What Is a Specialist Firm?

A specialist firm is a company that hires specialists to represent stocks listed on the New York Stock Exchange (NYSE). Specialists on the NYSE are the market makers who facilitate trade of a certain stock by buying and selling to and from investors and holding shares of that stock when necessary. Companies listed on the NYSE will interview employees of the specialist firms, seeking out suitable people to represent them by holding inventories of the companies' stocks.

Specialists no longer exist in their traditional sense. They are now called Designated Market Makers (DMM). The switch occurred as trading became more electronic. Specialists would personally handle many of the orders coming into a stock. With DMMs, nearly all transactions are automated.

Key Takeaways

  • Specialists used to handle the order flow coming into a stock listed on the NYSE.
  • Specialists no longer exist. Designated Market Makers (DMM) now handle order flow, primarily via electronic means.
  • Specialist firms no longer exist in their traditional sense. There are five NYSE designated market maker firms.

Understanding the Specialist Firm

Specialists no longer exist in their traditional sense. Here's how it used to work.

A specialist firm is a firm that employs a specific type of market maker that facilitates trades of specific stocks on the New York Stock Exchange (NYSE). Market makers also work on the Nasdaq, but since the Nasdaq is all electronically-traded and the NYSE is traded in person, specialists have more duties than do Nasdaq market makers, both in breadth and in volume.

Specialists employed by a specialist firm are interviewed by companies that list their stock on the NYSE to see which specialist will be able to facilitate trades and encourage maximum liquidity of their stock. When the company finds the specialist they feel will represent their company the best, they contract with the specialist firm to assign that specialist to represent their stock.

The number of specialist firms in operation has decreased rapidly over the last four decades. In the 1980s, there were more than 50 specialist firms, and most of these were family-owned businesses with long histories in New York financial markets and securities exchanges. By 2008 there were 10, due to decades of mergers and acquisitions and families exiting the industry or selling firms. Seven of these were stock specialist firms, while the other three specialized in exchange-traded funds (ETFs)​​​​​​​. As of 2021, only 3 firms remain registered as NYSE DMMs: Citadel Securities; GTS Securities; and Virtu Americas.

Trading on the NYSE is almost entirely electronic now. Specialists are no longer needed to personally handle orders. That said, the NYSE still employs DMMs on their trading floor. As of February 2021, there are three NYSE designated market maker firms. DMMs "assume true accountability for maintaining a fair and orderly market" according to the NYSE.

Specialist and Designated Market Maker

A specialist is a person who operates on the floor of the New York Stock Exchange (NYSE) to buy, sell, or hold a specific stock. A specialist is a type of market maker that is physically present on the trading floor. The specialist must display their best bid and ask prices to allow for trades, and also step in with their own capital to buy, sell or hold stocks as market conditions demand. Their entire function is to keep the market for their stock as liquid as possible.

A specialist allows for the trading of a specific stock by serving four roles: auctioneer of stocks to investors, agent for investors in stock trades, catalyst to instigate trades from interested parties, and principal who buys, holds, and sells shares of stock with their own capital when necessary.

These days, DMMs have similar tasks, but most of their job is now automated through the use of algorithms and hand-held electronic devices that match orders. DMMs may still intervene in the market in certain situations.

According to the NYSE, DMMs are core liquidity providers, reduce volatility, improve price discovery at the open and close, reduce trading costs for investors, and have much higher obligations than traditional market makers.

Example of What a Specialist Did

In today's market, due to regulation NMS, investors receive the best bid or offer available when making a trade.

In the day of the specialist, that wasn't always the case. That order could be matched where the specialist deemed the impact would be least. For example, a big sell order may be matched with several buy orders below the posted bid price. If the specialist allowed the big sell order to hit the bid price it would have certainly dropped the price anyway, and so the specialist filled the sell with other buy orders or with his own capital, not affecting the current bid.

It worked both ways. Sometimes investors got a better price than expected, sometimes a worse price, and most of the time they got the price expected.

In today's market that doesn't happen. Orders are processed by going through the best bid (if selling) and offer (if buying) first. An order cannot trade at a price worse than the best bid or offer at the time of execution. Although, due to technical glitches this may sometimes still happen.

Also, when there was a lot of frantic buying or selling the specialist could freeze the book, preventing NYSE order flow, allowing a moment for calmer heads to prevail. During this time the specialist could match buy and sell orders without adjusting the bid or offer price.

Through doing these things, the specialist's goal was to maintain an orderly market.

At the market open, specialists would also look at all the buy and sell orders, and find the price that allowed for the most liquidity/orders to be matched.