As the months tick by and the deadline draws closer, broker-dealers are stepping up their preparations for the scheduled June 29 implementation of Reg NMS. Ever since the Securities and Exchange Commission (SEC) passed the sweeping set of stock trading rules in April 2005 to modernize the national market structure, major securities firms have moved to establish internal, cross-organization Reg NMS teams to develop comprehensive strategies that address the new rules. And many firms have joined industry committees to make sure that their organizations' interpretations of Regulation National Market System (Reg NMS) are in line with other market participants' views.
Like other large players, BNY Securities Group, which consists of five broker-dealer companies, has been active on industry committees. "We participate on four SIA committeessub-penny, order protection rule, the general trading committee and the fourth committee comprised of technologists working out the implementation of the rules set forth by the SEC," says Deborah Kase, managing director at BNY Brokerage, which is part of BNY Securities Group. Kase also chairs the firm's internal BNY Brokerage Reg NMS task force.
Since September 2005, BNY Brokerage has held regular Reg NMS meetings. "Most of the committee is involved on a daily basis, updating themselves on Reg NMS initiatives that are happening," relates Joseph Cangemi, managing director, BNY Brokerage, who manages the on-floor trading desk at the New York Stock Exchange, where he advises institutional accounts on the impact of Reg NMS. >>
But, despite industry efforts, it looks as if final preparations for Reg NMS will come down to the wire. "For Reg NMS to work properly, it requires all these market centers, all these exchanges, anybody that's internalizing ordersorder processing vendors, market data vendors, broker-dealers and the utilitiesto all cooperate together," observes Tom Jordan, president of Jordan and Jordan, a financial technology consulting firm, and chairman of the Advisory Committee of the Financial Information Forum (FIF), an association that addresses issues impacting the financial information industry.
Initially, many firms assembled Reg NMS teams driven by compliance and legal staffs, but now that the June 29 deadline for implementing Phase 1 of Reg NMS in 250 stocks is rapidly approaching, technology and operations staffs are getting more actively involved, according to Jordan. (Trading centers must begin trading in all NMS stocks on Aug. 31, 2006, when Phase 2 begins). These cross-functional teams are better equipped to interpret the rules in Reg NMS and translate their findings for the technologists, who need to update and modify systems, he adds.
The Devil's in the Details
But, though major brokerage firms have been planning diligently for Reg NMS, many uncertainties remain. For starters, industry firms have been waiting for clarification on the order protection rule (OPR)formerly known as the trade-through rulebefore programming the automated rules into their systems. And most broker-dealers say the bulk of their work revolves around compliance with the OPR, which requires trading centers to prevent executions at prices inferior to better quotes displayed by other trading centers. Without the clarifications from the SEC, however, some firms are hesitant to spend resources on implementing changes.
"The lightning rod issue is trade-through," says Bill Yancey, CEO of Penson Financial Services, based in Dallas. "Everybody that receives order flow has the responsibility to get the best price," he notes. As an executing and clearing firm, "We have the burden of monitoring for the best execution." And, obviously, the monitoring will be accomplished with order routing technology.
But the OPR should not be a burden for Penson, according to Yancey, since the firm already is using smart order routing and "external services to make sure we get best execution." Penson started planning for Reg NMS when the rule was passed in April 2005, he relates. Yancey, who served on both the Security Traders Association and SIA trading committees in 2005, notes that Penson also owns Nexa Technologies, a direct-market-access firm that offers front-end and back-office technology. "There's not a lot of things that we have to do on our side, except in the technology area, where we make sure that we reach out to the destination displaying the best price," he says. Penson already takes a snapshot of the market at the time the order is received and creates an exception report if it obtains a different price, Yancey adds. It also has access to archived data from venues such as the NYSE and ECNs.
Meanwhile, other firms already are making programming changes to their order-routing logic and fine-tuning their smart order routers to obtain the best price in a world of fast markets. Looking at Reg NMS as a competitive advantage for its 7 million retail clients, TD Ameritradethe company resulting from the merger of Ameritrade and TD Waterhousehas been coding the new rules into its order-routing logic, says Chris Nagy, managing director in charge of order routing at the firm. Since the online broker has retail clients that do direct order routing, "We're going to have to ensure that they get the best price," he says.
Another detail on which firms are waiting clarification is how to code for new order types, such as intermarket sweep orders (ISO), which are exceptions to the trade-through rule. As of late January, brokers were waiting for further guidance from the self-regulatory organizations (SROs) on how to identify ISOs and, in general, on specific rules that each SRO is going to use to implement Reg NMS. "I would suspect that every exchange or ECN is going to have its own standard for how you promulgate that order type," comments Shane Swanson, chief compliance officer at Automated Trading Desk in Mt. Pleasant, S.C. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio