|  | | 2005 News and Press Releases | | |
HEADLINE NEWS:
Reg NMS's Unintended Consequences
Staff Writer – Securities Industries News
Securities Mosaic. November 14, 2005
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EXCERPT: The Securities and Exchange Commission's Regulation NMS, adopted last April, was designed to modernize the regulatory structure of the U.S. equity markets. But like other rules governing the securities industry, such as the order directing the implementation of decimal pricing over four years ago, the rollout of Reg NMS will most likely yield some unexpected results. Just as the move to decimal pricing--intended to reduce investor confusion--resulted in spreads so narrow that the profitability of the market-making industry was significantly challenged, this new regulation will also likely result in unintended consequences for the securities industry and its participants.
Three of these probable outcomes: increased market fragmentation, considerable systems-implementation costs and very large compliance-related expenditures. Because the rules that comprise the new regulation are slated to take effect next year, now is the time for firms to plan. Decisions regarding details about how the regulation will be implemented are currently being made, so firms should make their voices heard either individually or through industry associations. Fragmentation -- The order-protection rule of Reg NMS will protect the best bids and offers of each exchange, Nasdaq and the NASD's alternative display facility (ADF) so that if those quotations are automated, they cannot be traded through. As a result, competition for the top-of-book position will be intense--and even greater in larger market centers such as Nasdaq, where many market makers and electronic communications networks (ECNs) will be competing for the coveted "protected" spot. This is likely to spur market participants to look to other market centers with fewer competing quotations, such as the ADF or regional stock exchanges, to provide more opportunities for their quotations to be at the top of book. Two recent developments--the formation by the Boston Stock Exchange, Credit Suisse First Boston, Fidelity Brokerage, Citigroup and Lehman Brothers of the Boston Equities Exchange (BeX) and the purchase of a stake in the Philadelphia Stock Exchange by Citigroup, CSFB, Morgan Stanley and UBS--appear to be in part responses to the new Reg NMS world. These moves followed Knight Capital Group's acquisition of Attain ECN in the spring. Knight could use Attain to disseminate quotes either through the ADF or another exchange to increase its odds of being at the top of book. |
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