In 2005, the SEC adopted Reg NMS (fully implemented/ enacted in 2007), with a series of initiatives designed to modernize and strengthen the national market system ("NMS") for equity securities; the initiatives included (1) a new order protection rule (#611), which established intermarket protection against trade-throughs for all NMS stocks. A trade-through occurs when one trading center executes an order at a price that is inferior to the price of a protected quotation, often representing an investor limit order, displayed by another trading center. Only quotations that are immediately accessible through automatic execution would be protected. (2) a new access rule (#610), which promoted fair and non-discriminatory access to quotations displayed by NMS trading centers through 3 ways viz. (a) enabling the use of private linkages offered by a variety of connectivity providers, rather than mandating a collective linkage facility such as ITS, to facilitate the necessary access to quotations; (b) limiting the fees that any trading center can charge (or allow to be charged) for accessing its protected quotations to no more than $0.003 per share and (c) requiring SROs to establish, maintain, and enforce written rules that, among other things, prohibit their members from engaging in a pattern or practice of displaying quotations that lock or cross the protected quotations of other trading centers. (3) a new sub-penny rule (#612), which established a uniform quoting increment of no less than one penny for quotations in NMS stocks equal to or greater than $1.00 per share to promote greater price transparency and consistency; if the price of the quotation is less than $1.00, the minimum increment is $0.0001. (4) amendments to the market data rules (#601, #603) and joint industry plans in order to (a) promote the allocation of revenues to the various SROs that more closely reflects the usefulness to investors of each SRO's market information, and (b) improve the transparency and effective operation of the Plans by broadening participation in Plan governance. (5) a reorganization of existing exchange act rules governing the NMS to promote greater clarity and understanding of the rules. In adopting the above, the commission was guided by a firm belief that one of the most important goals of the equity markets is to minimize the transaction costs of long-term investors and thereby to reduce the cost of capital for listed companies. Moreover reducing the transaction costs would also help secure the performance of the equity investments of millions of Americans who use them in their retirement or their childrens' education.
Effect of Reg NMS by 2011At least one paper in 2011 had examined the impact of reg NMS, specifically, the effects of the two new rules, the order protection rule and the access rule, on execution cost, execution speed and probability, price impact, and the efficiency of price discovery. It was shown that both the quoted and effective spreads increased, the quoted depth decreased, and the market quality index decreased after the implementation of Reg NMS. Spreads increased across all trade size categories and the largest trade size group exhibited the largest increase, indicating that Reg NMS had a greater adverse effect on larger traders. There was an increase in the price impact of trades and the dispersion of the pricing error. The results show that the order execution speed was slower in the post-NMS period for most market orders and marketable limit orders. The order fill rate decreased across all order types and the order cancellation rate increased for both marketable and nonmarketable limit orders after the implementation of Reg NMS. The decrease in the fill rate and the concurrent increase in the order cancellation rate may have occurred as more high-frequency traders (HFTs) split up orders to hide intentions and cancelled orders to maneuver around.
Reg NMS amendments in 2024Due to the technology and economics of trading having evolved signficantly since 2005, the below amendments were created to go into effect on Dec 2024. (1) sub-penny rule (#612): If a bid or offer, order, or indication of interest is priced equal to or greater than $1.00 per share, then the minimum increment will be (a) $0.01, if the Time Weighted Average Quoted Spread (TWAQS) for the NMS stock during the evaluation period was greater than $0.015; or (b) $0.005, if the TWAQS for the NMS stock during the evaluation period was equal to or less than $0.015. Further, as amended, minimum pricing increments for quotes and orders will be assigned on a semiannual basis using 3-months of trading data to calculate each NMS stock's TWAQS. TWAQS is defined as the average dollar value difference between the NBB and NBO during regular trading hours where each instance of a unique NBB and a unique NBO is weighted by the length of time that the quote prevailed as the NBB or NBO. (2) access rule (#610): For protected quotations priced $1.00 or more, a 10 mil/ share (1 mil = $0.0001) access fee cap is adopted. For NMS stocks priced under $1.00, the access fee will be capped to 0.1% of the quotation price. Also, all exchange fees charged, and rebates paid, for the execution of an order in an NMS stock would be determinable at the time of execution. (3) transparency of better priced orders: The definition of round lots which was never formally defined were defined so by the NMS amendements in 2020. A round lot would be defined for NMS stocks that have an average closing price on the primary listing exchange during the prior calendar month of: (a) $250.00 or less per share as 100 shares; (b) $250.01 to $1,000.00 per share as 40 shares; (c) $1,000.01 to $10,000.00 per share as 10 shares; and (d) $10,000.01 or more per share as 1 share. The odd-lot information definition per the NMS amendments in 2020 included (a) odd-lot transactions and (b) odd-lots at a price greater than or equal to the national best bid and less than or equal to the national best offer, aggregated at each price level at each national securities exchange and national securities association. This definition would now also include a new data field, (c) BOLO - for each NMS stock, the best odd-lot order to buy would mean the highest priced odd-lot order to buy that is priced higher than the national best bid, and the best odd-lot order to sell would mean the lowest priced odd-lot order to sell that is priced lower than the national best offer. For implementation of the round lot definition and the round lot indicator, the compliance date will be the first business day of November 2025. The compliance date for the odd-lot information definition will be the first business day of May 2026.
SEC stay on amendmentsOn Dec 12 2024, the SEC granted a partial stay of the amendments to Rules 610 and 612. The SEC did not stay the amendments to Rule 610(d), which requires that all exchange fees charged, and rebates paid, for executing an order of NMS stock be determinable at the time of execution.