Designated Market Making Alive and Well at NYSE
Traders Magazine Online News, December 23, 2011
Floor trading might be in decline, but it's far from dead. In fact designated market makers on the floor of the New York Stock Exchange have been making headlines recently.
NYSE just 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.
Floor traders have been hearing about their eminent demise for years now, but the DMM business, which sits at the heart of NYSE floor trading, is beating strong. That's apparent by the brand new posts being unveiled by the New York after the exchange made a "significant" capital investment, according to NYSE.
"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, getting involved in large situations and dampening volatility."
The importance of DMMs became readily apparent during the "flash crash" of May 2010. Stocks on the Nasdaq fell to a penny in a matter of minutes before recovering again. On the New York stocks still fell dramatically, but DMMs were able to slow down the process, taking the other side of sell orders so prices never went as low as they did on other exchanges.
Mecane said the flash crash reinforced the point that, while technology can be great, sometimes it makes sense for people to 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 its technology, however, Getco looked for a way into the game, becoming a designated market maker on the exchange for the first time in 2010.
With its acquisition of BofA Merrill's DMM business, Getco is more than doubling its designated market maker operations. Todd Abrahall, head of DMM services for Getco, called the move a natural expansion for the firm.
"This business fits us," Abrahall said. "There's been a transformation down there [at NYSE], and this is a great opportunity."
Getco views being a designated market maker as an extension of its previous offerings, one more way the company can reach a segment of the market that is focused on the New York. Many issuers like having a significant amount of liquidity in one location, Abrahall said, and being a DMM helps Getco to be active in those stocks.
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