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Humans touch still essential for market liquidity and stability at NYSE

Changes to regulations that secure the role of specialist brokers in determining stock prices at the New York Stock Exchange (NYSE) are essential to maintaining market liquidity and stability according to an academic from LSE.

As of this week, the specialists – the NYSE’s so-called Designated Market Makers (DMMs) – can share disaggregated and post-trade order information at their posts with the Exchange’s floor brokers. This is the result of a ruling by the regulator, the Securities and Exchange Commission (SEC), after receiving evidence from Dr Daniel Beunza and Professor Yuval Millo, who have been studying the NYSE since 2003, as well as from the NYSE itself.

Dr Daniel Beunza, an economic sociologist, said: “Our research indicates that human communication between market makers and floor brokers has a positive impact on price discovery as it facilitates a more widely shared understanding of the market. This results in a greater willingness to transact.”

wall street signThis informal sharing of information has always been part of a DMM’s role and helps floor brokers make sense of the market at any given point in time. However, this had never been codified.

When the NYSE proposed to amend their rules to reflect the DMMs’ full role, the SEC expressed concern that this would unfairly discriminate against off floor market participants.

However, in two comment letters to the SEC supporting the NYSE’s proposals, Daniel Beunza and his colleague, Professor Yuval Millo, argued that sharing information in this way would be “fundamentally superior” to systematic electronic dissemination of information. They said: “It would be more targeted in nature, more limited in reach and it would disseminate less timely and therefore convey less sensitive information while still retaining the primary benefits of allowing counterparties access to liquidity.”

Beunza and Milo also point out in their letters that the tight social ties among the Exchange’s floor participants encourages appropriate behaviour and builds an environment of trust which allows more sensitive information to be disseminated. 

Dr Beunza also added: “Retaining the human dimension of the NYSE means that market makers can give information to floor brokers that they need to make sense of a crisis like 2010’s flash crash, for example. To ensure safety, we need to make sure that automated systems retain important social features.”

An article on Dr Beunza and Professor Millo’s work on the automation of stock exchanges can be seen here: The rise of machines?

Posted: Thursday January 30 2014

For more information

Sue Windebank, LSE press office, T: 020 7955 7060, E: s.windebank@lse.ac.uk