The New York Stock Exchange (NYX:US) plans to let more brokers become market markers, providing a new category of competitor for firms such as Barclays Plc (BARC) and Getco LLC that oversee trading in shares at the Big Board.
The exchange proposed creating supplemental liquidity providers that would operate as registered market makers and get more lenient treatment for short sales, according to a filing with the Securities and Exchange Commission. Such a category would fall between the two tiers of traders that now provide prices to buy and sell on the exchange: designated market makers, whose duties are most stringent, and the current supplemental liquidity providers, who face fewer obligations.
Exchanges are experimenting with ways of inducing market makers to quote more aggressively to attract volume. Nasdaq Stock Market proposed a pilot test in less-active exchange- traded funds that would allow issuers to pay for bids and offers. Bats Global Markets Inc. started a program this year that encourages market makers by giving $200 a day to the firm with the best quotation performance for ETFs listed on Bats and $50 to the firm in second place.
“The program recognizes the significance of SLPs to NYSE’s market model and expands the number of potential firms that could participate,” Joseph Mecane, co-head of U.S. listings and cash execution at NYSE Euronext, said in a phone interview. “It gives SLPs the ability to be deemed registered market makers.”
Nine SLPs operate at the NYSE providing quotes that augment those supplied by designated market makers, which are in charge of trading. The new category of brokers must meet the current SLP quoting requirements and provide continuous bids and offers. The initial program began in 2008.
NYSE’s SLPs currently can’t become market makers on that venue the way they can on Nasdaq or exchanges run by Bats and Direct Edge Holdings LLC. The proposal would allow firms that want the benefits of being market makers and the better pricing available to SLPs to trade on the exchange.
Mecane said he expects a “handful” of firms, either current SLPs or other brokers, to become SLMMs, as the new category will be called. The program will be introduced in June or July, pending SEC approval, he said. The SEC must approve the program before New York-based NYSE Euronext can implement it.
NYSE’s four designated market-making companies, which include Goldman Sachs Group Inc. (GS:US) and Knight Capital Group Inc., have more onerous quoting and trading requirements than current SLPs and those who may join the new category. They get higher rebates than SLPs and other firms when they provide bids and offers for customers to trade with.
Brokers in the new category must provide continuous bids and offers in the stocks in which they’re registered, just as they do on Nasdaq Stock Market and other exchanges. They must also meet the requirement for NYSE’s SLPs that they furnish bids or offers at the best available prices at least 10 percent of the day each month and trade 10 million shares daily across their securities. Current SLPs include Barclays, Citadel LLC, Tradebot Systems Inc. and Virtu Financial LLC.
NYSE Amex proposed a similar market-making program for its stocks. That exchange’s SLP program began in January 2010.
NYSE, the world’s largest exchange by the value of its listed companies, hasn’t had competing market makers since at least 1967, although only 33 corporations were represented by more than one specialist earlier that decade, according to “A Financial History of the United States” by Jerry W. Markham. Designated market makers replaced specialists in the mid-2000s as the SEC imposed new trading rules on exchanges and brokers.
Single Market Maker
Each NYSE stock will continue to have a single designated market maker obligated to maintain fair and orderly trading and run the auctions at the start and end of each trading day. NYSE rivals have multiple registered market makers competing against one another on their venues.
Mecane said NYSE created competition within its market when it introduced the SLP program in 2008. Since then the exchange has “effectively had multiple market-maker-like liquidity providers with obligations,” he said. That program was started to provide more quotes at better prices in NYSE-listed stocks after SEC rules boosted competition from rivals including Nasdaq OMX Group Inc. (NDAQ:US) in New York, Bats in Lenexa, Kansas, and Jersey City, New Jersey-based Direct Edge.
NYSE accounted for 20.8 percent of volume in stocks listed on its exchange this year through yesterday, according to data compiled by Bloomberg. Including NYSE Arca, the parent company’s share of trading was 30.3 percent, the data show. NYSE traded four-fifths of the volume in its companies a decade ago before the SEC’s regulatory overhaul.
Current SLPs can choose to remain as they are or become market makers. The former will be known as SLP-Prop firms. A broker can be both an SLP-Prop and SLMM as long as the trading comes from separate business units and their activity isn’t coordinated, NYSE said in the filing. Not all securities may have market makers from the new category.
SLMMs will be considered bona fide market makers and will qualify for more lenient requirements related to short sales, NYSE said in its filing. The firms must also meet net capital requirements specific to market makers, NYSE said.
“The exchange believes that the proposed rule change would expand the number of member organizations eligible to participate in the SLP program,” NYSE said in the filing. “In particular, it would enable member organizations that are registered as market makers on other exchanges that are not interested in joining the existing proprietary-only SLP program to join the SLP program.”
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