under the integration roadmap, cross-market surveillance monitors for manipulation strategies that exploit the settlement cycle difference (T+0 digital versus T+2 conventional) or price discrepancies between tokenized and conventional forms of the same security.

Institutional Adoption Roadmap

Building institutional-grade secondary market liquidity requires a systematic approach to institutional adoption:

Phase 1 — Current (2025-2026): Early adopter institutions (47 registered QIs) establish operational capabilities for digital securities trading, settlement, and custody. CMA sandbox graduates and ELDAP participants form the core liquidity provider base.

Phase 2 — Expansion (2027): Target 200+ registered institutional investors, including GCC cross-border participants. Sovereign digital sukuk issuance creates the benchmark instrument that institutional fixed-income mandates require. Introduction of repo and securities lending for digital securities, providing institutional participants with balance sheet efficiency tools.

Phase 3 — Maturation (2028-2030): Full convergence of digital and conventional trading infrastructure. All of Tadawul’s 5,000+ institutional participants gain access to digital securities through the unified platform. Target daily volume of SAR 500M-1B for digital securities, representing 5-10% of total Tadawul daily volume.

Retail Investor Liquidity Impact

The planned expansion of investor access to semi-qualified and retail investors will fundamentally change the liquidity profile:

Volume Projection: CMA modeling projects that retail investor access could increase daily digital securities volume by 3-5x, driven by:

• Lower average trade sizes (SAR 5,000-20,000 versus current SAR 85,000 average)
• Higher trade frequency (retail investors typically trade more frequently than institutions)
• Broader instrument coverage (retail demand for equity tokens and sovereign sukuk expected to exceed fixed-income institutional demand)

Spread Compression: Increased retail order flow provides natural liquidity for market makers, enabling tighter spreads. The CMA targets average spreads below 10 bps for liquid digital securities after retail access expansion, down from the current 15-25 bps.

Market Quality Metrics: International experience (notably Singapore’s SGX Digital and Hong Kong’s HKEX Digital) suggests that retail participation improves market quality through increased quote competition, reduced market maker concentration, and more continuous order flow throughout the trading session.

The development of secondary market liquidity is foundational to the entire Saudi tokenized securities ecosystem. Without institutional-grade liquidity, issuers cannot justify the additional cost and complexity of tokenization over conventional issuance. The CMA’s coordinated approach — combining regulatory incentives, sovereign issuance, and infrastructure investment — reflects an understanding that liquidity requires deliberate cultivation rather than organic emergence. The Kingdom’s $2.7 trillion capital market provides the underlying scale; the challenge is migrating that scale onto digital infrastructure in a way that maintains the market quality standards that institutional investors demand. The first SAR 12-18 million in daily digital securities volume demonstrates that the infrastructure works. The path to SAR 500 million-1 billion in daily volume — which would position Saudi Arabia as the world’s most liquid digital securities market — requires the combination of sovereign issuance, retail access expansion, and GCC cross-border trading that the CMA’s roadmap targets by 2028.

The liquidity development framework reflects the CMA’s understanding that tokenized securities must achieve institutional-grade trading quality before they can attract the capital flows needed to fulfill Vision 2030 financial sector objectives. Saudi Arabia’s position as a FATF member since 2019 ensures that the AML/CFT compliance infrastructure supporting secondary market activity meets international standards, reinforcing confidence among both domestic and international participants. The combination of sovereign issuance, regulatory incentives, and GCC cross-border cooperation provides the foundation for scaling digital securities liquidity to institutional relevance within the CMA’s 2028 convergence timeline.

For secondary market liquidity inquiries: info@sauditokenisation.com