The launch of the Beijing Stock Exchange on Nov 15 has ignited investor enthusiasm for innovative small and medium-sized enterprises, with the eight BSE-focused mutual funds sold out only a few hours after subscriptions kicked off on Nov 19.

Yet the long-term healthy development of the new exchange still requires continuous efforts to improve its market infrastructure, especially when it comes to motivating more participation from investors and market intermediaries.

The new stock exchange is built upon the NEEQ Select, the highest tier of the National Equities Exchange and Quotations system. However, the NEEQ, also known as the new third board, has been plagued by lukewarm investor participation and insufficient market liquidity.

For instance, the average daily turnover rate, which measures trading volume as a percentage of the total number of shares outstanding, came in at approximately 1.2 percent on the NEEQ Select this year. The number is much lower than about 5.9 percent on Shanghai's tech-heavy STAR Market and indicates less attractive liquidity conditions on the new third board.

Such a lack of market liquidity, if it becomes a chronic phenomenon on the BSE, will raise transaction costs for investors, weigh on stock valuations, limit the financing ability of listed firms and dent the exchange's attractiveness for companies seeking IPOs.

For sure, the BSE has stirred up market enthusiasm in its initial stage of trading. But a key task facing the new exchange is how to nurture a multilayered investor system that will ensure abundant market liquidity after sentiment settles down.

At present, the exchange has tackled the task by reducing the securities asset threshold for any retail investor qualified for BSE trading to 500,000 yuan ($78,200), down from the NEEQ Select's 1 million yuan and the same as the STAR Market.

The move has proved helpful, evidenced by an increase of 340,000 qualified investors within the first trading week after the exchange kicked things off.

But more should be done going forward. Investors may bear greater risks in BSE trading than other mainland exchanges as Beijing-listed companies are innovative SMEs typically in their early development stage with highly volatile business operations.

Therefore, institutional investors who have adequate risk tolerance should be ushered into the exchange to improve market liquidity and pricing efficiency.

Also, it is important to enrich the exit channels for private market investors, including venture capital and private equity funds, to attract more investments in startups that represent potential IPO applicants to the Beijing bourse.

Feasible approaches in this regard include further developing regional centers of equity transactions and nurturing more secondary fund managers, who purchase existing partnership interests in private fund vehicles.

It is also indispensable to perfect the mergers and acquisitions market. In the United States, VC and PE investors exit investments in innovative companies by having them acquired in roughly nine out of 10 cases. The domestic M&A market will also play a bigger role in facilitating exits of private market investors in the future.

Apart from attracting more investment in Beijing-listed firms and nonpublic small businesses, efforts are also necessary to boost participation of market intermediaries in the exchange.

Just as investors have only lackluster interest in the new third board, many intermediary institutions do not have an active presence on the board. It means that more time is needed for the Beijing exchange to encourage and expand market intermediary participation.

Take investment banking as an example. Many securities firms have quit the new third board due to softening market demand, with only about 30 still providing investment banking services on the board at present.

Intermediary institutions that lack business experience on the new third board have to start from scratch if they plan to tap into the new opportunities offered by the Beijing exchange－a process that will generate both financial and time costs. Meanwhile, the size of BSE IPOs is typically small and limits the profits generated by investment banking services.

All these can mean that securities firms that have closed their new third board investment banking business may take a wait-and-see approach when deciding whether to restart their business on the BSE, pending more signs that demand for BSE IPOs is sufficient.

Therefore, safeguarding stable market operation of the BSE and consolidating market confidence in the exchange in its initial stage of development will be crucial for motivating more intermediary institutions to build and expand their BSE-related business lines.

Once intermediary institutions actively engage in BSE business lines, the innovation and base tiers of the new third board may also draw more interest from intermediary institutions, vitalizing the whole BSE-related ecosystem.

A similar rationale applies to information-related intermediary services. Many Beijing-listed companies specialize in niche sectors and make it necessary for investors to access information intermediaries such as industry and company analysts so that they can better understand business models of companies.

Unfortunately, analysts are inclined to follow listed firms with large market capitalizations to maximize their earnings under the current charging mode of securities research.

Listed companies whose market caps rank within the top 25 percent of the A-share market are each followed by 37 analysts on average. By contrast, more than two-thirds of listed firms with capitalizations below the median for all A-share companies, or about 5.5 billion yuan, have no analysts following them.

The market caps of Beijing-listed companies can be even smaller, which means lower overall interest from securities analysts. How to better communicate with the market and provide effective information for investors will be a challenge for Beijing-listed firms to overcome.

All in all, a vital question has emerged for the new exchange to answer: How can a sustainable business model with continuous interest from investors and analysts be created to form a virtuous cycle where lower information asymmetry, higher stock valuations, a bigger investor base and greater analyst interest all reinforce each other.

Huang is an associate professor of finance at the China Europe International Business School (CEIBS).Sun is a research associate with the CEIBS.