NMS Approval Creates Questions

Industry observers are awaiting the full specifications of the Securities and Exchange Commission's proposed reform of US equity markets, Regulation National Market System, which the SEC approved last week.

Reg NMS covers four areas: the Order Protection Rule, designed to outlaw execution at anything less than the best price; the Access Rule, which establishes uniform access and fees across different markets; the Sub-Penny Rule, which establishes a uniform price increment of no less than a penny; and the Market Data Rules, which will change the way data is distributed and paid for.

The amendments included in Reg NMS will correct the "seriously flawed" current formulae for distributing market data revenues among exchanges by dividing revenues equally between trading and quoting activity, according to Annette Nazareth, director of the market regulation division of the SEC. Nazareth says the current formulae encourage wash trades and trade shredding because of their focus on the number of trades executed on a venue rather than just on quoting.

The new rules are also intended to promote wider availability of data by allowing US exchanges to formulate their own services for distributing their data, as exchanges in other regions are able to do—although they still have to distribute their best bid and offer via the Consolidated Tape Association's feed.

However, critics point out that the new rules do not do anything to address fees charged for access to market data, which some still believe to be too high.

Nazareth rejects the idea that the commission should deal with the issue of fees before addressing the revenue sharing formulae. But she does admit that forcing exchanges to distribute via one consolidator prevents fee levels from being determined by market forces.

The Sub-Penny Rule will come into effect in July, while the others will come into force between April and July 2006.