SEC's 2005 Regulation National Market System (Regulation NMS) strengthened U.S. securities exchanges, aiming for fairer and more efficient markets. It introduced four rules, covering order protection, improved market data access, and decimalization of price quotes.
The Securities and Exchange Commission (SEC) implemented the Regulation NMS in 2005 to improve the trading of listed U.S. stocks. This regulation aimed to enhance transparency by improving quote display and market data access, thus ensuring investors receive the best possible price for their orders.
How Does Regulation NMS Work?
Regulation NMS, passed under Section 11A of the Securities Exchange Act of 1934, brought significant changes to the regulatory structure of U.S. equity markets. It not only redesignated existing NMS rules but also introduced new requirements to modernize and strengthen the market. Regulation NMS includes four essential components, which are as follows:
- Market Data Rules: These rules allocate revenue to self-regulatory organizations that promote and enhance market data access.
- The Sub-Penny Rule: For stocks that are priced above $1.00 per share, the smallest price change allowed is $0.01. Stocks priced below $1.00 can have price changes as small as $0.0001.
- The Order Protection Rule: Its purpose is to ensure investors get the best price for their orders. This rule prohibits trading centers from executing orders at worse prices, enforcing the National Best Bid and Offer (NBBO) requirement to direct orders to venues offering the best prices.
- The Access Rule: This rule aims to improve access to quotations in the NMS by enhancing linking and reducing access fees. It mandates national securities exchanges and associations to enforce regulations against displaying cross-automated quotations or locking quotations.
What Are the Advantages of Regulation NMS?
Regulation NMS was implemented to promote fair market pricing and enhance overall market quality. Its success, according to the SEC, has solidified the reputation of U.S. equity markets as efficient, fair, and competitive. The regulations were also crafted to adapt to changes in equity markets, including the introduction of new technology and the emergence of new trading markets for penny and sub-penny increments.
What Is the Criticism of Regulation NMC?
Critics of Regulation NMS raise concerns about its Order Protection Rule, which they believe gives an advantage to high-speed traders. They also argue that the rule makes trading more expensive and difficult for pension funds and institutions to execute trades at desired prices promptly.
Another issue is that better price visibility has led to large investors favoring off-exchange trading, contributing to the growth of dark pools. Some critics recommend updates to the regulation, while others propose replacing it with rules more aligned with traditional trading practices.
Regulation NMS made significant changes to how U.S. stock markets are regulated. Its goal was to make sure prices are fair and the markets are better overall. It has succeeded in meeting these goals, but some people have criticized its Order Protection Rule. Despite this, Regulation NMS is still a very important part of how U.S. stock markets are regulated.