Rule changes announced on Friday that will redefine the role of ‘specialist’ market makers on NYSE, thus potentially increasing liquidity on the exchange, are a “welcome move” according to TABB Group, a research house.
Last week, the New York Stock Exchange proposed amending Rule 98, and a dozen related rules, to redefine ‘specialists’ – exchange members that make markets in specific stocks – as designated market makers (DMMs). As well as boosting liquidity, the move is seen as helping NYSE reduce latency in the face of competition from rival electronic venues.
Miranda Mizen, a senior consultant at TABB, said the move was a big step forward. “The phasing out of the specialist is a welcome move, should please the antagonists of the model and is equally good for the exchange that has had to support them,” she wrote in a note issued by the firm.
NYSE said the changes would allow members flexibility when structuring specialist operations and managing risks. “Because of changes to the marketplace, including changes to the specialist’s role as a result of the increased use of electronic trading, the Hybrid Market, and Regulation NMS, as well as technological advances in surveillance and internal controls, the NYSE believes that current Rule 98 imposes unnecessary restrictions on member organisations seeking to engage in specialist operations at the exchange,” said NYSE’s filing to the US Securities and Exchange Commission.
The exchange, now part of the NYSE Euronext group, expects to introduce its new model for trading in Q3 2008.
As well as removing restrictions on specialists, the proposals will add new opportunities for price improvement for DMMs, which are designed to encourage more resident liquidity. This, according to Mizen, will put the onus on DMMs to be more proactive in their provision of liquidity, and also places DMMs on a par with participants who may enter non-displayed liquidity. “More importantly, though, is the opportunity to reduce the latency in the execution process significantly and bring the NYSE turnaround times more in line with electronic competitors,” she said.
Mizen said the rules must be viewed as transitory, and that the exchange will need to keep moving towards a more cost-efficient, competitive market model. For example, the exchange still retains an expensive floor overhead. “This rule represents a giant stepping stone which sets the scene for further changes, but by itself will not transform the exchanges fortunes overnight,” she said.