What Was a Specialist Unit?
A specialist unit was a group of people or firms that served as market makers for one or more stocks that traded on a specific exchange. The work performed by people in this unit has been largely replaced by electronic mechanisms over time. As a result the jobs in such units rarely exist anywhere in the world nowadays.
A specialist unit maintained a stable market in a given security by acting as both a principal and agent for brokers. As a principal, a specialist unit often held its own inventory of stock, in order to facilitate liquidity for a given trade.
Today, specialist units go under different names, such as designated market makers (DMMs) and supplemental liquidity providers. Specialist units and their current-day counterparts were most heavily used by the New York Stock Exchange (NYSE).
- Specialist units were primary market makers for certain groups of stocks listed on the New York Stock Exchange floor.
- No longer referred to by 'specialist units,' the NYSE now calls them designated market makers (DMMs).
- DMMs provide liquidity and maintain an orderly two-sided market in the names that they are specialists in.
Understanding a Specialist Unit
Specialist units were in charge of maintaining, as much as possible, relatively narrow bid-ask spreads for specific securities, as well as maintaining market liquidity, managing limit orders, and large block trades. The unit might be a collection of market specialists, or for larger trading areas, a market specialist and a team of clerks that would assist the specialist.
Also, specialist units were charged with balancing the market by taking the opposing side of bullish or bearish sentiment for a given stock by trading out of the group’s own inventory. This helped to facilitate trading in times of market uncertainty or volatility involving particular stocks.
Due to the advent of electronic trading, few exchanges worldwide employ specialist units. The New York Stock Exchange, however, employs designated market makers (DMMs). Much like specialist units, the DMMs maintain fair and orderly markets for a specific set of securities. Using both manual and electronic means, they help to avoid big trading imbalances that can halt the trading of particular stocks.
The DMMs also play an important, though rarely used function, of being available in the event of a halt to trading. DMMs serve as the first line of defense in the event that circuit-breaker rules must be executed. If a given stock, or even a major index, should rise or fall rapidly in panicked selling or buying, the DMMs will step in and take over the electronic order flow to manually execute trades for a few minutes. If orders seem to return to an acceptable degree of flow and price fluctuation, the electronic mechanisms are reinstated, otherwise trading in that stock, or in the general market, may be halted for the day.
While many exchanges prefer to let machines take on the role of matching buy and sell orders for customers, the NYSE believes involving both humans and machines helps improve price discovery and dampen volatility. The DMMs take into account industry-specific intelligence, as well as their knowledge of both economics and trading systems when making their decisions. They are given an incentive to work for the benefit of market participants, rather than to trade for their own benefit.
In addition, DMMs sometimes serve as points of contact for the listed companies they represent for the exchange, providing companies information regarding the mood of traders and who is trading the company’s stock.
According to the NYSE, DMMs make markets significantly less volatile at the market open and close. On days when stock lock-ups expire, or when stocks list for the first time, the DMMs are beneficial so that they can respond to circumstances that may be relatively rare or even unique.
The Role of Supplemental Liquidity Providers
Another group that acts much like specialist units is the NYSE’s supplemental liquidity providers (SLPs). These are high-volume members of the exchange provided a financial incentive by the NYSE to maintain narrow bid-ask spreads in specific, heavily traded securities, using their own stock to fill incoming orders.
The exchange‘s goal is to add liquidity at each price level. SLPs generally trade from their own accounts, however, the NYSE maintains that SLPs have the same publicly available trading information as other NYSE customers, not more information.