The firm's withdrawal, effective from close of business yesterday, is a blow for the smaller companies sector and is likely to worsen liquidity in many tiddlers' shares.
Share dealers said Warburg's pull-out was the biggest so far from the sector, which has been hit by low levels of trading volumes ever since the stock market crash of October 1987.
In the past few years several other City firms have ended market making in smaller companies. They include ANZ McCaughan Dyson and Citicorp. Some others have been trimming the number of stocks in which they are willing to buy or sell.
There have been rumours that Barclays de Zoete Wedd, another leading market maker, recently reduced its coverage in smaller companies, but BZW said yesterday it was not planning any changes at present.
Warburg's move has been prompted by low profit levels from dealing in the smaller company stocks. A spokesman said: 'We have looked at the profitability of all the stocks in which we make markets and the unprofitable lines of share have been dropped for commercial reasons.'
As a result, it has stopped dealings in the least actively traded stocks. About 280 are in companies with a market value of less than pounds 20m. However, Warburg will continue to make markets in 1,400 others.
About 90 small companies struck off its book will be left with just one market maker. This will severely hamper the liquidity in these companies' shares for some weeks.
The Stock Exchange said that some would eventually be taken up by other market makers. The remainder would be transferred to its company bulletin board, a computerised trading facility set up last April as an alternative to the market maker system.
The aim is to improve liquidity of third- and fourth-line stocks. At present about 120 stocks are traded on the bulletin board but the numbers are likely to grow.
Some experts fear Warburg's move will be followed by others because of unprofitable levels of business. But the bulletin board system, under which each quoted company is allocated a page of financial information, has also caused controversy. Opponents say it could further reduce, rather than raise, interest in the sector.Reuse content