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NYSE Requests a Four-Week Extension of the Reg NMS Deadline

Although it has been beaten to death by industry analysts and press, the importance of the changes to the U.S. securities industry spurred by Reg NMS cannot be overstated. The industry anxiously awaits full implementation of the regulation in 2007.

Why It's Important: Reg NMS is finally here -- maybe. Feb. 5 is the final date for full operation of Reg NMS-compliant trading systems, and by October all stocks will be phased into compliance. But the NYSE has requested a four-week extension of the Reg NMS deadline. At press time, the SEC had not responded to the request, though many believe the SEC is likely to grant the extension. Transitioning into a post-NMS world requires firms to conduct an extensive technological overhaul. Compliance with the trade-through rule is the greatest challenge.

The fallout on market structure will be substantial, with market analysts predicting fragmentation that will level the playing field for crossing networks, regional exchanges, dark pools of liquidity and internal markets. Order flow will be dispersed and competition among trading venues will be fierce.

Where the Industry Is Now: Most firms have been working for quite some time on building their order-routing capabilities and bolstering their infrastructure from the bottom up, as it has been two years since the SEC first proposed the market structure changes. The deadline extension for the trade-through rule has given the industry enough time to complete the development of NMS-compliant routing functionality and the supporting infrastructure.

The stock exchanges all expect to roll out to meet the February deadline, with some having already piloted or launched their new trading systems. Most systems will be fully automated, eliminating floor trading for equities in all exchanges but the NYSE and American Stock Exchange, which will run hybrid models -- for now.

Focus in 2007: The coming year will establish the impact that the expected increase in transaction volume and subsequent reporting requirements will have on the industry infrastructure. Estimates vary widely on the capacity increase that will be required to handle the surge in volume, but analysts agree that although messaging and transaction rates have skyrocketed in recent years, the worst is yet to come. TABB Group estimates that storage capacity requirements for the next several years will experience at least mid to high double-digit growth annually.

Industry Leaders: None of the bulge-bracket broker-dealers have taken a noticeable lead in Reg NMS implementation, nor have any fallen behind. Given the broad swath of changes resulting from the regulation, the industry has been collaborating through industry conferences, events and focus groups to share knowledge.

However, when Reg NMS is fully implemented and market participants develop a clearer picture of the true capacity requirements, large firms will be able to leverage their size and scale to bolster themselves in short order by pouring on the resources. Small and midsize firms may struggle to keep up.

Technology Providers: In a word: everybody. It has been a race to see who can insert the most references to Reg NMS in their press releases, marketing materials and sales pitches. Most vendors are positioning themselves as Reg NMS solution providers because the regulation will impact so many different types of technology. Execution management systems, order routers, market data feed distributors, data aggregators, data centers and networking all are among the many technologies that will be impacted by NMS.

The Price Tag: Industrywide spending on Reg NMS-related technology is expected to reach $125.1 million in 2007, according to estimates from Aite Group. Industry analysts likely will update their projections in the first quarter of the year.

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