• Feb
  • 03
  • 2006
  • 6:05 AM

Wanted: plain-English summary of Reg. NMS. Or a good guacamole recipe.

By: Ray Pellecchia
File Under: NYSE

A correspondent writes:

hi - i'm a non-trader working at a sell-side securities firm. i keep hearing about "the impact of reg nms," and i get that it comes in four major pieces, but i was wondering if you can explain both what the overall thrust of this regulation is, and what (in plain english) each of the four major pieces mean.

i understand there are going to be revisions to the "trade through rule", "order protection rule," sub-penny pricing, and a "market data rule."

most confusing to me is the order protection rule, trade through, and market data rule (in that order). – Alex F.

p.s. thanks for the blog...it's great!

Alex – Thanks for the kudos. And thanks for the question, though it’s a toughie, and I have to punt.

Your humble blogger hates to punt. Watching the game, on fourth down, your humble blogger always jumps up and yells, "JUST GO FOR IT!" while knocking over the guacamole dip, only to collapse dejectedly back onto the couch when the punt team trots out.

But punt I must here. Wouldn’t be appropriate for me to try to re-cast what the SEC is doing.

Fear not. Reg. NMS is 523 pages, but have you taken a look at it? The overview that starts on page 21 is as plain as I think it can get, and the further you go into it, the more detailed it gets. Worth checking out if you haven't already.

Beyond that, I did a quick Web search and found no shortage of analyses, but also a shortage of factual information and understanding of how markets actually work.

So I punt to the blogosphere, too: anybody seen a simple, disinterested summary of NMS for Alex? Wing it in. Or send along your favorite guacamole recipe in time for the Big Game this weekend.

Comments

The Hybrid does not allow for "best price" descovery. Thereby disadvantaging investors. -- R. DeFilippo

Hybrid provides investors with choice. Investors who prefer speed over price discovery can send orders that will trade at the bid or offer, auto-ex. They may well get both speed and price improvement, however, through specialists using their algorithms via the API to provide systemic price improvement, or from trading-floor brokers who use discretionary e-Quotes to trade at more aggressive prices than the published bid or offer.

Investors may also choose the auction for price discovery. Institutional-sized orders handled by trading-floor brokers will continue to seek out the best trading opportunities via the agency-auction model. Retail customers may choose price discovery through the use of new order types such as Auction Limit or Auction Market orders, both of which quote rather than trade automatically in the hope of attracting a better price.

In all cases, the NYSE model will continue to provide an environment for orders to compete against each other to produce the best pricing possible for investors and listed companies. -- RP

by R. DeFilippo on February 3, 2006 12:36 PM

does not allow floor brokers to be on parity... -- R. Bruno

Floor brokers who use e-Quotes retain the right to trade on parity. In Hybrid, displayed interest always trades before non-displayed interest. This is true of electronic reserves and verbal bids and offers not reflected in the quote. In addition, CAP orders provide brokers the opportunity to trade along with electing volume to the extent of availablity liquidity.

e-Quotes provide the opportunity to layer interest and to have a reserve and provide the opportunity for participation in both electronic and auction trades. In a later phase of Hybrid, discretionary e-Quotes will allow floor brokers to use e-Quotes with pricing discretion and to react to incoming orderflow. -- RP

by R. Bruno on February 3, 2006 1:58 PM

Ray, to answer your question honestly, I have to say you've stumped me as well. The best summary available of the darn report is right on the front page of it! It's even titled "Summary," if that weren't obvious enough. By the way, I would have a guacamole recipe ready for you right now, but I suppose you wouldn't want it anymore. The Steelers won, which I'm sure you already know.

However, I do have some more thoughts for you. Let's discuss insider trading. I'd like to discuss it's history, why it's considered illegal by the government, where it stands today, your personal views on it, and finally my own views on insider training. Since I've already started the discussion, it's your turn to input. So please, go ahead. I hope we can get somewhere beneficial for all of us.

by Asad Panjwani on February 6, 2006 8:43 AM

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