SEC To Provide Reg. NMS Guidance
Source: Wall Street Letter
Veronica Belitski
The Securities and Exchange Commission's division of market regulation is tapping Wall Street as it crafts guidance on how to implement Regulation National Market Structure, which goes into effect next year. The SEC recently began contacting brokerage firms and exchanges to discuss details that need to be addressed.
"We will be working closely with the industry," said Robert Colby, acting head of market regulation. Colby told WSL the process is still in early stages, so the commission has not yet determined what specific areas will be addressed. The guidance will come in question and answer format, and will be widely distributed. The first piece of guidance is expected to be on the sub-penny rule, which prohibits undercutting a quote by under a penny, and goes into effect in January. The next likely areas are uniform market access and the trade-through rules, which requires compliance by April. Guidance on market data rules will be last with a compliance date set for July.
Brokerages say the guidance is sorely needed. "The industry as a whole is facing an overhaul of the entire market system, and the SEC needs to clearly define fundamental structural changes," said William McGowan, managing director of Interactive Brokers.
One question some firms have asked is what happens when a broker accesses the market with the best price but the exchange's system does not respond, or comes back missing essential information, thus preventing the broker from executing the order. "Who will be in violationthe broker or the market?" McGowan asked, adding that the commission has not addressed how it would monitor the technological improvements at exchanges and other market venues.
Analysts also want to see more detailed information on how brokers' internal systems should best comply with the trade-through rule. Because the trade-through rule requires firms to store large amounts of market data to show that they achieved best price, technology investments are estimated to cost millions, and firms want to know how to spend the money most efficiently, said Randy Grossman, analyst at Financial Insights.
In the area of market data, the SEC may clarify whether the amount of fees firms pay to the exchanges for access to market data will depend on size of trades or the number of trades a firm does on a particular exchange. "Guidance on the final rule is necessary," said Fred Federspiel, president of Pipeline Trading Systems, an electronic marketplace. "We need exact formulas for market data," he said.
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