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After-hours price discovery more robust as pandemic and retail participation provide boost

Data Insights

Market Making and the NYSE DMM Difference

Steven W. Poser
Director, Product Development, NYSE

September 8, 2021

Market makers1 play a key function in markets, committing capital to bridge timing differences between buyers and sellers. With the industry debating underlying market structure tenets such as tick sizes there has been renewed focus on different types of market making activity. NYSE Research has produced a white paper examining market making in US cash equities and highlighting the value of the NYSE Designated Market Maker (DMM) model compared to other U.S. equity market making models.

In U.S. equities, registered market makers on exchanges must provide displayed liquidity throughout regular trading hours2 on both sides of the market. This means they must be willing to buy or sell the stock at all times, and display a price within 8% - 30% of the National Best Price.
Short-term price changes of 8% are exceedingly rare; marketplace rules generally limit quick price moves to less than this amount.3 This means standard market making requirements do not, on their own, contribute to marketplace liquidity. And this is true regardless of how many market makers are on an exchange, as all registered market makers have the same requirements. On the NYSE, the DMM is positioned to provide support across the “field”.

NYSE DMMs are different in many ways:

  • In addition to meeting the minimum quoting requirements required of registered market makers on all exchanges, DMMs must also maintain a bid or offer at the NBBO a specified percentage of the day. In other words - they must be a leader in the prices at which they quote their assigned securities.
  • DMMs are required to maintain price continuity with reasonable depth, which they achieve by quoting not only at top of book, but also providing liquidity at multiple price levels to help dampen volatility.
  • As the market maker dedicated to a security, DMMs can provide real-time market insight to issuers.
  • DMMs facilitate the opening and closing auctions and have an obligation to supply liquidity as needed. As a result, DMMs use their expertise to determine a price that ensures that all marketable interest participates in the closing auction. In special situations, they can delay the close and go back out to the Street to seek additional imbalance-offsetting liquidity.

NYSE DMM Depth of Book Performance

These obligations mean NYSE DMMs provide consistent liquidity throughout the trading day and at multiple price levels, helping to dampen volatility. In S&P 500 stocks they have displayed liquidity more than 66% of the time within 10 basis points of the NBBO. In the less liquid securities of the S&P 600 Smallcap Index, DMMs provide liquidity within 10 basis points of the NBBO 63% of the trading day.

In summary, NYSE DMMs’ unique set of obligations and benefits results in better trading for NYSE-listed companies. Registered market makers, in contrast, have flexibility to participate when conditions are favorable and remain largely anonymous. Our new paper explores these issues in detail.

1 See the NYSE Brief here: https://www.theice.com/insights/conversations/nyse-briefs#market-maker
2 Most days, 9:30AMET to 4:00PMET, and around certain holidays until 1:00PMET.
3 The Limit Up Limit Down plan generally prevents price moves in the most liquid stocks of more than 5% in a short period of time, and 10% in less active securities. See luldplan.com.

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