Regulation NMS
The substantive topics addressed by reproposed Regulation NMS are (1) order protection, (2) intermarket access, (3) sub-penny pricing, and (4) market data. In addition, Regulation NMS would update the existing Exchange Act rules governing the national market system, and consolidate them into a single regulation. Finally, two amendments would be made to the joint industry plans for disseminating market information (Plans).
1. Protecting Orders by Limiting Trade-Throughs
- Reproposed Rule 611 would affirm the fundamental principle of price priority by limiting trade-throughs of protected quotations for all NMS stocks. A "trade-through" is a trade at a price worse than a quoted price. To qualify for protection, a quotation would be required to be automated. The reproposed rule would not provide any protection for manual quotations.
- Specifically, the reproposal would require trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent trade-throughs, and, if relying on one of the rule's exceptions, which are reasonably designed to assure compliance with the exception.
- The Commission is proposing two alternatives for the scope of quotations to be protected. The first alternative would protect the best bids and offers of the nine self-regulatory organizations and Nasdaq whose members currently trade NMS stocks - specifically, it would protect the best bids and offers of each exchange, Nasdaq, and the NASD's ADF. The scope of quotations covered by this alternative is comparable to the ITS provisions.
- The second alternative also would protect the best bids and offers of the various self-regulatory organizations and Nasdaq, but would establish a mechanism for a market to voluntarily secure protection for its depth-of-book quotations at prices below its best bid or above its best offer.
- The reproposed rule does not contain a general "opt-out" exception that would have allowed market participants to disregard displayed quotations. The elimination of any protection for manual quotations is the principal reason that this broad exception is not included in the reproposal.
- The reproposal adds a number of tailored exceptions that are more consistent with the principle of protecting the best price than a general opt-out. A number of these exceptions would help ensure that the reproposal is workable with high-volume stocks and relate to, among others, intermarket sweep orders, quotations displayed by markets that fail to meet the response requirements for automated quotations, and flickering quotations with multiple prices displayed in a single second.
- The reproposed rule would cover transactions executed by block positioners and would protect 100-share quotations.
- Overall, the reproposal is designed to be a practical response to developments in the marketplace to encourage the important customer protection and market integrity goals of best execution and the protection of limit orders.
- The reproposed rule would not change a broker-dealer's existing duty to obtain best execution for customer orders.
2. Intermarket Access Reproposal
- Reproposed Rule 610 would establish a uniform market access rule that would promote non-discriminatory access to quotations displayed by SRO trading centers through a private linkage approach.
- In addition, the reproposed rule would require trading centers that display quotations in NMS stocks through an SRO display-only facility to provide a level and cost of access to such quotations that is substantially equivalent to the level and cost of access to quotations displayed by SRO trading facilities in that stock.
- Reproposed Rule 610 also would harmonize the pricing of quotations across different trading centers by limiting the fees that any trading center could charge (or permit to be charged) for accessing its protected quotations to no more than $0.003 per share (or, if the price of a protected quotation is less than $1.00, to no more than 0.3% of the quotation price per share). This reproposed fee limitation substantially simplifies the originally proposed limitation on fees which, in general, would have limited the fees of individual market participants to $0.001 per share, with an accumulated cap of $0.002 per share.
- Finally, the reproposed rule would require each SRO to establish and enforce rules that, among other things, prohibit its members from engaging in a pattern or practice of displaying quotations that lock or cross the protected quotations of other trading centers.
3. Sub-Penny Reproposal
- Reproposed Rule 612 would prohibit market participants from displaying, ranking, or accepting quotations in NMS stocks that are priced in an increment of less than $0.01, unless the price of the quotation is less than $1.00. If the price of the quotation is less than $1.00, the minimum increment would be $0.0001.
- This reproposal is intended to prevent sub-penny pricing from being used to "step-ahead" of customer limit orders for an economically insignificant amount which could, over time, discourage investors from placing limit orders, an important source of market liquidity.
4. Market Data Reproposal
- Regulation NMS would update the formulas for allocating revenues generated by market data fees to the various SROs to correct the flaws of the current formulas, which incent distortive behavior such as wash sales and trade shredding, and to allocate revenues to SROs that contribute to public price discovery by dividing market data revenues equally between trading and quoting activity.
- The revised formula is much less complex than the original proposed formula, primarily because, consistent with the approach of the trade-through and access reproposals, the revised formula would eliminate any revenue allocation for manual quotations.
- The reproposed amendments also would require the creation of advisory committees composed of non-SRO representatives to the joint industry plans, which are intended to improve the transparency and effective operation of the plans by broadening participation in plan governance.
- Finally, the reproposal would promote the wide availability of market data by authorizing markets to distribute their own data independently (while still providing their best quotations and trades for consolidated dissemination through the plans) and streamlining outdated requirements for the display of market data to investors.
Comments on these proposals should be submitted to the Commission within 30 days of publication in the Federal Register.
Asset-Backed Securities
The Commission voted to adopt new and amended rules and forms to address comprehensively the registration, disclosure and reporting requirements for asset-backed securities under the Securities Act of 1933 and the Securities Exchange Act of 1934. The Commission issued proposals on this topic in May of this year.
Principally, the amendments will accomplish the following:
- update and clarify the Securities Act registration requirements for offerings of asset-backed securities, including expanding the types of asset-backed securities that may conduct delayed primary offerings on Form S-3;
- consolidate and codify existing interpretive positions that allow modified Exchange Act reporting that is more tailored and relevant to asset-backed securities;
- provide tailored disclosure guidance and requirements for Securities Act and Exchange Act filings involving asset-backed securities; and
- streamline and codify existing interpretive positions that permit the use of written communications in a registered offering of asset-backed securities in addition to the statutory registration statement prospectus.
The amendments are intended to clarify the regulatory requirements for asset-backed securities in order to increase market efficiency and transparency and provide more certainty for the overall ABS market and its participants. In response to comment, the amendments have delayed compliance dates until Jan. 1, 2006, to allow market participants to prepare for the new requirements.
The full texts of the detailed releases concerning these items will be posted to the SEC Web site as soon as possible.
