Before we address this question, let's review what specialists do. Specialists are people on the trading floor of an exchange, such as the NYSE, who hold inventories of particular stocks. A specialist's job is not only to match buyers and sellers, but also to keep an inventory for him or herself that can be used to shift the market during a period of illiquidity.
The job of the specialist originated in 1872, when it was recognized that there was a need for a new system of continuous trading - before this, each stock had a set time during which it could be traded. Under the new system, brokers began to deal in a specific stock to remain at one location on the floor of the exchange. Eventually, the role of these brokers evolved into that of the 'specialist'.
It is the specialist's job to act in a way that benefits the public above all. Every specialist accomplishes this by filling the four vital roles of (1) auctioneer, (2) catalyst, (3) agent and (4) principal. Let's take a closer look at what a specialist does in fulfilling each of these roles:
- Auctioneer – Shows best bids and offers, becoming a 'market maker'.
- Catalyst – Keeps track of the interests of different buyers and sellers and continually updates them.
- Agent – Places electronically routed orders on behalf of clients. Floor brokers can leave an order with a specialist, freeing themselves up to take on other orders. Specialists then take on the responsibilities of a broker.
- Principal – Acts as the major party to a transaction. Since specialists are responsible for keeping the market in equilibrium, they are required to execute all customer orders ahead of their own.
To further enhance the competitiveness and performance of the NYSE, specialists were replaced by designated market makers (DMM) who manage both the physical and automated auction process. The NYSE DMMs are employed by:
- Brendan E. Cryan & Co.
- Citadel Securities LLC
- GTS Securities, LLC
- IMC Financial Markets
- Virtu Financial Capital Markets LLC