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January 2, 2012

DMMs Alive and Well at NYSE

By James Armstrong

Floor trading might be in decline, but it's far from dead. Designated market makers on the floor of the New York Stock Exchange have been making headlines recently.

NYSE spent several million dollars on new posts for DMMs on the floor. Market maker Getco paid an undisclosed amount to acquire the DMM business of Bank of America Merrill Lynch. And now Virtu Financial has acquired a market-making unit from Cohen Capital and is poised for a possible entry into the DMM business on the New York.

Joe Mecane

"We're not going to deny the significant role that technology has come to play in today's world," said Joseph Mecane, executive vice president of NYSE. "There have clearly been a lot of efficiencies and reductions in the number of people involved in trading across the whole industry. At the same time, we do think there is still a role for people to play in markets."

Mecane said the "flash crash" of May 2010 showed that, while technology can be great, sometimes it makes sense that people get involved. And while the market-making business is not as profitable as it used to be, a handful of canny firms have embraced the DMM model.

Traditionally, Getco has focused on electronic platforms, so until recently the firm was not interested in being a DMM on the New York. As NYSE upgraded technology, Getco looked to get into the game, becoming a designated market maker on the exchange in 2010. With its acquisition of BofA Merrill's DMM unit, Getco is more than doubling its designated market maker operations.

"This business fits us," said Todd Abrahall, head of DMM services for Getco. "There's been a transformation down there [at NYSE], and this is a great opportunity."

Getco isn't the only electronic market maker now interested in being a DMM. Cohen Capital's operations recently bought by Virtu are currently only on the Amex exchange, but Cohen, and now Virtu, has the right to be a DMM for new listings on the New York.

Though it is rare for a company to switch from one DMM firm to another, Virtu will now be able to bid for a chance to be the DMM for new listings on the NYSE.

Virtu declined to comment for this article, but many people in the industry expect the firm to become an active DMM on the NYSE floor. Vincent Viola, chief executive officer of Virtu, said in a statement the company is "excited about playing an important part of the NYSE and NYSE Amex marketplace."

NYSE's Mecane said there will probably remain four or five DMM firms on the exchange, though that number could go up or down by one or two. In addition to Getco, Barclays, Goldman Sachs and Knight all currently have DMM businesses on NYSE.

Technology has not wiped out market makers on the floor, but it has made them much more efficient. A market maker a decade ago might only have handled two or three names, whereas a DMM today is more likely to handle 30. Many efficiencies have already been realized, however, and few people expect the same type of consolidation to continue unabated.

"We're at the point where the technology has made it about as efficient as it can for one individual," said Patrick King, a director at Knight and a DMM on the NYSE floor. "Do we have the capacity to go to 35, 40? Maybe, but that's probably pushing the envelope."

King said firms that have tried to give their DMMs too many names to handle have had push-back from the floor community.