Designated Market Maker (DMM): Definition, NYSE Role, Vs. Broker

What Is a Designated Market Maker (DMM)?

A designated market maker (DMM) is a market maker responsible for maintaining fair and orderly markets for an assigned set of listed stocks. Formerly known as specialists, the designated market maker is the official market maker for a set of tickers and, in order to maintain liquidity in these assigned stocks, will take the other side of trades when buying and selling imbalances occur. The DMM also serves as a point of contact on the trading floor for the listed company, and provides the company with information, such as the general market conditions, the mood of traders, and who is trading the stock.

Understanding Designated Market Maker

The designated market maker position is relatively new to the New York Stock Exchange. This type of position was added in order to increase competitiveness and market quality as electronic trading becomes more widespread and dominates financial markets. Announced in 2008, the DMM is considered a value-added service offering higher touch than what an electronic-only platform can provide.

Designated market makers will maintain within their inventory quantities of shares for the securities they are assigned. Quotes offered by the DMM are on par with what floor brokers offer, and the DMM is obligated to quote at the national best bid or offer for a percentage of the time. This can include more than one name. In fact,

 According to NYSE, the DMM serves three important functions:

• Manage a physical auction along with an automated auction, which includes electronic quotes from other DMMs and market participants
• Meet NYSE market depth and continuity standards
• Encourage participation and improve market quality by keeping quotes in-line with floor broker quotes

As trades are made and quotes get filled on bids and offers, the DMM works to balance their inventory accordingly. Part of the responsibility is to lessen volatility and increase liquidity, but those factors are not always under their control. Nevertheless, the market maker is expected to maintain quotes and to ensure orders are executed regardless of market conditions.

DMMs also oversee and run opening auctions, when orders are taken before the opening of an exchange to buy and sell securities, and closing auctions as well, when closing prices are similarly resolved after exchanges close on each trading day. Companies such as investment banks and trading firms can act as designated market makers.

Market Makers vs. Floor Brokers

Brokers—who represent the interests of financial institutions, pension funds, and other organizations investing in the market—work with designated market makers to make trades happen. On the trading floor of the NYSE, DMMs are positioned in the center and the floor brokers are located along the periphery.

One of the bigger changes from the specialist role, which the DMM replaced, involves the trade information that a DMM has access to. Designated market makers do not have access to information on who has bought or sold a security until after the trade is made, meaning that the DMM does not have inside information and faces the same risks as other market participants. This levels the playing field between the DMM and floor brokers.