US exchanges, brokers and dealers are struggling to meet the October deadline for compliance with Reg NMS – a US version of Europe’s MiFID – which will change the way equities are quoted and traded, writes Michael Imeson.

What is it?

Regulation National Market System (Reg NMS) modernises the regulatory structure of the US’s National Market System – the system of multiple exchanges and electronic communication networks (ECNs) for quoting and trading securities. The regulation is intended to enhance share price transparency and encourage more electronic quoting and trading of shares, thereby creating more efficient and fairer equity markets.

It affects exchanges, ECNs, alternative trading systems, brokers, dealers, institutional and retail investors and technology providers. Reg NMS is, in short, the twin sister of the EU’s MiFID (Markets in Financial Instruments Directive), though they are not quite identical (but equally ugly, some might say).

Who dreamed it up?

The Securities and Exchange Commission (SEC), which approved the regulation in April last year. The deadline for compliance with the main parts was to have been last month, but it was recently extended to a series of five dates beginning this October and running through to October 2007.

What will be its main provisions?

There are four:

  • Order protection: Rule 611. Requires trading centres to obtain the best prices for investors when trades are executed by automated systems.

 

  • Inter-market access: Rule 610. Improves investor access to trading centres’ quotations.

 

  • Sub-penny pricing: Rule 612. Prohibits market participants from displaying quotations in NMS stocks priced in increments of less than $0.01, unless the quotation is less than $1.

 

  • Market data: measures to widen the availability of market data to investors.

 

What’s in the small print?

The document runs to 523 pages.

What does the industry say?

“The biggest impact on the US equity markets is that floor-based trading will become a thing of the past,” says Jodi Burns, a senior analyst at research company Celent. This is because it makes automated trading so much more attractive to investors than manual trading.

While investors will undoubtedly benefit from the regulation – as will connectivity providers, such as extranet, direct market access and FIX engine vendors – exchanges and market participants are sweating to meet the implementation deadline.

How much will it cost?

Firms are cagey, but admit they are investing heavily in IT, new business models and compliance.

What do the regulators say?

The SEC says: “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 modernisation to reflect these changes is inescapable.”

The law of unintended consequences

The SEC’s main intention was for investors to be the big beneficiaries, but this may not be the case. “The typical retail investor will likely see no difference in the way he or she participates in the equity markets, and the typical institutional investor’s job just got harder,” says Ms Burns.

Although New York Stock Exchange is putting a brave face on the issue and says it is embracing the reforms, it and other exchanges that still rely heavily on manual trading will have their work cut out to adapt. They will be forced to adopt or cease to exist.

Meanwhile, ECNs and electronic exchanges such as Nasdaq are likely to prosper at their manual competitors’ expense.

Could we live without it?

Yes, but if Europe’s got one, the US might as well have one too.

Rating: 4

Rating scale: 5 = Essential 4 = Useful 3 = Neutral 2 = Unnecessary 1 = Waste of time

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