What is Regulation NMS

Regulation National Market System (NMS) is a set of rules passed by the Securities and Exchange Commission (SEC), which looks to improve the U.S. exchanges through improved fairness in price execution as well as improve the displaying of quotes and amount and access to market data.


This regulatory ruling is comprised of four main components:

  • The Order Protection Rule aims to ensure that investors receive the best price when their order is executed by removing the ability to have orders traded through (executed at a worse price). This rule requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution of trades at prices that are inferior to protected quotations displayed by other trading centers. This rule also created the National Best Bid and Offer (NBBO) requirement that requires brokers to route their orders to the venues offering the best-displayed price.
  • The Access Rule aims to improve access to quotations from trading centers in the National Market System by requiring greater linking and lower access fees. This rule includes a mandate that each national securities exchange and national securities association adopts, maintains, and enforces written rules prohibiting their members from displaying cross automated quotations or quotations that lock.
  • The Sub-Penny Rule sets the minimum quotation increment of all stocks over $1.00 per share to at least $0.01. Stocks under $1.00 can see quotation increments of $0.0001.
  • Market Data Rules allocate revenue to self-regulatory organizations that promote and improve market data access.

How Regulation NMS Influences Market Efficiency

The intent of Regulation NMS is to promote competition, fair market pricing, and quality in the overall market. According to the SEC, Regulation NMS has been a key factor in the equity markets in the U.S. being recognized for their efficiency, fairness, and competitive nature.

The policies instituted under these regulations are also meant to address changes that have been underway in equity markets that include the introduction of new technology as well as new types of markets for trading in penny increments.

There have been critiques of Regulation NMS, in particular, the Order Protection Rule that mandates stocks must be traded on exchanges that show the best-quoted prices. One of the criticisms is that the rule gives an advantage to high-speed traders. There is also a perception that the rule makes the market more expensive. Pension funds and other institutions can also find it more difficult to execute trades. Further updates to Regulation NMS have been recommended by its critics. Some have gone as far as suggesting the policies be replaced entirely in favor of new rules more in line with current trading practices.