What is Supplemental Liquidity Provider (SLP)
Supplemental liquidity providers 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, which was 0.15 cents as of 2009.
BREAKING DOWN Supplemental Liquidity Provider (SLP)
The supplemental liquidity provider (SLP) program was introduced shortly after the collapse of Lehman Brothers. The collapse of Lehman Brothers in 2008 caused major concerns about liquidity in markets, which led to the introduction of the SLP to attempt to alleviate the crisis. The other two key market participants are Designated Market Makers (DMMs) and Trading Floor Brokers. The NYSE’s unique market model combines leading technology with human judgment to prioritize price discovery and stability over speed for listed companies. The NYSE believes the human element of its market model results in lower volatility, deeper liquidity and improved prices.
SLPs were created to add liquidity and 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 or Offer (NBBO) in each of their assigned securities at least 10 percent of the trading day. SLPs are also required to average 10 million shares a day in provided volume to qualify for enhanced financial rebates.
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 1 million shares of average daily volume. SLPs trade only for their proprietary accounts, not for public customers or on an agency basis. SLPs that post liquidity in an assigned security that executes against incoming orders are awarded a financial rebate by the NYSE.
Facts About Supplemental Liquidity Providers
- The pilot SLP program rewarded aggressive liquidity suppliers, who complement and added competition to existing quote providers.
- An NYSE staff committee assigns each SLP a cross section of NYSE-listed securities. Multiple SLPs may be assigned to each issue.
- A member organization cannot act as a Designated Market Maker and SLP in the same security.
- When they were first instituted in 2009, supplemental liquidity providers were intended to complement designated market makers.