What Is an Affirmative Obligation?
In finance, the term "affirmative obligation" alludes to the obligations of market makers working on the New York Stock Exchange (NYSE). These market producers are otherwise called "specialists" of the NYSE.
How Affirmative Obligations Work
In the course of trading, it is common for the demand for specific securities to periodically surpass the supply, or for the inverse to happen. Regardless, the market producers of the NYSE would be required under their affirmative obligations command to buy or sell shares to keep an orderly trading environment.
Specifically, on account of demand far exceeding supply, market producers could be required to sell inventory in that security. In like manner, assuming that supply exceeds demand, they might be required to purchase shares. As such, the affirmative obligations command guarantees that supply and demand are kept in a sensibly close balance, in this manner diminishing cost flimsiness.
As the NYSE has become progressively automated in recent years, the job of specialist market producers has comparably advanced. Today, the traditional job of the NYSE specialist has been supplanted by DMMs. As well as adjusting supply and demand, these important entertainers likewise bear extra liabilities, for example, laying out suitable opening prices for securities and working to reduce the transaction costs looked by investors.
Real World Example of an Affirmative Obligation
Extra practices which fall under the affirmative obligation system of modern DMMs include: keeping up with orderly trading in the opening and closing periods of the trading day; giving statements on the best accessible stock prices; and regulating processes which eliminate market liquidity from the market, to oversee risk.
At times, the NYSE will help these DMMs by giving rebates for market-production activities. These rebates are intended to boost prudent and effective market-production activities, and are hence fastened to results like the precision of quoted prices, the level of market liquidity, and the quality of statements accessible for daintily exchanged securities.
- An affirmative obligation is the responsibility of NYSE specialists to give market-production services to a specific security.
- Their affirmative obligation obligations incorporate giving stock citations, restricting market volatility, and educating the opening and closing prices regarding certain securities. To boost these activities, the NYSE offers different rebates to their designated market producers (DMMs).
- Today, the NYSE's market creators are known as [designated market producers (DMMs)](/designated-market-producer dmm).