The New York Stock Exchange is beginning to look more like Nasdaq.
As part of a wider, multi-faceted plan to promote aggressive quoting, the division of NYSE Euronext is moving to a multiple market maker model. It will introduce a new class of market maker that will operate off-board and compete with the specialist.
These so-called supplemental liquidity providers (SLPs) must maintain a bid or an offer at the national best bid or offer in their assigned securities at least 5 percent of the trading day. In return, the NYSE will pay them a rebate of 15 cents per 100 shares when their quotes result in trades. The goal, according to the exchange, is to generate more quoting activity, leading to tighter spreads and greater liquidity at each price level.
“We’re rolling [the pilot program] out in the 500 most active names where we believe incenting SLPs by compensating them to provide liquidity will supplement all of the other initiatives that we’ve put in place to build the NYSE book,” Robert Airo, vice president of relationship management and sales at NYSE Euronext, said.
The NYSE announced the pilot program on Friday after receiving approval from the Securities and Exchange Commission for two broad initiatives to overhaul the role of its specialists. The SLP concept was not a part of the original proposal submitted to the SEC earlier this year, but has been approved by the regulators, Airo said.
In their new incarnation as “designated market makers,” specialists received new trading and hedging privileges and were freed from certain restrictions. Under the pilot, SLPs will compete with the designated market makers in the same stocks. However, a member organization cannot act as a designated market maker and a SLP in the same security.
SLPs and DMMs will not be equals. The rebate for DMMs will soon be 30 cents per 100 shares, double that of SLPs. Also, DMMs are required to make two-sided markets 10 percent of the time in less active securities, and 5 percent of the time in the most active securities.
Both SLPs and DMMs will be on equal footing when it comes to doling out incoming orders. Also, both parties are on equal footing with DOT orders when those traders set the best quote.
The NYSE will assign each SLP a cross section of NYSE-listed securities. Multiple SLPs may be assigned to each issue.
The pilot will start with a focus on highly active issues, and gradually expand its coverage. The SLP will have the same publicly available trading information and market data that all other NYSE customers have available to them. SLPs will not know the identity of their counterparties, for instance.
In moving to a multiple market maker model, the NYSE takes a page from the playbooks of Nasdaq and the regional exchanges. There is one big difference however. SLPs, like the NYSE’s designated market makers, will trade only for their proprietary accounts, not for public customers or on an agency basis. And with the SLP program’s rebate policy, the exchange also moves a step closer to mimicking a common market center model.
“The NYSE for broad customers isn’t moving to a maker-taker model,” Airo said. “But the NYSE is moving to a make-take model for the SLPs in the program.”
Neil Fitzpatrick, chief operating officer at Citadel Execution Services, thinks the SLP program packs some potentially intriguing incentives. The NYSE is making a smart move by using pricing to try to give people the opportunity to be first-in-queue, he said.
And the NYSE is not just relying on the traditional specialist to beef up the liquidity in its names, Fitzpatrick said. With its recent changes, the NYSE management has acknowledged frankly that the era of the exchange dominating trading in its listings is over, he said.
“The era of pure floor trading is over and the NYSE is bringing its model forward,” Fitzpatrick said.
Citadel’s derivatives group is taking an active look at what the SLP program offers and is talking about becoming an NYSE member.
