Designated market markets on the New York Stock Exchange are now required to quote the stocks they trade more competitively. The new requirement is designed to increase the Big Board’s market share.
DMMs must now quote at the national best bid and offer at least 10 percent of the time for liquid stocks. "DMMs have been exceeding the requirements, which is part of why we determined it was appropriate to set the bar higher," said Ray Pellecchia, an NYSE Euronext spokesman.
The Big Board operator also rolled out new pricing for DMMs designed to spur them to quote in bigger size. The new quote obligations and pricing went into effect on Tuesday. No changes were made to the exchange’s so-called supplemental liquidity providers program. SLPs are a second tier of exchange market makers that compete with DMMs in individual stocks but have lesser obligations as well as benefits.
NYSE’s market share in its own names was 23.7 percent in July, according to Barclays Capital. So far this quarter through Aug. 28, the exchange’s market share is less than 23 percent, compared to more than 25 percent in the first two quarters of this year and in the third quarter last year.
The current changes are a continuation of the NYSE’s overhaul of its specialist system last fall. The changes eliminated some of the advantages specialists (now called DMMs) used to have, and lessened their obligations. This was done in response to shifts in the trading environment in recent years that made the former role of specialists outmoded in a faster and more competitive marketplace for NYSE-listed stocks.
"We’re constantly evaluating our model in terms of enhancing its competitiveness, and in particular we’re reviewing it now with an eye toward the upcoming end of the pilot period of the new model [which went into effect last fall]," Pellecchia said. He added that the exchange operator is reviewing the improvements it might want to make to that model. The model overhauled the role and responsibilities of specialist firms trading on the New York, among other changes.
Pellecchia noted that DMMs remain "a key component of our market’s success" by providing liquidity in times of market dislocation and by helping to dampen volatility. "We’re looking to build on DMMs’ success by increasing the quoting standards, measured on a stock-by-stock basis, and also incenting the provision of quotes in larger size at the best price," he said.
Over the last year, DMMs have responded to their new role at the NYSE, as well as the exchange’s improving technology, by increasing their participation rate, or their share of the Big Board’s executed volume. Last month, DMMs accounted for 8.8 percent of the NYSE’s volume. In March, they accounted for 9.0 percent. In August 2008, they were just 3.2 percent.
The exchange’s market share in NYSE-listed names stayed roughly even over that period, declining only in the last two months. In March it was 25.2 percent, down slightly from 25.8 percent in August 2008, according to data from Barclays Capital. The exchange lost a lot of share prior to the summer of 2008. In August 2007, for instance, its share was 45.8 percent.
DMMs must now quote at the national best bid and the national best offer a total of 10 percent of the time for actively traded NYSE stocks, and 15 percent of the time for less-active stocks. Previously, DMMs had to be at the national best bid and the national best offer a total of 5 percent of the time for active stocks, and 10 percent for other stocks.
For active stocks, the new requirements are 50 percent higher for the exchange’s five DMM firms. For less-active stocks, the new obligations are double what they were last month. Active stocks are those with a consolidated average daily volume of 1 million shares per month. Stocks with monthly ADVs below that level are considered less active.
The exchange has also adjusted its pricing for DMMs to push them to quote more aggressively. For actively traded stocks, NYSE is now giving DMMs the rebates they’re used to receiving only if they meet a "quoted size ratio." To qualify for the 30 cents per round lot, each DMM, on a monthly basis, must now represent a total of 15 percent of the shares at the inside market when the NYSE is quoting the best price in that stock.
Bigger quotes would increase the depth at the inside market and could lead to more executed volume, increasing the NYSE’s market share. DMMs that meet their quoting obligations but not the quoted size ratio each month will get 25 cents per 100 shares. Those that don’t meet the quoting requirements for a stock will find their rebates cut in half. They’ll get a rebate of 15 cents per round lot. Previously all DMMs in actively traded stocks got 30 cents.
For less-liquid stocks, DMMs that meet their quoting obligations will still get their old 35-cent rebate plus all the quote revenue the exchange receives in that particular name. The quote revenue comes from the sale of market data for NYSE-listed stocks. DMMs that don’t meet their quoting obligations will now also get the lower rebate of just 15 cents.
