(FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.)
Is the Reg NMS debate re-opened?
On July 21, 2025, the US Securities and Exchange Commission said it would host a roundtable in September to discuss trade-through prohibitions in the National Market System stock and listed options markets.
“Reg NMS and its Rule 611 have not served investors or broker-dealers well, given the market distortion and resulting gamesmanship by those that seek to take advantage of the Reg NMS structure,” SEC Chairman Paul Atkins said in the release. “It is incumbent upon the Commission to give the public an opportunity to weigh in on items in our rulebook that deserve a refresh, and I look forward to the input we will receive on various aspects of the Rule 611 trade-through prohibition applicable to NMS stocks and the analogous NMS plan trade-through prohibition applicable to listed options.”
The backstory is that the SEC adopted Regulation National Market System in 2005 to enhance market transparency and enable more competition among market operators, with the broader aim of protecting end-user investors. Reg NMS has four main components: the order protection rule, which prohibits orders being ‘traded through,’ or executed at a worse price; the access rule; the sub-penny rule; and market data rules.
The full and final Reg NMS ruleset is 523 pages.
What’s interesting now is that Atkins has never liked Reg NMS. Two decades ago he joined fellow SEC commissioner Cynthia Glassman in dissenting on its adoption, mostly focusing on the trade-through rule.
“We do not believe that Regulation NMS is the appropriate policy choice,” Glassman and Atkins wrote. “Instead of facilitating a national market system in which technology, competition and innovation will produce benefits for all investors, Regulation NMS saddles the marketplace with anachronistic regulation that reduces investor choice and raises investor costs … Far from enhancing competition, we believe that Regulation NMS will have anticompetitive effects.”
A Traders Magazine article published in 2005, when the Reg NMS debate was raging, considered both sides of the argument. “Is Reg NMS good for competition or not?” the article asked. “How Reg NMS will affect U.S. capital markets may remain an open question for the months to come while the industry adapts to its new requirements.”
It probably took years rather than months for the question to be answered, but 20 years later, the general consensus is that Reg NMS did, on balance, improve competition. That is borne out by the greatly increased number of market operators, a reduction in trading costs, and more access to data. Of course, no ruleset is perfect, and Reg NMS critics aren’t wrong when they cite increases in market fragmentation and complexity, and more opportunities for certain market participants to game the system.
It will be interesting to see how deeply the September roundtable dives into Reg NMS. In a recent note to clients, law firm Sidley said: “markets have evolved significantly since the (order protection) rule’s adoption. With the proliferation of trading venues and advanced order types, some observers question whether the rule still promotes its original goals or instead leads to adverse outcomes such as increased complexity and potential gaming of the rule’s mechanics.”
One burning question is: If Atkins had his 2005 Reg NMS vote over again, would he still dissent?
When contacted by Traders Magazine with this query, an SEC spokesperson only referred us to the July 21 release announcing the roundtable.
