RegNMS

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Regulation NMS (National Market System) is a series of initiatives that amend a portion of the original Securities and Exchange Act of 1934 (11A), and includes new substantive rules that are designed to modernize and strengthen the regulatory structure of the U.S. equity markets.

REG NMS is the biggest change in US securities law since 1975, updating and revising more than 10 major sections of the code. The most significant aspect is a new requirement that all market participants route their orders to the trading venue that offers the best price. This “order protection rule” replaces an older “trade-through rule.”

Four main rules/amendments made by the S.E.C. in Regulation NMS are outlined below:

RULE 1: Order Protection Rule (611)

Requires trading centers to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the execution of trades at prices inferior to protected quotations displayed by other trading centers, subject to an applicable exception. To be protected, a quotation must be immediately and automatically accessible.

RULE 2: Access Rule (610)

Requires fair and non-discriminatory access to quotations, establishes a limit on access fees to harmonize the pricing of quotations across different trading centers, and requires each national securities exchange and national securities association to adopt, maintain, and enforce written rules that prohibit their members from negation in a pattern or practice of displaying quotations that lock or cross automated quotations.

RULE 3: Sub-Penny Rule (612)

Prohibits market participants from accepting, ranking, or displaying orders, quotations, or indications of interest in a pricing increment smaller than a penny, except for orders, quotations, or indications of interest that are priced at less than $1.00 per share.

RULE 4: Amendments to Market Data Rules (603)

Updates the requirements for consolidating, distributing, and displaying market information, as well as amends the joint industry plans for disseminating market information that modify the formulas for allocating plan revenues and broaden participation in plan governance.

Sub-penny and Market Data Rules are in effect. While Access Rule and Order Protection Rule compliance requirements will be mandatory October 2007 onwards.

Important dates:
• March 5, 2007: Full operation of trading centers that intend to utilize trade-through protection under Rule 611 during the Pilot Stocks Phase (July 9-August 20, 2007) and the All Stocks Phase (August 20-October 8, 2007).
• July 9, 2007: Start of full industry compliance with Rules 610 and 611 beginning with 250 National Market System (NMS) stocks (100 New York Stock Exchange stocks, 100 NASDAQ stocks and 50 American Stock Exchange stocks).
• August 20, 2007: Start of full industry compliance with Rules 610 and 611 for remaining NMS stocks.
• October 8, 2007: Completion of phased-in compliance for Rules 610 and 611.