NYSE, Nasdaq Boost Price-Quote Rules to Help Ensure Liquidity

Sept. 2 (Bloomberg) -- NYSE Euronext and Nasdaq OMX Group Inc. are increasing price-quoting requirements for some market makers to help ensure adequate liquidity, as regulators and exchanges try to prevent another crash like the May 6 retreat.

Nasdaq Stock Market now requires brokers that want to qualify for its select market-maker, or SMM, program to quote at a security’s best price at least 10 percent or 15 percent of the day, based on a stock’s average volume. The New York Stock Exchange will strengthen quotes rules for nine firms next month.

“Events on May 6 highlighted the fact that there’s a real risk of liquidity disappearing in certain stocks,” said Kumar Venkataraman, a professor at Southern Methodist University Edwin L. Cox School of Business in Dallas who studies trading in the equities and bond markets. “Issuers and other participants want to know what exchanges are going to do to make sure this doesn’t happen again.”

Regulators and exchanges are working to enhance the trading obligations of market makers following the May 6 rout that erased $862 billion in equity value in about 20 minutes as some firms reined in the liquidity they were providing. The changes by NYSE and Nasdaq specify the minimum time each day that firms must be at the national best bid or offer -- known as the NBBO - - the highest price at which mutual funds and investors can sell and the lowest at which they can buy shares on any market.

‘More Meaningful’ Rules

Nasdaq’s updated requirement “is more meaningful to issuers” than the old rule that SMMs be 0.2 percent of the volume in that stock and quote within a range of the NBBO, said Frank Hatheway, chief economist at Nasdaq OMX, who’s based in Rockville, Maryland. “It’s stricter.” SMMs previously had to quote within 2 percent of the NBBO half the time for the most actively traded stocks.

“We’re trying to enhance the amount of liquidity we have in the market” at the NBBO, Hatheway said.

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