NYSE Launches SLP Program with Goldman Sachs

The New York Stock Exchange’s new program to bring in outside liquidity providers to help shore up its market is live. Goldman Sachs & Co. is the exchange’s first broker-dealer member to compete with former specialists by making markets on the NYSE from off the floor. Others in the wings are Spear, Leeds & Kellogg Specialists, a Goldman division, Knight Equity Markets, and, most likely, Barclays Capital.

The NYSE announced its “supplemental liquidity providers” program on October 24, 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 exchange did not disclose the names of any of the firms that intended to become SLPs, but plans to shortly.

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. The NYSE now represents about 25 percent of its own listed volume, down from 80 percent in 2005. NYSE Arca’s NYSE-listed market share is around 18 percent.

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 is already streaming markets to the NYSE as an SLP, Spear, Leeds & Kellogg and Barclays are getting ready to go live. Both are current DMMs. Canaday confirmed that Goldman and SLK are among the New York’s SLPs. Barclays, which has not confirmed that the firm will be an SLP, did not immediately respond to a request for comment.

Knight Equity Markets, the giant market-making division of Knight Capital Group, is also in the process of becoming an SLP. According to Jamil Nazarali, managing director and head of the company’s electronic trading group, the NYSE had earlier approached the market-making firm to get their feedback on the SLP program. Knight began exploring NYSE membership after those conversations, and expects to become an exchange member “imminently.” Nazarali added that his firm’s goal is “to be an SLP in nearly every NYSE stock,” although the final decision about that hasn’t yet been made.

Joe Mecane, executive vice president and chief administrative officer for U.S. markets at NYSE Euronext, told Traders Magazine that “one SLP is already live and several more are in the process of completing their applications and technology work.” He declined to comment on the identity of the SLPs. The NYSE, Mecane said, would release information about the SLP program in the near future.

Ray Pellecchia, a NYSE Euronext spokesperson, said the NYSE was starting the SLP program “in the most liquid stocks.” The exchange’s October rule proposal to the Securities and Exchange Commission said SLP-eligible securities would initially include 500 of the most actively traded names. The exchange said it would “gradually add more NYSE-listed securities to the program, with the intent of including all NYSE-listed securities.”

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, which are now known as DMMs. The NYSE’s goal for both DMMs and SLPs is to give them 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 given to DMMs (floor brokers get 4 cents, while all other market participants get nothing).

Jamie Selway, co-founder of agency broker White Cap Trading, said the NYSE’s SLP program is an “encouraging sign” 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.” He added that price remains a more-important catalyst for flow than parity is in the exchange’s new market model.

At the same time, Selway observed, a hurdle for some liquidity-providing firms that might want to join the ranks of SLPs is regulation. Many firms may not want to be regulated by NYSE Regulation, which is required for member firms. “They don’t have a lightweight regulatory regime for SLPs,” he said.

That was an initial concern for Knight. However, Knight’s Nazarali noted, the issue has been addressed, to a large degree. “With the streamlining of regulations by the Financial Industry Regulatory Authority, it’s now less cumbersome to be a member of both NYSE and FINRA than it had been in the past,” the brokerage exec said.

Knight believes SLPs can 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.” Knight’s combined October share in NYSE-listed and American Stock Exchange-listed volume was 9.5 percent, up from 5.1 percent in October 2005, according to AutEx data.

The Big Board’s SLPs will compete directly with DMMs. Every listed Big Board security is currently assigned to a single DMM, which now could face upstairs electronic rivals with financial incentives to improve the market. 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. Qualifying quotes must be displayed, but SLPs can earn credits for all displayed and non-displayed quotes that lead to executions once they meet their monthly average quoting threshold.

White Cap’s Selway points out that the NYSE’s SLP program is heading in the right direction by broadening 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 mnemonic when trading in their assigned names to get credit for their activity.