No More Secrets
By Lisa Dallmer

The sound bytes are everywhere … faster executions, automatic trading, Reg NMS. Not sure what the details of Reg NMS really are? Well, let's not gloss over it; let's itemize the market structure changes in more detail.

The regulatory management of market structure is done through Securities and Exchange Commission (SEC) rule making, and there are certain unique rules applicable to either broker dealers or exchanges depending on the role each plays when routing and filling customer orders. Reg NMS is a significant rewrite of certain rules. If you can get past both the legalese and the broad generalizations, you can start to see how the equity markets will look in the future. And that is pretty exciting indeed.

What Is Market Structure
The "NMS" in Reg NMS stands for National Market System. The National Market System is the rules of engagement for order equity flow interaction, execution and trade reporting in the U.S.; in other words, it is how equity trades get done on Wall Street.

The finer points of market structure have become increasingly visible over the past 10 years, as technology and competition for handling orders and trades has kicked into high gear. Seeking to improve their competitive positions in this era of technological change, brokers, exchanges and buy-side firms all marched down to Washington, D.C., in recent years, lobbying for an overhaul of several critical rules of engagement. Each had a different opinion about how to modify the rules, and after much deliberation, public hearings, floggings and over 700 comment letters (some verbose-paint-drying manuscripts, others are engaging editorials complete with sport analogies and humor), the SEC took action. By a 3-2 vote taken on April 6, 2005, the SEC commissioners approved the adoption of new substantive rules designed to modernize the structure of the U.S. equity markets.1 Aside from the Order Display Rules adopted in 1996, these are the first significant revisions to the NMS since it was established in 1975.

In large part, Reg NMS can be thought of as new plumbing to an old house. Most of the heavy lifting is being handled by the exchanges and broker dealers, as they are the portal to the equity markets for fund managers and individual investors.

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