Growth in NYSE’s Liquidity Provider Programs

By: Ray Pellecchia

File Under: NYSE

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From my colleague Colin Clark in Strategic Analysis:

Since the rollout of the new market model in October 2008, NYSE continues to evolve and grow its three unique liquidity provider programs: 1) Designated Market Makers (DMMs), 2) Supplemental Liquidity Providers (SLPs), and 3) Floor Brokers. The volume traded by this group has nearly doubled in 11 months. Together these programs account for 26% of NYSE volume, up from 13% in November 2008. NYSE’s low take fees, coupled with the strong liquidity provision from the DMMs and SLPs, help make NYSE a superior venue to send your orders.

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Designated Market Makers (DMMs) - Today, the five DMMs are among the most active trading firms on the NYSE, accounting for an aggregate 9.1% of NYSE volume in September 2009, up from 3.6% in September 2008, prior to the rollout of NYSE’s new market model. There is only one DMM per issue. They have strong obligations to maintain an orderly market, quote at the National Best Bid and Offer (NBBO) and facilitate price discovery during openings, closings and imbalances. In September, NYSE introduced new incentive-based quoting standards by issue that have further increased the percentage of time and size the DMMs are at the NBBO. The statistics in the charts below highlight the significant price support provided by the DMMs. In September 2009, DMMs quoted at the NBBO 43.3% of the time, DMMs represented 18.2% of the NYSE quote size at the NBBO, and 91.5% of DMM volume traded was liquidity providing (versus liquidity removing).

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Supplemental Liquidity Providers (SLPs) - There are currently six SLPs and three applications are pending. There may be several SLPs per issue providing liquidity complementary to that of the DMMs. SLPs are upstairs electronic trading firms utilizing proprietary capital. The SLP program began in November 2008 and recently accounted 9.5% of NYSE volume traded in September 2009. Like the DMMs, SLPs also have quoting obligations. On average, SLPs quote at the NBBO 27.9% of the time, and more than 90% of SLP volume is liquidity adding in nature.

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Floor Brokers - There are 102 floor broker firms, which accounted for 7.2% of NYSE volume in September 2009. Floor brokers differentiate the NYSE market model by providing human expertise and value-added service to facilitate larger-sized institutional orders. Floor brokers have parity with other orders in NYSE's allocation model and may service customers using algorithms, which accounts for one-quarter of their activity. Floor brokers also use their booths as an “upstairs” trading desk to send orders to multiple markets. The NYSE is in the process of replacing the broker booths with modern trading desks to create a unified trading environment for “upstairs” and on-floor operations.

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