The SEC amended Regulation NMS in order to foster "a competitive environment for the dissemination of NMS information via a decentralized consolidation model with competing consolidators." The amendments expand national market system information required to be collected, consolidated and disseminated "with respect to quotations for, and transactions in, national market system stocks."

The amendments (i) expand the content of generally available NMS market data and (ii) introduce the ability of "competing consolidators" to replace the current delivery system, in which data flows through "securities information processors" that have a monopoly on the distribution of NMS data. The adopted amendments differ from the original proposal (see previous coverage) in that they, among other things, (i) do not include the elimination of order protection for smaller round lot quotations and (ii) follow a phased implementation approach.

EXPANSION OF NMS DATA

The SEC provided a chart illustrating the extent to which the definition of NMS data has been amended (and largely expanded). Among the principal changes are the following:

  • a "round lot" continues to be defined as 100 shares for securities priced at no more than $250 per share; for shares priced above that amount, the term "round lot" includes fewer shares: (i) 40 shares, if the share price is between $250 and $1,000, (ii) 10 shares, if the share price is between $1,000 and $10,000, and (iii) 1 share for securities priced above $10,0000;
  • to the extent that regulatory requirements are based on a trade being in a "round lot," as opposed to an odd lot, the numbers above will define a round lot;
  • NMS data will now include not only the "best bid and offer," but also data as to the aggregate depth of book at five prices away from each of the highest bid and lowest offer; and
  • a greater amount of information beyond price and size must be provided, including additional information as to auctions.

Under the final amendments, over-the-counter bulletin board quotation and transaction data, as well as concurrent use data (i.e., corporate bond and index data), is now excluded from the definition of NMS data. The SEC explained that such securities are not "NMS securities" and, in any case, the only regulated provider of such data now is FINRA and, thus, there is no urgent need for a rule as to the consolidation of such data.

DATA DELIVERY

Currently, basic NMS data is provided through "securities information processors," which are monopolies. There is a widespread view that this data is both insufficient as to its scope and delivered in an inefficient manner (see footnotes 26-28 of the release and accompanying text). The SEC's Regulation NMS amendments deal with the first problem by expanding the scope of what is considered basic data (as discussed above), and with the second problem by establishing a decentralized system in which competing (data) consolidators obtain market data and remarket it to their clients. Under the decentralized consolidation model, each self-regulatory organization (e.g., each national securities exchange) is required to make market data available to competing consolidators and "self-aggregators" (e.g., brokers, dealers, SROs, and investment advisers registered with the SEC) so that consolidated market data can be generated. Specifically, competing consolidators will "collect, consolidate, and disseminate" consolidated market data, and self-aggregators will collect and consolidate market data "solely for internal use."

It is contemplated that competing consolidators may provide different levels of service to their clients; e.g., offer all of the basic NMS data, a subset of the NMS data, or all of the basic NMS data and additional data on top of that. Competing consolidators would also be required to register with the SEC under new NMS Rule 614. In addition, the Regulation NMS amendments subject competing consolidators to certain fairness, promptness, accuracy and reliability standards. Certain competing consolidators with sufficient market share will also be subject to Regulation SCI.

FEES

Although the data delivery system adopted by the SEC uses competitive forces to improve data delivery and potentially reduce costs, the price at which the exchanges sell data to the competing consolidators will be established through a regulatory process.

The final rule will go into effect 60 days after its publication in the Federal Register.

Commissioner Statements

SEC Chair Jay Clayton stated that the phased implementation approach "should allow for a successful transition to the new infrastructure framework."

SEC Commissioner Hester Peirce said the amendments will facilitate greater availability and faster dissemination of market data. She said that the amendments do not address larger concerns that (i) the SEC remains a "market data price referee" with respect to core data and (ii) the benefits of NMS Rule 611 ("Order Protection Rule") do not outweigh the costs. Commissioner Peirce noted that she would have supported measures limiting the costs for competing consolidators (e.g., exempting such entities from Regulation SCI).

SEC Commissioners Elad Roisman and Caroline Crenshaw asserted that the amendments are not a "panacea." Mr. Roisman emphasized that the success of the amendments in achieving their objective relies on "active and frank engagement from those responsible for the building and programming of the systems the amendments envision [which] will be vital to keep these efforts on track." Mr. Roisman recommended, among other things, that the SEC (i) hold an annual roundtable discussion that assesses the progress of the implementation and effect of the amendments, and (ii) revisit its 2004 SRO concept release regarding SRO fees for market data. Commissioner Crenshaw emphasized the importance of "monitor[ing] the effects of the rule to ensure that it is benefitting investors" and identifying "areas where we need to continue to modernize."

Commissioner Allison Herren Lee highlighted unaddressed recommendations from commenters that the SEC adopt minimum performance or content standards for the data disseminated by competing consolidators. Additionally, Ms. Lee stated that the SEC should consider more holistically how best execution is determined and achieved.

Commentary Steven Lofchie

The comments of Commissioner Lee and of Commissioner Peirce reflect the very different economic philosophies of the two commissioners.

Commissioner Lee criticizes the rule amendments for being insufficiently prescriptive as to the regulation of competing consolidators. She is not satisfied that competition among consolidators that are required to provide service level information is sufficient to motivate the consolidators to provide a good product; she wants the SEC to regulate more specifically the contents of that product.

By contrast, Commissioner Peirce enthusiastically supports the rule changes and regrets that the SEC does not go further in examining the trading procedures mandated by Regulation NMS, which she argues have a "distortive effect" on trading.

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