Regulation NMS: One Rule to Bind Them All

April 18, 2005


New York, NY, USA April 18, 2005

Celent Communications evaluates the impact of Regulation NMS on various members of the equities trading community and identifies connectivity providers as the biggest beneficiaries. It also finds that NYSE and block trading platforms are the biggest victims.

On April 6, 2005, the SEC finally put to rest the 15-month long debate over the future of the US equity markets. By the weakest of margins, the SEC voted to approve Regulation NMS, a set of sweeping market reforms intended to modernize the regulatory structure of the National Market System created in the 1970s. The effects of Reg NMS will be felt by exchanges, ECNs, alternative trading systems, brokers, dealers, institutional and retail investors, and the technology vendors that provide the links between all these puzzle pieces. In a new report, , Celent provides an analysis of the winners and losers, and predicts what events may arise in the future.

The report begins with a contextual overview of the problems Regulation NMS is intended to solve. Problems such as inaccessible markets, uneven regulation and technology, and opaque market data distribution systems are discussed. Celent痴 analysis then moves to the specific details of the four major reforms embedded in Regulation NMS and provides a granular explanation of how trading practices will change as a result. The report then examines the specific impact of these rule changes on exchanges, ECNs and block trading platforms, front-end technology providers, the sell-side and buy-side communities, connectivity providers, and market data vendors.

Celent believes that connectivity providers, such as extranet, direct market access, and FIX engine vendors, are the biggest beneficiaries of Reg NMS. Connectivity becomes increasingly important as the markets become more electronic and more formally linked. While the SEC痴 intention was for investors to reap the biggest benefits, this unfortunately is not the case. The typical retail investor will likely see no difference in the way he or she participates in the equity markets, and the typical institutional investor痴 job just got harder.

Celent痴 analysis also predicts that life for the manual exchanges, like the NYSE and some regional exchanges, will be more difficult going forward. They will be forced to adopt electronic trading capabilities or cease to exist. ECNs and electronic exchanges will be fine in the new Reg NMS world, and will likely reap the benefits of the changes forced upon their manual competitors.

According to Jodi Burns, senior analyst in Celent痴 Securities & Investments group and author of the report, "Ultimately, the biggest impact Reg NMS will have on the US equity markets is that floor-based trading will become a thing of the past. Regardless of who individually wins and loses under Reg NMS, overall the equity markets will improve and modernize as they stop straddling the worlds of manual and electronic trading and embrace wholeheartedly the benefits of technological innovation."

The 30-pagereport contains four figures. A table of contents is available online.

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Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

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Table of Contents


New York, NY, USA April 18, 2005

Regulation NMS

Return to report Abstract


Executive Summary 3
Introduction 5
What's Wrong With the Markets? 7
Uneven Regulation 7
Market Access 8
Locked and Crossed Markets 9
Market Data 10
Sub-Penny Quoting 11
Regulations NMS Rules 13
Order Protection Rule 13
Market Access 15
Market Data 17
Sub-Penny Quoting 21
Impact of Regulation NMS 22
Effect on Exchanges 22
Effect on Trading Platforms 23
Effect on Front-End Systems 24
Effect on Sell-Side and Buy-Side 25
Effect on Connectivity Providers 27
Effect on Market Data Vendors 27
Looking Ahead 29
Objectivity and Methodology 30

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