Redefining the Roles of Key NYSE Market Participants

By: Ray Pellecchia

File Under: NYSE

• 6 Comments
• Email Entry

As the New York Stock Exchange continues the rollout of our next-generation trading model, and recognizing that we're making significant changes, I thought it might be useful to summarize the main roles and responsibilities of each of the three key market participants: Designated Market Makers (who have succeeded Specialists); Trading Floor Brokers, with their new tools; and the new Supplemental Liquidity Providers.

Designated Market Makers
Designated Market Makers (DMMs) are at the center of the NYSE market and are the only participants in any market who have true accountability for maintaining a fair and orderly market. DMMs:
• Convene both a physical auction convened by DMMs and a completely automated auction that includes algorithmic quotes from DMMs and other market participants;
• Have the obligation to maintain an orderly market in their stocks, quote at the national best bid or offer a specified percentage of the time, and facilitate price discovery at the open, close and in periods of significant imbalances;
• Provide price improvement and match incoming orders based on a pre-programmed Capital Commitment Schedule, which has been added to the NYSE Display Book, minimizing order latency. DMMs and their algorithms do not receive a “look” at incoming orders. This ensures that an intermediary does not see orders first, and that DMMs compete as a market participant;
• Are on parity with quotes from floor brokers and those on the Display Book, encouraging DMM participation and higher market quality.

Trading Floor Brokers
Brokers on the NYSE Trading Floor leverage their physical point-of sale-presence with information technologies and algorithmic tools to offer customers the benefits of flexibility, judgment, automation and anonymity with minimal market impact. Trading Floor Brokers:
• Have parity with DMMs and the NYSE Display Book, no matter whether the Broker’s order is represented physically or via an algorithm or e-Quote. That is, they can join the first displayed quote on the Book, and split stock with that order.
• Have the ability to route all or part of a customer order to an external algo engine from their handheld order-management device. These algorithms offer Floor Brokers the ability to provide customers with additional execution capabilities in an environment that offers a balanced combination of technology for fast, automated and anonymous order execution; and a physical marketplace for discovering block-sized liquidity and improving prices.
• Can utilize a technology feature called Block Talk to more efficiently locate deep liquidity. Block Talk is designed allow Floor Brokers to broadcast and subscribe to specific stocks they have an interest in, creating an opportunity to trade block-sized liquidity that is not accessible electronically. Since the messages contain no specific order information, customers benefit from a discovery process in a secure environment free of impact, information leakage or intermediation.
• Also have the ability to identify via their hand-held order-management system the last five buyers and sellers in a stock by badge number. They can message a specific member that they are in touch with the contra side. This is valuable information for pricing blocks, as it is about real buyers and sellers, not indications of interest.
• Have a special feature with their reserve orders: when the displayed amount is exhausted, reserve interest replenishes on parity. In contrast, the “upstairs” reserve order functions as it does in an electronic market: replenishing at the back of the queue.
• Are positioned to act on the expanded imbalance and indication information at the open and close of the market. They can participate as agent, or convey insight into the open or close for customers’ decision making.

Supplemental Liquidity Providers
Supplemental Liquidity Providers (SLPs) are upstairs, electronic, high-volume members incented to add liquidity on the NYSE.
• The pilot SLP program rewards aggressive liquidity suppliers, who complement and add competition to existing quote providers.
• SLPs are obligated to maintain a bid or offer at the National Best Bid or Offer (NBBO) in each assigned security at least 5 percent of the trading day.
• The NYSE pays a financial rebate to the SLP when the SLP posts liquidity in an assigned security that executes against incoming orders. This generates more quoting activity, leading to tighter spreads and greater liquidity at each price level.
• SLPs trade only for their proprietary accounts, not for public customers or on an agency basis.
• An NYSE staff committee assigns each SLP a cross section of NYSE-listed securities. Multiple SLPs may be assigned to each issue.
• A member organization cannot act as a Designated Market Maker and SLP in the same security.
• SLPs have the same publicly available trading information and market data that all other NYSE customers have available to them.

These descriptions and other updates and information will be posted on our Web page.

Thanks for reading, and as always, welcome your comments.

Today in NYSE History (NYSE.com)
12 Nov. 1879 --Forty new memberships were created to raise funds to enlarge the NYSE's building, bringing the total number of exchange members to 1,100.

I suppose that need for space ultimately led to a new NYSE building, opened in 1903 and later expanded, which is the place from which your humble blogger writes these words. And actually gets paid for it!