Electronic Market Microstructure

The new National Market System Regulation (Reg. NMS) is finalized and dates are being set for implementation deadlines. It seems like it has been long road that we have traveled to get to where we are. But considering the mandate of Reg. NMS was first spelt out originally back in 1970, under §11a of the Securities Exchange Act of 1934, and the confused state of the pan-European efforts on unifying their own financial system, the US is doing  a relatively “good” job despite different opinions on how Reg. NMS should be implemented.

Since the original 1970 notion of a NMS, the market and its supporting technologies have naturally changed dramatically due partially in a “renaissance” in technology and the realization of a global economy. Due to this, the SEC has proposed updated high-level regulations to address these profound progressions, which include the following:

• A uniform trade-through rule for both exchange-and Nasdaq-listed securities;

• A uniform market access rule with de minimis fee standard;

• A sub-penny rule prohibiting market participants from displaying sub-penny quotes except for securities with a share price of below $1.00;

• A modified system for the dissemination and pricing of market data; and

• New Regulations NMS, which would consolidate the existing NMS, rules under §11A of the Exchange Act.

So the overall objectives are set and complaints form market participants of possible unfair changes continue to go on. Some are saying the new regulation does not go far enough to renovate the current system, while others say the regulation lacks any kind of global regulatory reassessment of the capital markets.

Having said all of that, we are coming near the task at hand, becoming compliant. This will not be a simple task, it will include the following tasks; (i) business strategy, (ii) corporate alignment & sponsorship, (iii) funding & metrics of success, (iv) planning, (v) resource and provisioning, (vi) gap analysis, (vii) technology strategy: buy vs. build vs. renovate (viii) execution, (ix) testing & rollout, (x) implementation, and (xi) performance and compliance valuation. and roadmap the existing market structure and associated technologies and how they might be affected by the proposed new Reg. NMS changes. Admittedly these changes could be both good and bad for existing technologies; on one hand a required technology replacement or renovation may add value beyond the NMS requirement, or it can be considered a unnecessary regulatory gateway that degrades the overall performance and pureness of the particular functionality.