Last month, the New York Stock Exchange’s new program to bring in outside liquidity providers to help shore up its market went live. Goldman Sachs & Co. became the exchange’s first broker-dealer member to compete with former specialists by making markets on the NYSE from off the floor. In mid-November, Spear, Leeds & Kellogg Specialists, a Goldman division, Knight Equity Markets, and, most likely, Barclays Capital were getting ready to join the club.
The NYSE announced its “supplemental liquidity providers” program in October as part of its new market model. This is first time in its history the NYSE has veered toward a multi-dealer structure, even though SLPs are not officially considered market makers.
The Big Board launched the SLP program to provide another class of liquidity providers, in addition to designated market makers, who could help to bolster the exchange’s liquidity pool and potentially increase its market share. The NYSE has hemorrhaged market share over the last three years as listed volume increased. In mid-November, the NYSE represented about 25 percent of its own listed volume, down from 80 percent in 2005.
Goldman expects SLPs to boost price competition at the New York. “SLP quoting will provide more liquidity and should make the NYSE more competitive,” said Ed Canaday, a spokesperson for Goldman. “We have begun to see significant shifts in terms of the frequency with which the NYSE is at the NBBO, and we expect increases in volume and market share to follow.”
While Goldman was already streaming markets to the NYSE as an SLP, Spear, Leeds & Kellogg and Barclays were preparing to go live. Both are current DMMs. Barclays, which has not confirmed that the firm will be an SLP, did not respond to a request for comment.
Knight Equity Markets, the giant market-making division of Knight Capital Group, was also in the process of becoming an SLP. According to Jamil Nazarali, managing director and head of the company’s electronic trading group, Knight’s goal is “to be an SLP in nearly every NYSE stock.”
The SLP class of market participants is a recent addition at the NYSE. It was created along with the exchange’s new market model, which altered the responsibilities and advantages of the six remaining specialist firms, now called DMMs. The NYSE’s goal is to give both DMMs and SLPs financial incentives to make tighter markets in NYSE-listed securities. SLPs get 15 cents per 100 shares for liquidity they add to the NYSE’s book that gets executed, compared with 30 cents credited to DMMs.
Jamie Selway, co-founder of agency broker White Cap Trading, said the NYSE’s SLP program was an “encouraging sign” and one that could reenergize the New York market. In his view, the program is an acknowledgement that more was needed beyond DMMs to improve the NYSE’s ability to be at the inside market. “Functionally, [the SLP program] is nothing new,” Selway said. “It’s just people on the book who get paid extra to provide liquidity.”
Knight believes SLPs will add significant value on the NYSE. “When the depth of book is built up, we expect to see the NYSE at the inside market much more often than they were before, because all these people will be adding limit orders to their book,” Nazarali said. “We expect it will help them increase their market share.”
There’s also enthusiasm for SLPs on the exchange floor. “These liquidity providers will be making markets in addition to the existing DMMs, which should provide a deeper, more liquid market for the NYSE,” said Phil O’Rourke, director of NYSE trading at Capital Institutional Services.
SLPs can be existing DMM firms that want to stream markets in stocks they don’t already represent on the floor, or off-floor firms that want some of the benefits that accrue to being the equivalent of a market maker. In contrast to DMMs, which have stricter market-making obligations, SLPs must quote at the national best bid or offer at least 5 percent of the day on average in their assigned securities.
White Cap’s Selway points out that the NYSE’s SLP program broadens the exchange’s roster of liquidity providers. However, he said, the exchange is still trying to pick winners by selecting DMMs and SLPs and rewarding them with higher rebates. “A more humble approach is to pay everyone the same, and let the market figure out who’s best at providing liquidity,” he said.
An SLP committee at the NYSE will decide how many SLPs will be allowed in a particular stock, based on trading activity in that name. SLPs must trade on a proprietary basis, and cannot handle customer orders. They must use their SLP mneumonic when trading in their assigned names to get credit for their activity.
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