Functioning in some form since 1792, the New York Stock Exchange (NYSE) is the world’s largest stock exchange. The NYSE operates as an auction market, where a designated market maker (DMM) facilitates trading for a stock. Like an auctioneer, the DMM matches buyers with sellers, and can also trade with the public out of its own inventory. In any given trade, the DMM may act in an agency capacity or a principal capacity.
In practice, a DMM is both a person on the NYSE floor and a sophisticated electronic trading system. Modern markets move too quickly for a human to manually execute every trade. Most market making is handled by algorithms that react almost instantly to changing prices and order flow. People still oversee these systems, make sure they operate correctly, and can step in to trade manually when needed.
Private companies are hired by the NYSE to operate as DMMs, and each company assigns an employee to work at the DMM post on the floor. If you want a closer look, here’s a NYSE YouTube video describing the role of DMMs.
There are several DMMs on the NYSE, but each listed stock is assigned to one DMM. For example, all trades of Coca-Cola stock (listed on the NYSE) are facilitated by one specific DMM. The DMM’s primary goal is to “maintain fair and orderly markets” and reduce liquidity problems. In plain terms, the DMM helps ensure investors can trade at accurate market prices during normal trading hours.
There are several ways the NYSE supports this process. One key tool is its order-routing system, traditionally called the Super Display Book. When financial firms submit customer orders to the NYSE, most orders go through this system and are routed to the DMM for execution. In 2012, the Super Display Book was updated to the modern Universal Trading Platform, but FINRA still refers to the Super Display Book as the NYSE’s system.
If it’s a limit order that’s currently “away from the market,” the DMM places the order on its “book,” called the DMM’s book. To see what that means, here’s a simple example of what a DMM’s book might look like:
When a DMM reviews market dynamics, they’ll typically see a screen like this: a bid-and-ask display.
All of these orders are “away from the market,” meaning they can’t be filled at the current market price. The last completed trade was 500 shares at $40.25, which sits between the highest bid and the lowest ask.
The best buy order is 100 shares at $40.00, and the best sell order is 300 shares at $40.50. This is the inside market, meaning the best available prices currently on the DMM’s book. Therefore, the inside market is:
40.00 x 40.50
1 x 3
Market orders are often matched against limit orders on the book. A market order requests a trade at the next available price. For example, if a market order to buy 300 shares enters the system, it could be matched against the limit order to sell 300 shares at $40.50. In that case, the DMM acts in an agency capacity by matching:
If the DMM believes the $0.50 spread (between the highest bid and lowest ask) is too wide, it can step in and fill the market order at a better price than $40.50. Suppose the DMM sells 300 shares from its inventory at $40.40. That gives the buyer a $0.10 per share price improvement compared with the $40.50 sell limit order. This is a common way DMMs act in a principal capacity: instead of matching orders from the book, they buy into or sell from their own inventory.
When trading as principal, the DMM must avoid competing with public orders. In this example, that means the DMM can’t:
Doing so would mean trading in front of the public orders on the book.
These examples show how the DMM supports a fair, orderly, and liquid market:
Here’s a video that goes deeper into the DMM’s role in bid-ask spreads and how to approach test questions on the topic:
DMMs are also authorized to stop stock, meaning they freeze the price of a security for a short period of time. This is most often done for floor brokers, who also work on the NYSE floor. Floor brokers represent financial firms that send trades to the NYSE.
For example, Charles Schwab could send a representative to the NYSE floor to help facilitate large customer trades (small trades are routinely handled by the system with no human involvement). If Charles Schwab receives a large order in an NYSE-listed stock, it may route the order to a floor broker. The floor broker then communicates with the DMM and other floor brokers to seek the best possible price.
If the DMM chooses, it can quote a price to the floor broker and “lock it in” by stopping the stock for a short time. During that time window, the floor broker tries to find a better price from other brokers. If no better price is found before the time expires, the floor broker can return to the DMM and accept the quoted price. DMMs may only stop stock for public orders; they can’t do it for themselves or for a financial firm’s trading account.
The NYSE trades only stocks that are “listed” on the exchange. To be listed, issuers must meet certain standards, such as market capitalization and minimum numbers of shareholders. You don’t need to memorize the listing requirements, but you should know that the NYSE generally lists large companies with actively traded stocks.
One of the NYSE’s goals is to maintain fair and orderly markets. After Black Monday in 1987, the NYSE introduced circuit breakers to help prevent a market “death spiral.” Sometimes called trading curbs, circuit breakers pause trading for short periods when there’s a large, rapid market decline. For circuit breaker purposes, “the market” is measured by the S&P 500. The rules are enforced daily:
7% decline before 3:25pm ET
13% decline before 3:25pm ET
20% decline at any time
Circuit breakers don’t eliminate market declines, but they can temporarily slow downward momentum. Although the NYSE created the system, all major exchanges enforce these rules today. Circuit breakers are uncommon, but they were triggered during the 2010 Flash Crash (a 9% drop in minutes) and four times during the COVID-19 volatility in March 2020.
The NYSE is open every business day from 9:30am to 4:00pm ET. DMMs often arrive early (commonly around 7am ET) to analyze market data for price discovery. Even when the market is closed, financial firms can still submit orders into the system. If many buy orders accumulate overnight, the DMM may open the stock at a higher price than the prior day’s close (and vice versa). Setting the opening price based on pre-market supply and demand is called price discovery.
The NYSE isn’t the only exchange with this structure. A few other exchanges are modeled similarly, including the American Stock Exchange, referred to as NYSE-MKT. There are also regional exchanges, such as the Philadelphia Stock Exchange. A stock can trade on the NYSE and another exchange (often a regional exchange). These are called dual-listed stocks.
Any trade that takes place on the NYSE is a first market trade. As a reminder, a first market trade is a trade of a listed stock on an exchange. Listed securities can also trade outside their primary exchange in the OTC markets, which is called the third market.
When the same security trades in multiple markets, it can be harder to identify the best available price. The Consolidated Quotation System (CQS) helps by providing the consolidated tape, which reports quotes across multiple markets for securities listed on exchanges like the NYSE and NASDAQ. The consolidated tape combines first and third market quotes, but it does not include the second market (the non-NASDAQ OTC markets).
Sign up for free to take 16 quiz questions on this topic