The 1975 amendments, also called the National Exchange Market System Act, directed the securities and exchange commission to work with the industry toward establishing a national market system together with a system for the nationwide clearance and settlement of securities transactions.
SEC
The amendments are direct SEC to enable the establishment of a National Market System.
National market system plan
A national market system plan (or NMS plan) is a structured method of transmitting securities transactions in real-time. In the United States, national market systems are governed by section 11A of the Securities Exchange Act of 1934.
In addition to processing the transactions themselves, these plans also show the price and volume data for these transactions. Information on each securities trade is sent to a central network at the Securities Industry Automation Corporation (SIAC) where it is then distributed and consolidated with other trades on the same "tape".
Securities Industry Automation Corporation (SIAC)
The Securities Industry Automation Corporation (SIAC) is a subsidiary of the NYSE Euronext. Its purpose is to provide technical services for the exchanges themselves, members and other financial institutions. In this role, SIAC provides the computers and other systems required to run the exchanges. It also owns communication lines and hardware that provide real-time quotes and transaction information to all market participants from the Consolidated Tape/Ticker System (CTS), Consolidated Quotation System (CQS), and Options Price Reporting Authority (OPRA).
National Market System (NMS)
The National Market System (NMS) is the national system for trading equities in the United States.
Regulation NMS (or Reg NMS — Regulation National Market System) is a regulation promulgated and defined by the United States Securities and Exchange Commission (SEC) as "a series of initiatives designed to modernize and strengthen the national market system for equity securities. " It was established in 2007 and seeks to foster both "competition among individual markets and competition among individual orders" in order to promote efficient and fair price formation across securities markets. In 1972, before the SEC began its pursuit of a national market system, the market for securities was quite fragmented. The same stock sometimes traded at different prices at different trading venues, and the NYSE ticker tape did not report transactions of NYSE-listed stocks that took place on regional exchanges or on other over-the-counter securities markets. This fragmentation made it difficult for traders to compare prices of stocks. In 1975, Congress authorized the SEC to facilitate a national market system.
Formation of Reg NMS
In 2005, the rules promoting the national market system were consolidated into REG NMS. Some of the more notable rules include:
- Order Protection (or Trade Through) Rule - provides intermarket price priority for quotations that are immediately and automatically accessible (Rule 611)
- Access Rule - addresses access to market data such as quotations (Rule 610)
- Sub-Penny Rule - establishes minimum pricing increments (Rule 612)
- Market Data Rules: a) Allocation amendment – institutes a new Market Data Revenue Allocation Formula, b) Governance amendment – creates advisory committees, c) Distribution and Display Rules – governing market data (Rule 600, 601 & 603).
The order protection rule has generated controversies since it requires traders to transact on a trading venue at the lowest price rather than on a venue that offers the quickest execution or the most reliability. Thus, some have described it as an improper government intervention into private business affairs. Defenders of the rule argue that it really just requires what brokers should be doing if they are acting in their customer's best interests. Still, others have argued that the rule is too lax because it only protects the quotes at the top of the book.