REG NMS Cheat Sheet
Market Data Rules and Plans
Essence of the Rule:
The Market Data Rules and Plans update the formula for allocating revenues generated by market data fees to self-regulatory organizations (SROs) that produce the data for investors. The new formula would allocate revenues to markets based on the value of their quotes and trades. In other words, it would allocate revenues to those market centers that generate quotes with the best prices and the largest orders. The goal is to avoid manipulative behavior such as wash sales and shredding.
A wash sale occurs when a participant sells a security at a loss and then buys back the same replacement stock, to generate revenue from two reports. With tape shredding, a participant breaks up a large transaction, say 100,000 shares, and reports it as 1,000 trades at 100 shares each, again to maximize data revenues. The SEC says the new formula would eliminate any reward for manual quotations.
The new rule would also give market centers and their members (broker-dealers) the freedom to distribute their own data independently, with or without fees. However, market centers would still be required to provide their best quotes and trades for consolidated dissemination through the joint-industry plans. There are three plans: the CTA Plan, operated by the Consolidated Tape Association, which disseminates data for exchange-listed securities; the CQ Plan, which disseminates consolidated quote information for exchange-listed securities; and the Nasdaq UTP (Unlisted Trading Privileges) Plan, which disseminates consolidated transaction and quotation information for Nasdaq-listed securities. The amended rule would also require that markets utilize a single processor, currently SIAC (Securities Industry Automation Corp.) or Nasdaq.
Impact
Sell Side:
Broker-dealers that provide quotes to customers (and vendors) would be relieved of the burden to display a complete montage of quotes from all market centers trading a particular security. This could include quotes that are far away from the national best bid and offer (NBBO). Brokers (as well as investors and vendors) would benefit from more efficient use of systems capacity and lower costs for obtaining necessary data.
Buy Side:
Ultimately, the new market data rule would give investors the ability to choose (and pay for) only the data they use (beyond the consolidated display). More depth-of-book information could be made available to investors as a result of the rule, allowing SROs and their members (broker-dealers) to distribute their own data independently.
ECNs and Exchanges:
Self-regulatory organizations (SROs) will be rewarded for the value of the quote and trade information they provide. Network processors (SIAC and Nasdaq) would incur costs for calculating the new allocation formulas based on quotes and trades, which Reg NMS estimates at $1 million a year. But such costs may be passed on to SROs, which will incur additional costs of setting up new advisory committees for plan governance.
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