Quick Answer
Regulation NMS's display, order protection and sub-penny rules run on national market system (NMS) stocks, so listed options sit outside all three. A trading center keeps written procedures reasonably designed to prevent trade-throughs on that center, subject to nine exceptions. Specialist-type exchange members and over-the-counter (OTC) market makers display qualifying customer limit orders, and the sub-penny rule sets minimum increments.
The unit's three questions on one sheet: protection, display and pricing increments.
Which One-Liners Win Points?
- A protected quotation is an automated quotation that is an exchange's or association's best bid or offer, displayed by an automated trading center and disseminated under an effective plan. A manual quotation is never protected.
- A trade-through is a purchase or sale of an NMS stock during regular trading hours below a protected bid or above a protected offer.
- The order protection duty sits on the trading center: written procedures reasonably designed to prevent trade-throughs on that center absent an exception, plus regular surveillance and prompt remedy. An exemption, unlike an exception, needs a Commission order.
- Only an exchange specialist, a member its exchange authorizes to perform substantially similar functions, or an OTC market maker must immediately publish the price and full size of a customer limit order that improves its quote, unless an exception applies.
- An equal-priced order shows full size only if it equals the firm's quote, equals the national best bid or offer, and is more than a de minimis size change.
- An intermarket sweep order is a marked limit order routed while marked limit orders simultaneously sweep, as necessary, every better-priced protected quotation at full displayed size. Marking alone does not qualify it.
- The sub-penny rule bars five persons, including a vendor, from displaying, ranking or accepting a bid or offer, an order, or an indication of interest in an NMS stock in a prohibited increment.
Which Numbers Matter Most?
| Item | Value |
|---|---|
| Increment at $1.00 or more | $0.01; $0.005 if the stock's Time Weighted Average Quoted Spread was $0.015 or less |
| Increment below $1.00 | $0.0001 |
| New NMS stock during an operative period, at $1.00 or more | $0.01 |
| Round lot, by average closing price on the primary listing exchange during the prior Evaluation Period | 100 shares at $250.00 or less, stepping to 40, 10, then 1 as price rises |
| Regulation NMS block size | 10,000 shares or $200,000 market value, either alone |
Which Nine Exceptions Excuse a Trade-Through?
- Systems failure, material delay or malfunction at the displaying venue.
- Not a regular way contract.
- A single-priced opening, reopening or closing.
- A protected bid priced higher than a protected offer.
- Receiving an order marked as an intermarket sweep order.
- Simultaneously routing a sweep against the full displayed size of each protected quotation traded through.
- A price not based, directly or indirectly, on the quote and material terms not reasonably determinable at commitment.
- The displaying venue showed a best bid or best offer, as applicable, at a price equal or inferior to the trade-through price within one second before execution.
- A customer's stopped order, price agreed order by order, filled below the national best bid on a buy or above the national best offer on a sell.
Which Gotchas Trip Students Up?
- A block size order is excepted from display unless the customer asks for display, the reverse of the customer's non-display request.
- "Immediately" means no later than 30 seconds after receipt under normal conditions, per the Commission, and is not a safe harbor.
One-Breath Recap
Regulation NMS, the national market system regulation, applies its display, order protection and sub-penny rules to national market system stocks only, never to listed options. A trade-through is a regular-hours purchase or sale below a protected bid or above a protected offer, and protection requires an automated best bid or offer of an exchange or association. Each trading center keeps written procedures reasonably designed to prevent trade-throughs on that center, subject to nine exceptions. Specialists, similarly authorized exchange members and over-the-counter market makers must immediately display a customer limit order that improves their quote, unless an exception applies, and the sub-penny rule sets each stock's minimum pricing increment.
Need more than the recap? Read the full Regulation NMS unit.