What is the National Market System?

The National Market System (NMS) is the system for equity trading and order fulfillment in the U.S. It consists of trading, clearing, depository, and quote distribution functions. The NMS governs the activities of all formal U.S. stock exchanges and the Nasdaq market.

Understanding the National Market System (NMS)

The National Association of Securities Dealers (NASD) and the Nasdaq oversee the National Market System, which was created by the Securities Acts Amendments of 1975. The NMS governs exchange-based trading, such as on the New York Stock Exchange, and OTC trading on the Nasdaq. For practical purposes, the Nasdaq is considered an exchange, even though the negotiations occur directly among market markers.

To facilitate the fair distribution of information, the NMS requires that exchanges make bids and offers available and visible to all buyers and sellers. The advantages are an increase in liquidity and better prices. However, the system makes it difficult for institutions and large investors to execute large trades unnoticed. Some people argue that this visibility has pushed such trading off-exchange, fueling the expansion of private exchanges, called dark pools.

National Market System vs. Other OTC

Nasdaq is the highest of four levels of over-the-counter trading where companies must meet specific strict criteria of capitalization, profitability, and trading activity. Also, Nasdaq provides more comprehensive intraday trading information that is available for the lower levels of OTC stocks. Information includes last-sale prices, daily high and low prices, cumulative volume, and bid and ask quotes. Here, market makers must report actual transacted prices and share sizes within 90 seconds of the transaction. This requirement contrasts with the non-real-time reporting for non-NMS, lower tier OTC stocks.

The Nasdaq, while still a decentralized system for over-the-counter stock trading, is a virtual exchange with all the regulations, requirements, and safeguards which come with clearing houses. Other OTC markets have considerably fewer rules and safeguards.

OTC markets break down into three tiers, called the OTCQX, OTCQB and Pink Sheets. Listing requirements decrease with each level. Also, all of these markets are less stringent than exchanges covered by the National Market System.


The Securities and Exchange Commission (SEC) saw a need to strengthen the NMS and account for changing technology. In 2005, they issued the Regulation National Market System (Reg NMS) which contains four main components.

  1. The Order Protection Rule aims to guarantee investors get the best price at the execution of their order. The rule removes the ability to have orders traded through or executed at a worse price.
  2. Improved access to quotations from trading centers in the NMS is due to the Access Rule. The rule requires greater linking and lower access fees.
  3. The Sub-Penny Rule provides for uniform quotes by setting the increment to nothing less than one cent. The rule applies to all stocks listed at over $1.00 per share.
  4. Market Data Rules allocate revenue to self-regulatory organizations that promote and improve market data access.

Probably most important of these rules was the order protection, or trade through, provision. Trade executions are provided at the best price, no matter where that lowest price is available.

Critics complained that it requires traders to transact on a trading venue that had the lowest price, even though they would prefer doing business on the site with the fastest execution or the best reliability. The feeling was that it would result in worse outcomes for institutional orders with all costs factored in.