News

Reg NMS

News Brief
June 9, 2005

By: Cydney Posner

The SEC has posted the final rules for Reg NMS. Among other things (of which there are many--the release is 523 pages), Reg NMS includes the following:

  • requires trading centers to obtain the best price for investors when that price is represented by automated quotations that are immediately accessible (sometimes referred to as the "trade-through rule");
  • promotes fair and non-discriminatory access to quotations through a private linkage approach and establishes a limit on access fees to harmonize the pricing of quotations across different trading centers; and
  • establishes a uniform pricing increment of no less than one penny for orders, quotations or indications of interest equal to or greater than $1.00 per share, to provide greater price transparency and consistency.
There is a significant, rather testy, dissent posted by commissioners Glassman and Atkins, focusing principally on the trade-through rule. In their view, Reg NMS is at odds with Congress’ goal of protecting competition within the national market system: "With the adoption of Regulation NMS, the majority’s arbitrary notions and unfounded assumptions about how markets and investors should interact have taken unwarranted precedence over the interplay of competitive forces within the marketplace. We believe that Regulation NMS turns back Commission policy regarding competition and innovation and sets up roadblocks for our markets. The majority’s statutory interpretations and policy changes are arbitrary, unreasonable and anticompetitive. They are not supported by substantial evidence that, notwithstanding their anti-competitive effect, they are necessary or appropriate to further the purposes of the Exchange Act. The impetus for the Commission’s efforts to modernize the securities markets was the outdated Intermarket Trading System ("ITS") trade-through rule that impeded the ability of electronic trading centers to compete against floor-based exchanges in the listed market. It is ironic that the end result of this lengthy process is the imposition of even more complex trade-through restrictions, not only on the New York Stock Exchange, Inc. ("NYSE"), but on Nasdaq, a market in which competition is already robust. We believe the wiser and more practical approach to improving the efficiency of U.S. markets for all investors would have been to improve access to quotations, enhance connectivity among markets and market participants, clarify the broker’s duty of best execution, and reduce barriers to competition. In our view, these steps would improve market efficiency without exposing our markets to unforeseen consequences, redundant regulatory oversight and the concomitant compliance costs that will ultimately be borne by investors."

Anticipating these strong dissents, the adopting release notes that: "In recent years, the equity markets have experienced sweeping changes, ranging from new technologies to new types of markets to the initiation of trading in penny increments. The pressing need for NMS modernization to reflect these changes is inescapable. Thus, for the last five years, the Commission has undertaken a broad and systematic review to determine how best to keep the NMS up-to-date. This review has required the Commission to grapple with many difficult and contentious issues that have lingered unresolved for many years. We have devoted a great deal of effort to studying these issues, listening to the views of the public, and have carefully considered the comments contained in the record to craft rule proposals that would achieve the statutory objectives for the NMS. Given the wide range of perspectives on market structure issues, it is perhaps inevitable that there would be differences of opinion on the Commission's policy choices. The time has arrived, however, when decisions must be made and contentious issues must be resolved so that the markets can move forward with certainty concerning their future regulatory environment and appropriately respond to fundamental economic and competitive forces. The Commission always seeks to achieve consensus, but trying to achieve consensus should not impede the achievement of the statutory objectives for the NMS and should not damage the competitiveness of the U.S. equity markets, both at home and internationally. We believe that further delay is not warranted and therefore have adopted final rules needed to modernize and strengthen the NMS."

This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Cooley LLP, Cooley (UK) LLP, or any other affiliated practice or entity (collectively referred to as “Cooley”). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct or up to date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome. Do not send any confidential information to Cooley, as we do not have any duty to keep any information you provide to us confidential. This content may be considered Attorney Advertising and is subject to our legal notices.