National Market System (NMS)

What is the National Market System (NMS)?

The National Market System (NMS) advances free market transparency by managing how all major exchanges unveil and execute trades. It is the system for equity trading and order satisfaction in the U.S. that comprises of trading, clearing, depository, and quote distribution capabilities. The NMS governs the activities of all formal U.S. stock exchanges and the NASDAQ market.

Figuring out the National Market System (NMS)

The National Market System, which was made by the Securities Acts Amendments of 1975, is overseen by the National Association of Securities Dealers (NASD) and NASDAQ. The NMS governs exchange-based trading, for example, on the New York Stock Exchange, and OTC trading on the NASDAQ. For down to earth purposes, the NASDAQ is viewed as an exchange, even however the dealings happen straightforwardly among market markers.

To work with the fair distribution of data, the NMS expects that exchanges make bids and offers (ask price) accessible and noticeable to both retail and institutional investors. The benefits are an increase in liquidity and better prices. In any case, the system makes it hard for institutions and large investors to execute large trades inconspicuous. Certain individuals contend that this visibility has pushed such trading off-exchange, filling the expansion of private exchanges, called dark pools.

Important

On December 9, 2020, the Securities and Exchange Commission (SEC) adopted new rules expected to modernize the infrastructure for the assortment, consolidation, and scattering of market data for exchange-listed national market system stocks. Among other adopted rules, the SEC has refreshed and expanded the substance of NMS market data.

NMS versus Other OTC

NASDAQ is the highest of four levels of over-the-counter (OTC) trading where companies must meet specific criteria of capitalization, profitability, and trading activity. Likewise, NASDAQ gives more thorough intraday trading data that is accessible for the lower levels of OTC stocks. Data incorporates last-sale prices, daily high and low prices, cumulative volume, and bid and ask quotes. Here, market makers must report genuine executed prices and share sizes in somewhere around 90 seconds of the transaction. This necessity diverges from the non-constant reporting for non-NMS, lower tier OTC stocks.

The NASDAQ, while still a decentralized system for over-the-counter stock trading, is a virtual exchange with every one of the regulations, requirements, and shields that accompany clearing houses. Other OTC markets have extensively less rules and defends.

OTC markets break down into three tiers, called the OTCQX, OTCQB, and Pink Sheets. Listing requirements decline with each level. Likewise, these markets are less tough than exchanges covered by the National Market System.

Regulation National Market System (Reg NMS)

The Securities and Exchange Commission (SEC) saw a need to strengthen the NMS and account for evolving technology. In 2005, they issued the Regulation National Market System (Reg NMS), which contains four fundamental parts.

1. The Order Protection Rule expects to guarantee investors get the best price at the execution of their order. The rule eliminates the ability to have orders traded through or executed at a more regrettable price.
2. Further developed access to quotations from trading centers in the NMS is due to the Access Rule. The rule requires greater connecting and lower access fees.
3. The Sub-Penny Rule accommodates uniform quotes by setting the addition to nothing short of what one penny. The rule applies to all stocks listed at over $1 per share.
4. Market Data Rules assign revenue to self-regulatory organizations that advance and further develop market data access.

Presumably generally important of these rules was the order protection, or trade through, provision. Trade executions are given at the best price, regardless of where that lowest price is accessible.

Pundits whined that it requires traders to execute on a trading scene that had the lowest price, even however they would favor carrying on with work on the site with the quickest execution or the best reliability. The inclination was that it would bring about more regrettable results for institutional orders with all costs calculated in.

Highlights

• The National Market System (NMS) advances free market transparency by managing how all major exchanges unveil and execute trades.
• In 2005, the SEC issued the Regulation National Market System (Reg NMS) to strengthen the NMS and account for evolving technology.
• To work with the fair distribution of data, the NMS expects that exchanges make bids and offers accessible and noticeable to both individual and institutional investors.