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August 9, 2006

Two Years Later

By Michael Scotti

The debate has died down, but when the SEC released Reg NMS in early 2004, the national issue de jour was whether U.S. workers should be able to direct portions of their Social Security payments into private accounts. In that context, Reg NMS made sense: With that much new money expected to roll into the public markets, the mechanism for equity trading needed to be more electronic and efficient.

After all, we're talking about the nest egg of today's and tomorrow's retirees. Some of these baby boomers are doing a bad job of preparing for the golden years under difficult circumstances. Many pension funds are underfunded. And 401(k)s quite often are badly invested, with too much money in money markets and not enough in equities. Yet some fear stocks because they perceive them as a rigged game.

Indeed, even before the Reg NMS debate, institutional investors long argued that equity trading was costly and inefficient. So they started using direct market access tools. They also sought cheaper forms of execution because their own investors and fund boards pushed them there.

After some two years of debating Reg NMS, it is safe to say the big picture market structure questions have been answered. The industry has had plenty of time to hash out Reg NMS. Now comes the hard part: figuring out what it means in practical terms for equity traders and their firms.

Making a marketplace comply with a theoretical legal document is a daunting task. That's why brokerage firms need the SEC to provide additional clarifications on the rules of engagement under Reg NMS. Here at Traders Magazine, over the last few months, we've heard your fears about how Reg NMS will play out.

Therefore, our lead story in our Washington Watch section goes into detail about what areas of Reg NMS' order protection rule need further clarification. For example, when can an order be routed away from the marketplace with the best price and not violate the order protection rule?

And in our cover story, Executive Editor Peter Chapman delves into the critical issue of how Reg NMS will affect block trading. Chapman writes that the trade-through rule, 611, is obviously at the top of everyone's list. But rule 610, the so-called fair access rule that mandates linkages between markets, is also a critical issue for traders.

Traders Magazine understands the importance of Reg NMS for your shops. It is as critical to traders as better retirement planning is for millions of boomers.

Michael Scotti

Editorial Director