Supplemental Liquidity Provider (SLP)

What is a Supplemental Liquidity Provider (SLP)?

A Supplemental Liquidity Provider (SLP) is one of three major market participants on the New York Stock Exchange (NYSE). Supplemental Liquidity Providers (SLPs) are market participants who use sophisticated high-speed computers and algorithms to create large volumes on exchanges to increase market liquidity. As an incentive to provide liquidity, exchanges pay SLPs rebates or fees.

key takeaways

  • Supplemental Liquidity Providers (SLPs) are market participants that generate significant trading volume on stock exchanges with the goal of bringing liquidity to the market.
  • On the New York Stock Exchange (NYSE), SLP is one of three major market players.
  • SLPs are paid in rebates or fees for their role in facilitating market transactions.
  • SLP was introduced in the early days of the Great Depression after the collapse of Lehman Brothers.
  • SLPs trade only for their proprietary accounts, not for public clients or agencies.
  • High-frequency trading is fundamental to how SLPs work and improve market liquidity.

Learn about Supplemental Liquidity Providers (SLPs)

The Supplemental Liquidity Provider (SLP) scheme was introduced shortly after the collapse of Lehman Brothers in 2008, which raised major liquidity concerns. This concern led to the introduction of the SLP in an attempt to mitigate the crisis.

The NYSE market model includes SLPs, designated market makers (DMMs) and floor brokers, and is designed to combine technology and human judgment for efficient market pricing, which will also lead to lower volatility, more Great liquidity and better prices because of the human factor.

Exchange’s Supplemental Liquidity Provider (SLP)

SLPs were created to increase liquidity and complement and compete with existing quote providers. Each SLP typically owns a cross-section of securities on the exchange on which it is placed and is obligated to maintain a quote or quote for at least 10% of the trading day’s National Best Offer Offer (NBBO) in each security it allocates.SLPs also need to offer an average of 10 million shares per day to qualify for the enhanced financial rebate.

The NYSE Staff Committee assigns each SLP a cross-section of NYSE-listed securities. Multiple SLPs can be assigned to each question.

The NYSE rewards SLPs for competitive quotes with financial rebates when SLPs post liquidity in designated securities for execution of incoming orders. This generates more quoting activity, resulting in wider spreads and liquidity at each price level.

SLPs exist primarily in more liquid stocks with an average daily volume of more than 1 million shares. SLPs can only trade for their proprietary accounts and not for public clients or agencies.

High Frequency Trading and Supplemental Liquidity Providers (SLPs)

High-frequency trading is how SLP works and refers to the use of computers to process large numbers of transactions in nanoseconds. The entire order book, from start to finish, uses high frequency trading. High-frequency trading actually became popular thanks to SLPs after the collapse of Lehman Brothers.

The high frequency settings used by SLP involve algorithms that analyze market data to execute any trade. High-frequency trading is important because the faster the trades happen, the quicker, and likely bigger, the profits from the trades.

High-frequency trading has been shown to improve market liquidity, which is the main function of SLP, and improve the efficiency of market transactions, especially by quickly matching many bids and offers in the market to eliminate too small bids and offers price.

While the benefits of high-frequency trading are obvious, there are also many concerns that it can also bring instability to the market. In the event of a market sell-off, high-frequency trading can exacerbate the impact because it can fulfill requests in seconds. If that happens and the market falls, it could cause investors to rush to sell further. Of course, many exchanges have parameters and procedures to prevent catastrophic consequences.

Regardless of any risk, high-frequency trading has been shown to match market prices, resulting in increased efficiency, more accurate prices, and lower transaction costs.

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