Regulation NMS

Regulation NMS — short for Regulation National Market System — was adopted by the Securities and Exchange Commission in 2005 under authority granted by the Securities Exchange Act of 1934. It replaced a patchwork of earlier rules and sought to modernize the structure of the U.S. equity market in response to the proliferation of electronic trading venues and increasing market fragmentation. Reg NMS comprises four main rules: the Order Protection Rule, the Access Rule, the Sub-Penny Rule, and the Market Data Rules.

The Order Protection Rule (Rule 611) is the most widely discussed component. It requires trading centers — exchanges, ATSs, and broker-dealers — to establish policies preventing trade-throughs: transactions that execute at a price inferior to the best protected quotation displayed by another trading center. For example, if the NYSE is displaying the national best offer at $50.00 and a broker routes an order to Nasdaq where it fills at $50.05, that is a trade-through in violation of Reg NMS. The rule effectively mandates that the consolidated best bid and offer (NBBO) be respected across all trading venues.

The Access Rule (Rule 610) requires trading centers to provide fair and non-discriminatory access to their quotations and caps the fees that can be charged for accessing protected quotations at $0.003 per share. This fee cap created the economic foundation for the payment-for-order-flow model used by exchange maker-taker pricing programs and, by extension, PFOF arrangements between exchanges and broker-dealers.

The Sub-Penny Rule (Rule 612) prohibits market participants from displaying quotations in increments smaller than one cent for most securities, preventing a race-to-the-bottom where firms would undercut each other by infinitesimally small price increments.

The Market Data Rules (Rules 601 and 603) govern how consolidated market data — the public feed of quotes and trades across all exchanges — is collected, processed, and distributed. They require exchanges to participate in national market system plans for consolidated data dissemination (the CTA Plan and UTP Plan) and establish revenue-sharing formulas that redistribute data fees among exchanges based on their contribution of quotes and trades.

Reg NMS has been both credited with increasing competition and electronic trading efficiency and criticized for unintended consequences, including increased market fragmentation and the complexity that fragmentation creates for investors and regulators alike. The SEC has revisited Reg NMS multiple times, most notably with a comprehensive equity market structure reform proposal released in 2022 that would update the Order Protection Rule's tick sizes, minimum pricing increments, and best execution requirements.