Welcome to Regulation NMS: the SEC rules for the national market system (NMS) that decide which quotations the market must respect, which customer limit orders a firm must show the world, and how finely a price may be quoted.
Exam Weight: about 2 of the 50 scored items (CertFuel planning estimate; FINRA publishes weights only by function, and Function 1, Trading Activities, is 41 items / 82%)
What You'll Learn
In this unit, you'll cover:
- The Definitions Regulation NMS Runs On: which securities the rules reach, what makes a quotation automated and a trading center automated, the three limbs that together make a quotation protected, who counts as a trading center, and the round lot, block size and customer order terms every later rule is built from
- Order Protection: what a trade-through is, the written policies and procedures a trading center owes, the surveillance and remediation duty, and the Commission's power to exempt
- Customer Limit Order Display Requirements: who must publish a customer's limit order, what gets published at each price relationship, and the seven exceptions
- Trade Through Protection: the nine exceptions that take a trade-through outside the prevention duty, and the three conditions the stopped-order exception adds on top
- Intermarket Sweep Orders: the two requirements that make an order an intermarket sweep order, and who has to establish that they are met
- Sub-Penny Rule: the five persons bound, the three acts barred, the increment tiers and the spread test behind them, and the increment a brand new NMS stock is assigned
Why This Matters
Regulation NMS is the plumbing under a trader's day. It decides whether the quotation on the screen is one your venue must respect, whether a customer's limit order has to be shown at all, and whether a price you want to enter is even a legal increment.
The unit builds in that order:
- The definitions, because every duty here is written in them
- The order protection duty a trading center owes
- The display duty an exchange specialist, a member the exchange authorizes to perform functions substantially similar to a specialist, or an over-the-counter (OTC) market maker owes a customer's limit order
- The nine exceptions that bound the prevention duty
- The intermarket sweep order the two sweep exceptions run on
- The minimum increment a quotation, an order or an indication of interest may use
Two neighbors matter for scope. The quotation rule and the access rule, including locked and crossed markets, are covered in the unit on disseminating quotes and trade advertisements. The duty to seek the best market for a customer is covered in the unit on meeting obligations to customers regarding orders.
Let's start with the definitions, because the rest of the unit is written in them.