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Regulation NMS
How Might it Impact Trading?
August 2006
Aran Murphy
Research Analyst
The SEC's Regulation NMS (or Reg NMS, for "National Market System"), is expected to be fully implemented in October of 2007 and will change the rules governing when equity trades originating on one exchange can be executed on another.
The thinking of regulators was — and remains — that the integration of American trading centers into a National Market System (NMS) will lead to improved price discovery. The better the price information, the better the execution for investors and lower transaction costs overall.
In this Russell Research piece, Aran Murphy, Broker Research Analyst, explains four main provisions of Reg NMS — The Order Protection Rule, Intermarket Access, Penny Increment Pricing, and Price Publication Rules. He also looks at arguments for and against the regulation, including how, paradoxically, an "inferior price" trade can at times actually work in a client's interest.
The SEC rules may change market maker behavior, but they are not likely to require a change in strategies for Russell's mainly electronic, multi-venue, agency trading model. Trading tools, in the form of Execution Management Systems, allow Russell traders to optimize execution flow for price while minimizing speed and liquidity concerns.
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