In November 2008, the New York Stock Exchange added a new role to it’s trading model called ‘Supplemental Liquidity Providers’ or SLPs and reorganized the responsibilities of the other roles. According to the NYSE the SLP role is for ‘upstairs, electronic, high-volume members incented to add liquidity to the NYSE’. Read NYSEs definition here, it’s interesting.
Especially the following points
- The NYSE pays a financial rebate to the SLP 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.
- 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.
Bullet point one means that the NYSE does pay SLPs to trade agressively, i.e. make as many buys and sells as possible. The financial reward according to tradersmagazine.com is 15c per 100 shares (that is the incentive mentioned above).
Bullet point two means that the NYSE determines which securities the SLPs will be allowed to trade under this role. They are assigned to ‘issues’, i.e. securities that are in trouble.
Bullet point three means that a member cannot buy or sell to itself using different roles.
To me the effect of this is that at least for certain securities there is a guaranteed market, because their will always be an SLP assigned to buy and sell it. SLPs will always be interested in buying and selling those securities, because they get paid for it by the NYSE. They will most likely buy from and sell to other companies acting as Designated Market Makers (DMMs). So it is likely that there is not much profit in it – except for the fees that the NYSE doles out.
It is interesting to see which companies are acting as SLPs. The name on top of the list is, how could it be otherwise, Goldman Sachs. The volume they are generating is the largest. The figures I found on Zero Hedge and GoldmanSachs666 and which are originally from the NYSE show that Goldman Sachs has traded over a billion shares in that program – this is in a single week – and thus earned 1.5 mln in this week with practically no risk associated. Now of course that’s not much you might think, on the other hand it is given just for generating traffic and with no risk incurred. I would like to see who is dealing with whom, the securities and prices involved etc. This could shed some light on what is going on here.
However, that’s not the main thing I find most intriguing. That would be the fact that this setup reminds me of the rumors I have heard from time to time about a Working Group on Financial Markets which was authorized in 1988 by executive order 12631.
Now, of course, this is all conspiracy theory stuff about the plunge protection team. Yet it sounds an awful lot like Robert Heller, which is supposed to have said something like
“Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.”
The quote is taken from Wikipedia. I couldn’t verify it on the WSJ website.
Keep in mind that the money they are using for this is most likely taxpayers money provided via the TARP that the banks were supposed to lend out to get ‘credit flowing’. Were they really? Or is this some 350 billion of taxpayer provided play money to simulate a market that is still alive and working well?