SEC To Publish Regulation NMS for Public Comment


Washington, D.C., Feb. 24, 2004 -- The Commission today voted to publish for public comment Regulation NMS, which would contain four interrelated proposals designed to modernize the regulatory structure of the U.S. equity markets. The substantive topics addressed by proposed Regulation NMS are (1) trade-throughs, (2) intermarket access, (3) sub-penny pricing, and (4) market data. In addition, Regulation NMS would update the existing Exchange Act rules governing the national market system, and consolidate them into a single regulation.

1. Trade-Throughs

  • Regulation NMS would establish a uniform trade-through rule for all market centers that would affirm the fundamental principle of price priority, while also addressing problems posed by the inherent difference in the nature of prices displayed by automated markets, which are immediately accessible, compared to prices displayed by manual markets, which are not.
  • Specifically, the proposal would require self-regulatory organizations (SROs), as well as any market center that executes orders, to establish procedures to prevent the execution of an order for national market system stocks at a price that is inferior to the best bid or offer displayed by another market center at the time of execution.
  • At the same time, the proposal would include two exceptions to the general trade-through rule.
  • First, a market center would be allowed to execute an order that trades through a better-priced bid or offer on another market center if the person entering the order makes an informed decision to affirmatively opt out of the trade-through protections. Informed consent would need to be given on an order-by-order basis. This exception is designed to provide greater flexibility to informed traders while preserving the average customer's expectation of having his or her orders executed at the best price.
  • Second, an automated market - one that provides for an immediate automated response to incoming orders for the full size of its best displayed bid or offer, without restriction - would be able to trade through a better displayed bid or offer on a non-automated market up to a de minimis amount of one to five cents, depending on the stock's price. This exception reflects the comparative difficulty of accessing market quotes of non-automated markets.
  • Overall, the proposal is designed to be a practical response to developments in the marketplace that still preserves the important customer protection and market integrity goals of best execution and the protection of limit orders.
  • The proposed trade-through rule would not change a broker-dealer's existing duty to obtain best execution for customer orders.

2. Intermarket Access

Non-Discriminatory Access

  • Regulation NMS would establish a uniform market access rule that would help assure non-discriminatory access to the best prices displayed by market centers, but without mandating inflexible, "hard" linkages such as the Intermarket Trading System (ITS).
  • At its core, the proposal would prohibit a market center from imposing unfairly discriminatory terms that prevent or inhibit any person from accessing its quotations indirectly through a member, customer, or subscriber.
  • This standard is intended to assure that a member, customer, or subscriber of a market center can sponsor access to quotes and order execution without receiving disparate treatment in the handling of those orders with respect to fees, speed, or other terms.

Quote Standardization

  • Regulation NMS also would establish an access fee standard. This standard - designed to promote a common quoting convention - is intended to harmonize quotations and facilitate the ready comparison of quotes across the national market system.
  • The proposal would establish a de minimis fee standard for all market centers and broker-dealers that display attributable quotes through SROs. Specifically, access fees would be capped at $0.001 per share, and the aggregation of this fee would be limited to no more than $0.002 per share in any transaction.

Locked and Crossed Markets

  • Finally, the proposed rule would require each SRO to establish and enforce rules requiring its members to avoid - and prohibiting them from engaging in a pattern or practice of - locking or crossing the markets.

3. Sub-Penny Pricing

  • Regulation NMS would ban sub-penny quoting in most stocks. Specifically, it would prohibit market participants from accepting, ranking, or displaying orders, quotes, or indications of interest in a pricing increment finer than a penny in national market system stocks, other than those with a share price below $1.00.
  • This proposal is intended to prevent sub-penny pricing from being used by some market participants to "step-ahead" of customer limit orders for an economically insignificant amount. This "sub-pennying" could, over time, discourage investors from placing limit orders, which are an important source of market liquidity.

4. Market Data

  • Regulation NMS would amend the existing arrangements for disseminating market data in order to better reward SROs for their contributions to public price discovery, as well as implement most of the recommendations of the Commission's Advisory Committee on Market Information.
  • Under existing rules and joint industry plans, the trades and best quotes in thousands of listed and Nasdaq stocks are made available on a real-time and consolidated basis.
  • The proposal would replace the current plan formulas for allocating revenues derived from market data fees to the SROs, which are based solely on the number of trades or share volume reported by an SRO. This method of allocation has led to serious economic and regulatory distortions, creating incentives for "print" facilities, "wash" trades, and "shredded" trades. In addition, those markets that generate the highest quality quotes (i.e., the best prices and the largest sizes) are not necessarily rewarded.
  • In general, the proposed new formula would divide market data revenues equally between trading and quoting activity, in order to reward markets that publish the best accessible quotes.
  • The proposal also includes a number of improvements that were recommended by the Advisory Committee on Market Information. For example, the proposal would broaden participation in plan governance by creating advisory committees composed of non-SRO representatives. Such committees would help assure that interested parties have an opportunity to be heard on plan business, prior to any decision by the plan operating committees.
  • In addition, the proposal would authorize market centers to distribute their own additional data, such as limit order books, separate from other markets, as well as establish uniform standards for the terms of such distribution.

Comments on these proposals should be submitted to the Commission within 75 days of publication in the Federal Register.

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The full text of the detailed release concerning the proposals has been posted on the SEC Web site at


Last modified: 3/3/2004