What Is a Supplemental Liquidity Provider (SLP)?

Supplemental liquidity providers (SLPs) are one of three key market participants on the New York Stock Exchange (NYSE). Supplemental liquidity providers (SLPs) are market participants that use sophisticated high-speed computers and algorithms to create high volume on exchanges in order to add liquidity to the markets. As an incentive for providing liquidity, the exchange pays the SLP a rebate or fee.

Key Takeaways

  • Supplemental liquidity providers (SLPs) are market participants that create high volume on stock exchanges with the goal of bringing liquidity to the markets.
  • On the New York Stock Exchange (NYSE), SLPs are one of three key market participants.
  • SLPs are paid via rebates or fees for their role in facilitating market transactions.
  • SLPs were introduced in the early stages of the Great Recession, after the collapse of Lehman Brothers.
  • Trading by SLPs is only for their proprietary accounts, not for public customers or on an agency basis.
  • High-frequency trading is the basis of how SLPs function and improve liquidity in the market.

Understanding a Supplemental Liquidity Provider (SLP)

The supplemental liquidity provider (SLP) program was introduced shortly after the collapse of Lehman Brothers in 2008, which caused major concerns about liquidity in the markets. This concern led to the introduction of the SLP to attempt to alleviate the crisis.

The NYSE market model, which includes SLPs, designated market makers (DMMs), and floor brokers, is intended to combine technology and human judgment for efficient market pricing that would also result in lower volatility, expanded liquidity, and better prices, due to the human element.

Supplemental Liquidity Providers (SLPs) on the Exchange

SLPs were created to add liquidity and to complement and compete with existing quote providers. Each SLP usually has a cross-section of securities on the exchange where it exists and is obligated to maintain a bid or offer at the National Best Bid and Offer (NBBO) in each of their assigned securities for at least 10% of the trading day. SLPs are also required to average 10 million shares a day in provided volume to qualify for enhanced financial rebates.

An NYSE staff committee assigns each SLP a cross-section of NYSE-listed securities. Multiple SLPs may be assigned to each issue. 

The NYSE rewards competitive quoting by SLPs with a financial rebate when the SLP posts liquidity in an assigned security that executes against incoming orders. This generates more quoting activity, leading to tighter spreads and greater liquidity at each price level.

SLPs are primarily found in more liquid stocks with greater than one million shares of average daily volume. SLPs are only allowed to trade for their proprietary accounts, and not for public customers or on an agency basis.

High-Frequency Trading and Supplemental Liquidity Providers (SLPs)

High-frequency trading, which is how SLPs operate, refers to trading that utilizes computers to process a significantly large number of transactions within nanoseconds. An entire order, from start to finish, is used utilizing high-frequency trading. High-frequency trading actually became popular due to SLPs in the wake of Lehman Brothers collapsing.

High-frequency setups used by SLPs involve algorithms that analyze data in the market to execute any trades. High-frequency trading is important because the faster a transaction occurs, the quicker, and most likely the larger, a profit on a trade will be.

High-frequency trading has been shown to improve market liquidity, the main function of SLPs, and has made trading on markets more efficient, particularly removing bids and offers that are too small and by matching the many bids and offers in the marketplace quickly.

Though the benefits of high-frequency trading are clear, there are many concerns that it also brings instability to the markets. If a market sell-off occurs, high-frequency trading can worsen the impact because it can complete requests in less than seconds. If this happens and the markets fall, it can create a further rush by investors to sell. Many of the exchanges, of course, have parameters and procedures in place to prevent disastrous consequences.

Regardless of any risks, high-frequency trading has shown to match prices in the market, which leads to greater efficiency, where prices are more accurate and the costs of transacting are reduced.