Will Investors Ultimately Be Left Holding the Reg NMS Tab?
With all of the debate and concern that three-plus years of preparation brings, hopefully the full implementation of Reg NMS will be less of a story than many expect it to be. After all, many CIOs and CTOs profiled in this issue have spent countless hours and vast portions of their technology budgets to prepare for the upcoming regulation. Let's hope they spent it wisely.
But from a journalist's standpoint, selfishly, I might be tempted to hope for some problems or snafus. After all, any good business journalist can squeeze many stories out of even the most minor market glitch (see the media's collective coverage of the Feb. 27 NYSE "hiccup").
Media coverage aside, one Reg NMS side effect the industry is already experiencing is an explosion in trading-related message traffic. Exchanges and broker-dealers are already reporting three times the message traffic they were seeing just two months ago. Most of the increase can be attributed to algorithms that are pumping out -- and sometimes subsequently canceling -- thousands of orders per second. As I write this column (on July 9, the first day in the Pilot Stock phase), brokers have been reporting regular "traffic" delays on many of the exchanges, just after the opening at 10 a.m. each day, when the Fed makes an announcement or when "news" happens.
Most alarming, however, is that during the past few months there hasn't been a market event or a single unusually volatile day during which the markets' systems were seriously tested. Instead, the exchanges and brokers are reporting a tripling of message volume during relatively normal market activity. What will happen once the market moves to the All Stock phase on August 20? Worse yet, what will happen to message volume when markets are seriously stressed?
With all of the increased messaging, however, one thing has remained relatively constant: trade volume. Despite the threefold increase in messaging, the same number of shares are being traded. If this trend continues, it could be a problem for the exchanges, which generate much of their revenue from fees based on their trade volume. The exchanges have spent a lot of capital to increase bandwidth, but revenues from trade volume have remained flat. How will exchanges make up the difference? Most likely with a change to their fee structures. What those structures will look like is anyone's guess. But unless trade volumes increase to offset the cost of handling skyrocketing message traffic, the burden eventually will fall to the investor -- another unintended Reg NMS side effect.
Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio
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