Designated Market Maker (DMM)

A designated market maker (DMM) is a market maker that is obligated to maintain fair and orderly markets for an assigned set of listed firms. Formerly known as specialists, the designated market maker is a point of contact for the listed company, and provides the company with information, such as the mood of traders and who has been trading the stock. 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.

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 and more widespread. 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. As trades are made and quotes get filled on each side for bids and offers, the DMM will then work to balance their inventory accordingly. Part of the role of the DMM is to provide control over volatility and increase liquidity.

DMMs 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, with each DMM sometimes being responsible for several hundred listed stocks.

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

One of the bigger changes from the specialist role, which the DMM replaces, 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.