Reg NMS's Core Elements
Regulation NMS includes four key rules: the Order Protection Rule (trade-through prohibition), the Access Rule (fair access to market data and trading systems), the Sub-Penny Rule (prohibiting quotes in increments smaller than a penny), and the Market Data Rules (governing how securities information is disseminated). Together, these rules aim to ensure that investors receive the best available prices and that markets are interconnected and competitive.
The Unintended Consequences Debate
Critics argue that Reg NMS, by fragmenting order flow across many exchanges and trading venues, created conditions that favor high-frequency market makers over traditional investors. The complexity of the multi-venue market structure requires sophisticated routing technology — technology that firms like Citadel Securities possess but individual investors and traditional asset managers do not. Some academics argue Reg NMS inadvertently increased HFT advantages.
Order Protection in Practice
The trade-through prohibition requires that orders be executed at the best displayed price (NBBO). In practice, this means that routing decisions must account for prices across all exchanges. Wholesale market makers like Citadel Securities claim to fulfill the order protection requirement through price improvement — executing at prices equal to or better than the NBBO. The SEC's enforcement record shows that this standard is not always met.
Calls for Reg NMS Reform
Multiple market structure studies — including the SEC's own analyses — have called for updating Reg NMS to reflect two decades of market evolution. Key proposed changes include reducing tick sizes for appropriate securities, enhancing transparency requirements, and addressing the PFOF conflict. The SEC's 2022 proposal package included Reg NMS amendments. The fate of those proposals reflects the difficulty of restructuring well-established market practices with significant incumbency interests.