Designated Market Maker: Definition, Responsibilities, and Examples

• Strike
• Stock Market Guide
• Designated Market Maker: Def...

Written by Shivam Gaba | Reviewed by Shivam Gaba | Updated on 25 November 2024

A Designated Market Maker(DMM) is a person or an organization who has the responsibility to make sure that the market maintains decorum and transparency for an assigned set of listed stocks. The Designated market maker on NYSE, formerly known as specialists, is the official market maker for a set of tickers or a stock symbol.

The DMM serves as a point of contact on the trading floor for the listed company, and provides the company with information, like the general market conditions, the mood of traders, and who is trading the stock. Making use of DMM provides a higher level of service compared to electronic trading. They maintain within their inventory standards of shares for the securities they are assigned. Quotes offered by the DMM are criterion with the floor brokers offer and the designated market maker is obligated to quote at the national best offer for a percentage of the time.

A designated market maker will put out an equal number of buy and sell quotations for a particular share. They will immediately sell off their positions when they receive a buy request. This process minimizes the time between the buy and sell orders. Buying and selling authorize increased liquidity due to the increase in the number of transactions.

A Designated market maker is responsible for maintaining quotes and facilitating buy and sell transactions. They meet NYSE market depth and continuity standards and encourage and improve participation, and market quality by keeping quotes in line with the floor broker excerpt. Another responsibility of DMM is to lessen volatility and increase liquidity. Market makers are equipped to buy and sell stocks simultaneously to permit better liquidity.

There are mainly three types of entities that act as designated market makers such as brokerage firms, investment banks and individuals. BDSwiss, Blackbull markets, FP markets, Pepperstone, and Hotforex are the major market-making brokers. JPMorgan Chase and Goldman Sachs are examples of investment banks that are market makers as well. Individual market makers have to be experts and have to go through different tests to be able to apply for the position.

What does Designated Market Maker mean?

A Designated market maker is a liquidity provider that is appointed by a stock exchange or an authority like SEBI and SEC. The DMM serves as a point of contact on the trading floor for the listed company and provides the company with information including the general market conditions, the mood of traders, and who is trading the stock.

A DMM is responsible for prolonging quotes and facilitating buy and sell transactions. The quotes offered by the DMM are equal with what floor brokers offer and the DMM is required to quote at the national best bid for a percentage of the time.  DMM provides a higher level of service compared to electronic trading. It also oversees and runs opening distributions, when orders are taken before the opening of an exchange to buy and sell securities, and closing distributions as well, when closing prices are resolved after exchanges close on each trading day. Market making is easier when the market is in a bullish mood. Designated market makers are making markets for hundreds of listed stocks at a time.

The DMM is considered a value-added service offering higher touch than what an electronic-only platform can provide. They are also responsible for maintaining fair spread between offer and ask prices to ensure that trading activity remains efficient and effective. DMM acts as a connection between exchanges and the traders, providing information about trading activity and market conditions. This helps to make sure that traders have access to update market information and can make informed trading decisions. Designated market makers improve the matching in the stock market which enables more trades.

What is a Designated Market Maker responsible for?

The designated market maker plays an important role in ensuring the market for a particular security is functioning efficiently by providing liquidity, maintaining fair and orderly markets and providing market intelligence and facilitating trading activities.  

1. Providing liquidity: The DMM is responsible for providing both buy and sell extract for the security they are designated to, with the goal of making sure that there is enough liquidity in the market for investors to buy and sell the security.
2. Maintaining fair and orderly markets: The DMM should make sure that the trading activity is conducted in a fair and orderly manner. They must provide competitive extract, maintain a fair bid-ask spread and manage market volatility.
3. Providing market intelligence: The DMM must have extensive knowledge about the securities they are designated to and provide market intelligence, including information on trading activity, trends and news.
4. Facilitating trading: The designated market maker must act as a connection between the exchange and the traders, providing information on trading activity and market conditions.
5. Managing price discovery: DMMs are responsible for managing price discovery for their allocated securities. This includes helping to set opening and closing prices, as well as providing information on supply and demand for the securities.

These are the major responsibilities of designated market makers. The DMM operates both manually and electronically to facilitate price discovery during market opens, closes and during periods of trading instability. They compensate for the risk of holding assets because a security’s value will decline between its purchase and sale to another buyer. The DMMs are essentially lone market makers with a monopoly over the order flow in particular securities.

How much does a Designated Market Maker earn?

The earnings of a designated market maker (DMM) depend upon a variety of factors including the market they operate in, the volume of trading activity in the market, and their own individual performance. The DMMs work on the floor of the New York Stock Exchange (NYSE) and are responsible for ensuring the smooth functioning of trading in particular stocks. The highest salary for a DMM on the NYSE is around $114,000 per year with some earning as much as $200,000 or more, according to the data from Glassdoor. The average salary for a designated market maker is $93,578 per year in the United States.

The designated market maker also receives additional compensation such as bonuses or profit-sharing arrangements based upon their performance and the performance of the market as a whole. Top earners in the United States in March 2023 earn $7750 per month. And the average earnings of designated market makers is $4599 per month. DMM salaries in the United States will be paid differently by cities. The city with the highest salary is San Jose. 

The three most common skills that are needed for a designated market maker are equity options, portfolio risk, and National Association for security dealers (NASD). The market maker earns a profit through the spread between the securities bid and the offer price. Market makers bear the risk of covering a given security, which will drop in price if they are compensated for this risk of holding the assets.

How to be a Designated Market Maker?

Designated market maker involves certain requirements set by the exchange where one wishes to become a DMM. There are mainly 5 steps that help to become a designated market maker. They are listed below.

1. Eligibility requirements: The requirements vary by exchange, a DMM needs to be a member of the exchange and have a certain level of trading experience and financial resources.
2. Apply to become a DMM: The person who needs to become DMM should submit the application to the exchange and go through an approval process. This process involves an interview or an exam. NYSE needs you to pass the NYSE Arca Equity Trading Permits (ETP) test. The qualification test needs rigorous training, education, and orientation from NYSE.
3. Complete training: Once approved as a DMM, one should complete training provided by the exchange. This training will cover the rules and regulations governing DMMs as well as the specific responsibilities of the role. And the person should have a deep understanding of stock markets, especially market matching.
4. Obtain sponsorship: In some cases, one should need to be sponsored by a firm that is already a DMM on the exchange.
5. Start trading: One has completed the necessary training and has met all the requirements, he can begin trading as a DMM on the exchange.

Becoming a DMM is a complex process, and it is important to do research and understand the requirements and responsibilities of the role before applying. But the same needs them to have some qualifications that differ from exchange to exchange.  DMM must meet tough education, training, and testing requirements and to obtain New York Stock Exchange Arca Equity Trading Permits (ETP), register in a given security, and remain in good standing with NYSE Arca thereafter to perform marker making activities.

What are the examples of Designated Market Makers?

GTS is the New York Stock Exchange designated market maker and is the biggest DMM responsible for the largest group of companies in the world. NYSE has DMMs for each of the stocks listed on the exchange and some of the well-known DMMs are Citadel Securities LLC, Virtu Americas LLC, KCG Americas LLC, and Barclays. 

Chicago Mercantile Exchange DMMs are for various products including futures and options contracts.IMC Chicago LLC is a DMM for CBOE, Susquehanna Securities LLC is a DMM for PHLX, Hudson River Trading LLC, Jane Street Financial Ltd for IEX, Wolverine Trading LLC for MIAX, Peel Hunt LLP, Winterflood securities, Numis for the London stock exchange (LSE), Citadel securities, Two sigma securities for NASDAQ market makers are some of the examples of designated market makers.

How does a Designated Market Maker work in the stock exchange?

The DMM is a registered trading firm that operates on a stock exchange, with the responsibility of maintaining a fair and orderly market for a particular stock or group of stocks. A Designated Market Maker has been selected by the exchange as the primary market maker for a given security.

The DMM has the ability to pause or slow down trading in the stock they are responsible for, there is exact volatility or other unusual market conditions. It is assigned to the stocks by the exchange and they act as a broker and a dealer. DMMs uses as a combination of electronic trading and their expertise in the stock market, and also use their knowledge of the company and its financials to make informed decisions about the stock’s value.

What are the best Designated Market Makers?

The performance of DMM varies depending on a variety of factors including liquidity, volatility, specific stocks they are responsible for, market conditions, risk tolerance and their own trading strategies. Reputation, experience, technology and financial resources should be considered while evaluating the designated market maker.

Citadel Securities is a leading DMM on the NYSE, IMC trading in the NYSE, KCG holdings, Jane Street, Two Sigma securities, Jump trading, and Flow traders are the best-designated market makers operating on different exchanges and specialize in different types of securities.

Who appoints DMM?

Designated Market Makers are appointed by the stock exchange on which they operate. The DMM should agree to act as a designated market maker for all securities assigned to it by the exchange. The exchange approves the DMM for specific securities in accordance with the terms of the trading policies in its sole caution.

The exchange maintains the caution to change the designated market makers list of assigned securities in accordance with its published DMM program policies. The appointment of DMM is based on the exchange’s selection criteria which include factors such as the firm’s financial stability, experience in trading, and technological capabilities.

The New York Stock Exchange DMMs must apply to the exchange and must have financial strength, operational capacity, and compliance with regulatory standards. And they choose DMMs based on their application, performance metrics, etc.

How does DMM determine price?

The DMM uses a variety of techniques to determine the price of the security including monitoring trading activity, analyzing market data, using proprietary algorithms and models etc. They take into account any information that will be publically available such as news reporters, financial statements from the company, trading history, supply and demand.

One of the key responsibilities of a designated market maker is to determine the price of securities that are traded on exchange. The DMM goal is to provide liquidity to the market and ensure that buyers and sellers are able to trade the  security at a fair price. They must constantly adjust their pricing strategy in response to changing market conditions and other factors. 

Does NYSE have a Designated Market Maker?

Yes, The DMMs are independent firms that are registered with the New York Stock Exchange (NYSE), are required to maintain a register of the securities and are assigned to trade. There are mainly 12 main designated market makers including Credit Suisse securities, Deutsche bank securities, Goldman Sachs and Company, IMC Chicago, Jane street capital, KCG Americas, Latour Trading, OTA LLC, Susquehanna capital group, Timber Hill, Virtu Financial BD, Wolverine trading.

The New York Stock Exchange (NYSE) has designated market makers who are responsible for perpetuating fair and orderly markets for the listed securities they are appointed.

DMMs use their own capital to buy and sell securities on the NYSE and they are desired to provide continuous tender and ask prices for the securities they trade. The DMMs are responsible for monitoring the trading activities in the securities they trade and preserving orderly markets, which includes ensuring that trading is conducted in capitulating with NYSE rules and regulations. 

Can a DMM trade for their own account?

Yes, A designated market maker (DMM) can trade for their own account in the securities they are assigned to trade on the New York Stock Exchange. But they should follow rules and regulations to make sure that they are performing in an honest and transparent manner. DMMs must provide fair and competitive prices for the security they trade, both when trading for their own account and when acting as an agent for other market participants.

Therefore the NYSE must not take unfair advantage over other traders or manipulate prices of their position as a DMM. DMMs are authorized to trade for their own account, they are held to high standards of professionalism and integrity to make sure that they are performing in the best interests of the markets and all market participants.

Can a Designated Market Maker accept a not held order?

Yes, a designated market maker on the New York Exchange can accept a “not held” order.  A “not held” order is a type of order that gives the dealer caution as to time and price at which the order will be executed. The dealer has some flexibility in implementing the order, but it is not required to follow specific instructions from the customer regarding the timing or price.

DMM  must follow any parameters set by the customer such as a limit on the maximum price or a minimum order price. A DMM can accept an unheld order depending on the rules of the exchange and the particular responsibilities and obligations of the DMM. Not-held orders are used for larger orders that are more complex than standard market orders.

Do Designated Market Makers set prices?

No, Designated market makers do not set prices and their role is to facilitate trading and preserve impartial and orderly markets for specific securities on a stock exchange. Instead of setting prices, DMM deals with providing liquidity and maintaining orderly markets. They continuously monitor the market and adjust their excerpt in response to changes in supply and demand.

Prices in financial markets are decided by supply and demand. Buyers and sellers submit their orders to the market, and prices are set based on the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. DMMs facilitate this process by providing liquidity and stepping in to buy or sell when there is an imbalance of orders. So they do not set prices.

Is it profitable to be a Designated Market Maker?

Yes, Being a designated market makers is profitable. The profitability largely depends on factors such as market conditions, trading volume, and the DMM’s trading strategies and capabilities. Market conditions greatly impact a DMM’s profitability.

DMM’s trading strategies and capabilities also impact on profitability. Effective strategies help to minimize risks while maximizing profits can be critical to success. Significant investment of time, resources, and expertise is requisite to become a DMM. Designated market maker will be a profitable career path if the right skills and resources are properly implemented.

Does Market Maker lose money?

Yes, Market Makers could lose money. Market makers are responsible for providing liquidity to the market by continuously buying and selling securities. They make money by earning the bid-ask spread, which is the difference of buying and selling price of security.

However, when the market conditions change rapidly, causing market makers to be stuck with an inventory of securities that they are unable to sell at profit, it will lead to losses. Overall, market-making is a profitable business, but it is not without risk. Market makers use various risk management tools, such as hedging, to manage their exposure to market risks, by which losses can be minimized.

What is the difference between a stockbroker and a Market Maker?

Stockbrokers and market makers are entirely different.  A Stockbroker is an individual or firm that acts as an intermediary between buyers and sellers of securities such as stocks, bonds, and mutual funds. They execute orders on behalf of their clients and provide them with advice and guidance on investment decisions.

The term market maker refers to a firm or individual who actively extracts two sided markets in a particular security by providing an offer along with the market size of each. They facilitate trading by providing liquidity to the market. Market makers earn their profit from the spread between the offer and ask prices they quote, and from the volume of trades they facilitate.

What is the difference between a designated market maker and a specialist?

A designated market maker and a specialist, both are responsible for maintaining liquidity and orderliness in financial markets. But they operate in different contexts and have different responsibilities. DMM are designated by the exchange and are required to maintain an unbiased and orderly market by providing liquidity and sustaining tender ask spreads within specified limits.

A specialist is a type of market maker who is responsible for maintaining an orderly market for a particular stock on the New York Exchange. Specialists are designated by the NYSE and are required to sustain an orderly market by providing liquidity and maintaining tender ask spreads within specific limits. DMMs operate in a larger context and specialists operate in a more specific context.