Direct Edge Mulls Market-Making Rules

As the US Securities and Exchange Commission (SEC) considers how it may change the rules governing market-maker obligations, exchange operator Direct Edge plans to put its own market-maker rules in place for its markets.

Direct Edge, which launched as an exchange in June after operating as an ECN, has not previously set market-maker obligations, says William O'Brien, CEO of Direct Edge. "Now that we are evolving toward a more meaningful and realistic standard of what it means to be a market-maker, we look to follow the lead of other exchanges and adopt one in the near-term," he says.

In weighing responses to the market events of the May 6 Flash Crash, the SEC has been considering and receiving comments on plans to increase market-making obligations. Direct Edge is planning to adopt its market-maker standards in coordination with any new SEC requirements, according to an exchange spokesperson.

"Since the other major exchanges recently filed proposed changes with the SEC, we are waiting for the rules to coalesce, especially with regard to stub quotes," says the spokesperson. "Once that has happened, we will file an amendment to our rule set to offer market-maker status."

Market-makers are obligated to keep quotes within certain widths and avoid using stub quotes, which are placeholder quotes not intended for execution, explains Joseph Mecane, executive vice president and head of US cash at NYSE Euronext. Bryan Harkins, head of sales and strategy at Direct Edge, describes the exchange’s likely market-maker structure as taking the form of where a two-sided quote obligation will be closer to the inside and the two-sided quote obligations should be “within the single-stock circuit breaker threshold.”

More than increased market-making obligations will be necessary to prevent a recurrence of another flash crash, according to O'Brien. "Markets and regulators must layer other market obligations on top of market-wide significant shock regulation to have the right balance and achieve the right objectives through the right measures," he says.