Specialist Unit

A specialist unit was a group of people or firms that served as market makers for one or more stocks that traded on an exchange. This job with this name rarely exists anywhere in the world, due to electronic exchanges.

A specialist unit maintained a stable market in a given security by acting as both a principal and agent for brokers. As a principal, a specialist unit held its own inventory of stock, in order to facilitate liquidity for a given trade.

Today, specialist units go under different names, such as designated market makers and supplemental market makers, and they mainly work for the New York Stock Exchange.

Specialist units were in charge of maintaining relatively narrow bid-ask spreads for specific securities, as well as maintaining market liquidity, managing limit orders and large block trades.

Also, specialist units were charged with balancing the market by taking the opposing side of bullish or bearish sentiment for a given stock by trading out of the group’s own inventory. This helped to facilitate trading in times of market uncertainty or volatility involving particular stocks.

Due to the advent of electronic trading, few exchanges worldwide employ specialist units. The New York Stock Exchange, however, employes designated market makers - DMMs. Much like specialist units, the DMMs maintain fair and orderly markets for a specific set of securities. Using both manual and electronic means, they help to avoid big trading imbalances that can halt the trading of particular stocks.

While many exchanges prefer to let machines take on this role, the NYSE believes involving both humans and machines helps improve price discovery and dampen volatility. The DMMs take into account industry-specific intelligence, as well as their knowledge of both economics and trading systems when making their decisions. They are supposed to work for the benefit of market participants, without regard for themselves or particular traders.

In addition, DMMs sometimes serve as points of contact for the listed companies they represent for the exchange, providing companies information regarding the mood of traders and who is trading the company’s stock.

According to the NYSE, DMMs make markets significantly less volatile at the market open and close, as well as on days when stock lock-ups expire, as well as when stocks list for the first time.

Another group that acts much like specialist units are the NYSE’s supplemental market makers. These are high-volume members of the exchange provided a financial incentive by the NYSE to maintain narrow bid-ask spreads in specific, heavily traded securities, using their own stock to fill incoming orders. The exchange ‘s goal is to add liquidity at each price level. Supplemental market makers generally trade from their own accounts.

Notably, the NYSE notes that SLPs have the same publicly available trading information as other NYSE customers, not more information.