Direct Edge said it received approval to launch a market maker program for its two national exchanges.

The operator of the EDGA and EDGX exchanges said the program will begin on January 17 and be used to “deepen our liquidity and improve market quality for all investors.”

The Jersey City, N.J., exchange operator has begun accepting applications by securities firms to be market makers in given stocks, on its web site.

Only members of a Direct Edge exchange can become market makers on EDGA or EDGX.

Since the Flash Crash of May 6, 2010, the Securities and Exchange Commission has been considering whether to require firms trading on all-electronic exchanges to perform market-making obligations. These involve guaranteeing continuous trading in given stock symbols, even in volatile conditions.

On that day, the Dow Jones Industrial Average lost hundreds of points in a matter of minutes (and bounced back in roughly the same time), when buyers of securities disappeared.

On the one-year anniversary of the event, SEC chairman Mary Schapiro said high frequency traders either pulled back or pulled out. They accounted for 50 percent of volume and responded to what already was a down day "by taking liquidity rather than provide it,'' she said.

In a filing on its market maker program, Direct Edge said its market makers “must engage in a course of dealings for their own accounts to assist in the maintenance, insofar as reasonably practicable, of fair and orderly markets’’ on a Direct Edge exchange.

A Direct Edge market maker “must maintain continuous, two-sided quotations within a designated percentage of the National Best Bid (“NBB”) and National Best Offer (“NBO”, and together with the NBB, the “NBBO”) (or, if there is no NBB or NBO, the last reported sale). ‘’

The operator said:

These Market Maker quotation requirements are intended to eliminate trade executions against Market Maker quotations priced far away from the inside market, commonly known as “stub quotes”. They are also intended to augment and work in relation to the single stock pause standards already in place on a pilot basis for stocks in the S&P 500® Index4 and the Russell 1000® Index, as well as a pilot list of Exchange Traded Products (the “Original Circuit Breaker Securities”).

Under certain conditions, a permissible quote in National Market System securities, it said, will be not more than 8% away from the national best bid and offer.

But under Rule 600 of Regulation NMS, securities that are not:

Original Circuit Breaker Securities with a price equal to or greater than $1 shall not be more than 28% away from the NBBO; and a Market Maker’s quotes in NMS securities that are not Original Circuit Breaker Securities with a price less than $1 shall not be more than 30% away from the NBBO.

Read the Direct Edge Market Maker filing

Tom Steinert-Threlkeld writes for Securities Technology Monitor.



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