Sunday, December 13. 2020
Current Regulatory Structure
NMS market data is made available to investors through the national market system, a structure introduced by Congress in Section 11A of the Securities Exchange Act of 1934 and facilitated by the SEC in Regulation NMS. Established in the late 1970s, the present national market system for NMS information features a centralized consolidation model in which the national securities exchanges and the Financial Industry Regulatory Authority (“FINRA” and collectively, the “SROs”) collaborate under the Equity Data Plans to provide certain NMS market data for each NMS stock to exclusive SIPs. The exclusive SIPs combine that data and publish a national best bid and national best offer (“NBBO”) as well as last sale information. The SEC has been monitoring the efficacy of its NMS rules and has amended certain rules over the years. Despite the fact that technologies, as well as business and trading practices, have changed drastically, the agency has not substantially modernized the rules that govern the content and dissemination of NMS market data since their initial implementation.
Substantial technological shifts have occurred to the Exchange Act, including the combination of order routing and trading strategies, and technological advances which have significantly increased the automation and swiftness of markets. In terms of content, processing speed and access, these enhancements make trading more market data dependent, resulting in exchanges developing connectivity products and enhanced proprietary data. The content and latency differentials between the proprietary market data products and SIP data disseminated directly by the exchanges have become progressively more important.
The amendments seek to address the shortcomings in how the NMS collects and disseminates information by implementing the following changes:
- expanding and updating the content of NMS market data
- establishing a decentralized consolidation model in which competing consolidators, instead of the exclusive SIPs, will be responsible for collecting, consolidating, and disseminating consolidated market data to the public
Specifically, the adopted rules expand and update the content of NMS market data to incorporate:
- information regarding orders in share amounts less than the present round lot size, for example, 100 shares
- details about particular orders outside of an exchange’s best bid and best offer, such as certain depth of book data
- specifics about orders that are taking part in opening, closing, and other auctions
The following table highlights example content under the previous and new NMS market data.
|Last sale data/transaction reports||The price, size, and exchange of the last sale of the NMS stock, including odd-lot transactions.||No change.|
|Best bid and best offer (“BBO”)||BBOs for each SRO in round lot sizes (e.g., 100 shares).||BBOs for each SRO in revised round lot sizes based on the new “round lot” definition:
|National best bid and national best offer||NBBO is based on the round lot size quotations.||NBBO will be based on the new round lot size quotations.|
|Odd-lot quotations||Not included.||Odd-lot quotations at a price greater than or equal to the national best bid (NBB) and less than or equal to the national best offer (NBO), aggregated at each price level at each SRO.|
|Protected quotations||Protected quotations are in round lots.||Protected quotations will be in new round lots.|
|Depth of book data||Not included.||New “depth of book data” will include quotation sizes at each national securities exchange and on a facility of a national securities association at each of the next five prices at which there is a bid that is lower than the NBB and offer that is higher than the NBO.|
|Auction information||A limited range of auction information was provided by the Equity Data Plans, such as reopening auction information following Limit-Up Limit-Down (“LULD”) pauses and certain NYSE auction information.||New “auction information” will include any information specified by SRO rules or effective NMS Plans that is generated by an SRO leading up to and during an auction including opening, reopening, and closing auctions and publicly disseminated during the time periods and at the time intervals provided in such rules and plans.|
|SRO-specific program data||Information regarding SRO-specific programs, such as retail liquidity programs.||All current SRO-specific program data plus any additional data elements defined as such pursuant to the effective national market system plan(s) required under Rule 603(b).|
|Over-the-counter bulletin board (“OTCBB”) and concurrent use data||OTCBB quotation and transaction data and certain “concurrent use” data (i.e., corporate bond and index data) is offered in connection with current NMS market data.||This information will not be included in NMS market data under the rules adopted today.|
|Regulatory data||Includes information regarding short sale circuit breakers, trading pauses, regulatory halts and official opening and closing prices of the primary listing exchanges.||All current regulatory data plus a new indicator for applicable round lot sizes and any additional regulatory data elements defined as such pursuant to the effective national market system plan(s) required under Rule 603(b).|
|Administrative data||Includes messages specifying identifiers for market centers and issue symbols and messages regarding the beginning and end of trading sessions.||All current administrative data plus any additional data elements defined as such pursuant to the effective national market system plan(s) required under Rule 603(b).|
Decentralized Consolidation Model
The rule modifications also set forth a decentralized consolidation model under which competing consolidators, rather than the existing exclusive SIPs, will collect, consolidate, and disseminate certain NMS information. To support this decentralized model, the rules require each SRO to make available the data needed to generate consolidated market data to two new classifications of entities:
- competing consolidators who are responsible for collecting, consolidating, and disseminating consolidated market data products to the public and:
- must register with the SEC under new Rule 614 of Regulation NMS
- will be subject to certain standards concerning the promptness, accuracy, reliability, and fairness of their operations
- will be subject to Regulation SCI for those at the market share maximum and are “SCI competing consolidators”
- self-aggregators including brokers, dealers, SROs, and investment advisers who are registered with the SEC and elect to collect and consolidate market data for their internal use only. Self-aggregators will not be required to register with the SEC in a separate capacity
The adopted rules will be effective 60 days following publication in the Federal Register. To facilitate an orderly transition, the SEC has developed a phased transition plan that will begin in 2021.