Reg NMS
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| Reg NMS | |
|---|---|
| Name | Reg NMS |
| Type | United States financial regulation |
| Jurisdiction | United States Securities and Exchange Commission |
| Date adopted | 2005 |
| Related legislation | Securities Exchange Act of 1934 |
| Related agency | Securities and Exchange Commission |
Reg NMS
Reg NMS is a set of rules adopted by the United States Securities and Exchange Commission in 2005 to modernize trading and protect investors in New York Stock Exchange and Nasdaq Stock Market venues. It interacts with market structures overseen by entities such as FINRA, NYSE Arca, BATS Global Markets and Cboe Global Markets. The package sought to address issues raised by electronic trading advances exemplified by firms like Knight Capital Group and events such as the May 6, 2010 United States stock market flash crash.
Background and Purpose
Regulation National Market System was proposed in the aftermath of market fragmentation growth driven by Island ECN and Archipelago Exchange innovation and the advent of algorithmic trading used by firms like Getco and Renaissance Technologies. The project built on precedent from the Securities Exchange Act of 1934 and policy debates involving commissioners at the Securities and Exchange Commission and industry groups such as the Investment Company Institute, SIFMA and National Association of Securities Dealers. Debates referenced historical market events including the 1987 stock market crash and technological developments pioneered by Electronic Communications Network operators and legacy exchanges like the American Stock Exchange.
Key Rules and Components
The rule set included the Order Protection Rule, the Access Rule, the Sub-Penny Rule and the Market Data Rules, affecting venues including NYSE American and NASDAQ OMX Group. The Order Protection Rule (often called the trade-through protection) sought to prevent executions at prices inferior to displayed quotes on other venues, implicating firms such as Citadel LLC and Goldman Sachs. The Access Rule regulated fees and access protocols between market centers, and the Sub-Penny Rule limited quoting increments, affecting market makers like Citigroup and J.P. Morgan Chase. The Market Data Rules governed distribution and consolidation of proprietary data feeds produced by corporations like S&P Global and Thomson Reuters and used by subscribers including Bloomberg L.P. and Refinitiv.
Market Impact and Criticism
Critics including academics affiliated with Harvard University, University of Chicago and MIT argued Reg NMS had unintended consequences such as proliferation of sub-second strategies used by Two Sigma and Virtu Financial. Commentators from The Wall Street Journal and Financial Times alongside practitioners from Morgan Stanley and Bank of America Merrill Lynch debated effects on liquidity, displayed depth and order routing economics. Events highlighted by commentators include the 2010 flash crash and operational incidents involving Knight Capital Group and KCG Holdings. Legislators in the United States Congress and watchdogs like the Government Accountability Office examined whether rules favored high-frequency firms such as Tower Research Capital over institutional investors like Vanguard Group and BlackRock.
Legal and Regulatory Developments
Since adoption, Reg NMS spurred litigation and rulemaking involving the United States Court of Appeals for the District of Columbia Circuit and enforcement actions by the Securities and Exchange Commission. Follow-on regulatory initiatives included modifications driven by reports from the SEC Division of Trading and Markets and policy proposals debated during presidencies of George W. Bush, Barack Obama and Donald Trump. Internationally, standards were compared against regimes in European Union markets governed by MiFID I and MiFID II and oversight agencies such as the Financial Conduct Authority. Industry responses included rule filings by exchanges like NYSE Group and NASDAQ Stock Market, Inc. and consultation with trade associations such as SIFMA and AFME.
Compliance and Implementation
Broker-dealers including Charles Schwab Corporation, E*TRADE Financial Corporation and TD Ameritrade implemented routing logic and technology upgrades to comply with Order Protection and Access requirements, coordinating with market centers such as Direct Edge and IEX Group. Firms engaged legal counsel from offices associated with firms like Sullivan & Cromwell and Skadden, Arps, Slate, Meagher & Flom for compliance frameworks, and internal audit units reported to boards and risk committees similar to those at Goldman Sachs Group, Inc. and JPMorgan Chase & Co.. Technology vendors including Nasdaq Technology and NYSE Technologies provided consolidated tape services and matching engines to meet dissemination and connectivity demands.
Economic and Academic Analyses
Empirical studies by scholars from Columbia University, Princeton University, Stanford University and Yale University evaluated price discovery, execution quality and quote clustering after Reg NMS, citing metrics involving firms like Citadel Securities and Susquehanna International Group. Research published in journals such as the Journal of Finance, Review of Financial Studies and Journal of Financial Economics debated whether Reg NMS improved outcomes for retail investors served by brokers like Robinhood Markets and Interactive Brokers. Policy researchers at think tanks including the Brookings Institution and Cato Institute offered divergent recommendations regarding order protection waivers, maker-taker fees and consolidated tape reform, influencing ongoing SEC rulemaking and congressional hearings involving members of the House Financial Services Committee and the Senate Banking Committee.