Chapter 12 - Regulation NMS and Other Regulatory Reporting

Abstract

This chapter focuses on the Regulation National Market System (Reg NMS), which was approved by the Securities and Exchange Commission (SEC) on April 26, 2005. The implementation of Reg NMS is designed to modernize and strengthen more than 5000 listed companies within the NMS. The SEC strengthened the NMS to update antiquated rules and promote equal regulation of different types of stocks and markets while displaying greater liquidity. Regulation NMS includes two amendments designed to disseminate market information and includes new rules designed to modernize and strengthen the regulatory structure of U.S. equity markets. These include the “Order Protection or New Trade-Through Rule,” the “Access Rule,” the “Sub-Penny Rule,” and the “Market Data Rules.” The impact on the sell side for the Order Protection Rule is the need for brokers to update their order management systems to route orders to multiple marketplaces and to execute them against liquidity at several price points. This rule can potentially eliminate the role of the New York Stock Exchange (NYSE) floor brokers who are given large institutional orders in reserve. The Access Rule may have limited impact on sell-side firms given that most broker-dealers already have private linkages. Traditional buy-side firms are oblivious to access fees given that they pay brokerage firms to absorb all underlying costs. The Sub-Penny Rule has little impact on the sell side. Traditional buy-side firms may favor the proposal because hedge funds will no longer be allowed to quote in sub-pennies used to jump ahead of their limit orders. The Market Data Rules provide relief for the sell side from the burden of displaying quotes from all market centers trading a particular security.