Exchanges: Death of the specialist
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CAPITAL MARKETS

Exchanges: Death of the specialist

NYSE plans rule changes to improve the competitiveness of its trading floor.

The New York Stock Exchange plans finally to do away with the specialist model, replacing it with a system of designated market makers (DMMs) that will open the way for new entrants into what was once an exclusive and powerful club.

DMMs will have obligations to quote prices, given incentives to do so by trading rewards and by the potential exclusion from future securities allocations if quoting thresholds are not met. New applicants as well as current specialists can become DMMs and will benefit from preferential trading opportunities as the primary liquidity providers.

As part of the modernization of the role, the outdated negative obligations that essentially limit trading to maintaining a fair and orderly market, and which have hindered the specialists from competing with off-floor traders who could trade freely without obligations, have gone. DMMs will not, however, enjoy the same privileged access to information that specialists have enjoyed, such as the ability to see all orders and give their clients’ orders priority over other incoming orders at the same price. In the new market structure, the visibility of the order flow is reduced and the DMMs’ agency responsibility is limited to times of market imbalance.

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