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NYSE DMMs: Meeting the Volatility Challenge

Kevin Tyrrell
Head of NYSE Research

January 25, 2022

The NYSE market model features a Designated Market Maker (DMM) for each listed security. The DMM has unique responsibilities to actively make markets (i.e., quote bids and offers) throughout the trading day, both at the inside market prices and throughout the order book. The DMM is also responsible for executing the NYSE Opening and Closing Auctions, and is obligated to ensure all marketable auction orders receive an execution. Other markets do not apply such obligations to any market makers.

The NYSE DMM’s obligations have notable impact on highly volatile days, such as January 24, 2022, when the S&P 500 index’s trading range was 4.6%, the widest since the Pandemic-induced volatility on March 26, 2020. The NYSE market model and our Pillar technology, however, helped dampen volatility and uncertainty in NYSE-listed securities on the substantial trading volumes experienced on January 24th. NYSE DMMs’ obligations are in effect throughout such trading conditions, resulting in better market quality for NYSE-listed securities. Underlying this trading activity was NYSE’s Pillar Technology, which handled twice the average messaging load with no impact to speed or user experience.

Auction Performance and DMM Participation

The largest single trades each day are the Opening and Closing Auctions. The DMM is obligated to conduct the auction and, if needed, can participate in the auction to help produce a price that more accurately reflects market conditions. On January 24th, DMMs participated in Opening and Closing Auctions at nearly twice their usual rate. This contributed to NYSE Auctions achieving prices closer to market trading prices in times near the auctions.

DMM Displayed Liquidity Providing on NYSE

Represents DMMs' share of displayed liquidity providing as a % of total displayed liquidity providing, indexed to Dec 27-31.

This increased participation from DMMs contributed to NYSE maintaining its superior market quality. Consolidated quoted spreads, one important factor in trading costs, were lower for NYSE-listed securities across Large, Mid, and Small Cap indices as compared with Nasdaq-listed securities.

Consolidated Bid-Ask Spreads
January 24, 2022; basis points

Looking Forward

As we’ve discussed in our options market update and quarterly earnings preview, we anticipate continued higher volatility in the coming weeks. The combination of earnings news, monetary policy, and macroeconomic events may lead to additional significant market moves. The NYSE market model and Pillar technology provide superior market quality, which is even more critical than usual during such periods of uncertainty.

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