Enhancing market efficiency, transparency, and investor protection
Summary
The US Securities and Exchange Commission (SEC) adopted amendments to Regulation National Market System (Regulation NMS or Reg NMS). Regulation NMS was adopted in 2005 to provide a comprehensive framework for the regulation of quotations, trading, and transaction reporting of NMS stocks – stocks for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, and which represent the vast majority of US equity trading volume. The amendments are intended to:
- reduce the minimum pricing increments for the quoting of certain NMS stocks;
- reduce the maximum fees that trading centers, including the New York Stock Exchange and Nasdaq, are allowed to charge investors for execution against protected quotations1 (access fee caps); and
- enhance the transparency of better priced orders.2
The SEC notes that the amendments will affect trading in NMS stocks. Consequently, the SEC expects that the amendments will affect a wide variety of market participants, including national securities exchanges, other trading venues, exclusive securities information processors (SIPs) and their data users, any future competing market data consolidators, broker-dealers operating order entry and order routing systems, and others who engage in the trading of NMS stocks, including investors such as asset managers.
Impact and Actions
1. Final Rule 612 of Regulation NMS— Minimum Pricing Increment. When the SEC adopted Rule 612 in 2005, it established the minimum pricing increments of $0.01 for quotations and orders of NMS stocks priced at, or greater than, $1.00 per share, and $0.0001 for quotations and orders of NMS stocks priced under $1.00 per share. The final amendments will establish a minimum pricing increment of $0.005 per share for quotes and orders priced $1.00 or more for NMS stocks that have a time-weighted average quoted spread (TWAQS) was equal to or less than $0.015. Otherwise, the minimum pricing increment for those stocks will remain unchanged. Minimum pricing increments for quotes and orders will be assigned on a semiannual basis using 3-months of trading data to calculate each NMS stock’s TWAQS.
2. Final Rule 610 of Regulation NMS— Fees for Access to Quotations. The amendments contain two components. First, the SEC will impose a 10 mil access fee cap across all trading centers for protected quotations priced $1.00 or more and an 0.1% fee cap for protected quotations below $1.00. Second, the SEC will require that all exchange fees and rebates be determinable at the time of execution. However, this requirement will not extend to fees and rebates of non-exchange trading centers.
3. Final Rule—Transparency of Better Priced Orders.
a. Round Lot Definition: The SEC had amended the definition of round lot in a prior rulemaking (Prior Rulemaking). The final rule accelerates the effective date of the modified definition, which defines a round lot for NMS stocks that have an average closing price on the primary listing exchange during the prior calendar month of: (1) $250.00 or less per share as 100 shares; (2) $250.01 to $1,000.00 per share as 40 shares; (3) $1,000.01 to $10,000.00 per share as 10 shares; and (4) $10,000.01 or more per share as 1 share. Because the SEC will be eliminating the universal round lot definition, it is requiring the primary listing exchange of each NMS stock to provide to the exclusive SIPs an indicator for each NMS stock to show what the stock’s new round lot size is. NMS stock round lot size will be reevaluated semi-annually.
b. Odd Lot Definition: The Prior Rulemaking had also final rule also accelerates inclusion of odd-lot quotations priced better than the national best bid or offer (NBBO) in NMS data. The amendments will also impose a new requirement on the exclusive SIPs to disseminate the accelerated odd-lot information. Finally, the SEC will require the dissemination of a standardized best odd-lot order.
4. Effective and Compliance Dates
The effective date of the Reg NMS amendments is December 9, 2024. Different aspects of the Reg NMS amendments have different compliance dates. The first business day of November 2025 represents the compliance date for the:
- minimum pricing increment amendments;
- access fee caps; and
- modified definition of round lot and the round lot indicator.
The compliance date for the requirement that exclusive SIPs be provided with all data necessary to generate odd-lot information, and the collection, consolidation and dissemination of odd-lot information by the exclusive SIPs will be the first business day of May 2026.
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1 A trading center’s protected quotations are generally the quotations that represent the best bid or best offer in that trading center.
2 Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders, Securities Exchange Act Release No. 101070 (Sept. 18, 2024), 89 Fed. Reg. 81620 (Oct. 8, 2024).
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