Jamil Nazarali, senior managing director and global head of electronic trading at Knight, spoke with Traders Magazine about the role of market makers today.
On market making and May 6–
On May 6, there was no one who had enough liquidity to be buying from every seller. I don’t think you can mandate someone to be there all the time. However, I think you can provide incentives to be in the market more. Incentives could be in rebate form, or relief around short sales. I think one example is the NYSE’s DMM and SLP program–where they said, "We’ll provide economic incentives to be at the inside. And if you are a supplemental liquidity provider and come on our platform at the inside at ‘x’ percentage of the time, we’ll give you an enhanced rebate." And guess what happened? Lots of people came on their platform, and they started adding a lot of liquidity, and that resulted in an increase in NYSE market share. If you provide those types of incentives, people will respond to them and the market will be better off.
On why market makers should have stricter obligations–
I think market makers provide an important intermediary function in the marketplace. But over the last five to 10 years, high-frequency traders and other players in the market who don’t have the same requirements and obligations have taken a much more prominent role.
Right now, there are a lot of people who call themselves market makers, and they don’t really do anything other than put out a two-sided quote, which anyone can do. But at the same time, they’re able to get affirmative determination, which means they don’t have to locate a stock before they short it. What we’re advocating or saying is, "Look, it should mean something to be a market maker." It should mean something more than putting out a two-sided quote, which until recently, meant you could put something in at a penny by 10,000. Now, at least, it means something more. We put out a letter to the SEC that talks about requirements like percentage of time at the inside and depth within the national best bid and offer. We think these things would be helpful to the marketplace.
On requiring HFTs to register as market makers–
I do not think they should be required to register. But I do think if they do register as market makers, they should be bound by the same requirements, and if they do not register, they should locate stock before they borrow it, as only market makers are exempt from this requirement. I think it should mean something to be a market maker. But again, there is no reason they should be required. I think they provide a valuable function to the market–like providing liquidity–and I think that is good. I think if they are not going to avail themselves to any of the benefits of being a market maker, then they shouldn’t have to become market makers.
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