SEC Proposal Would Increase National Market System Data Quality, Access, and Transparency

The National Market System (NMS), which is the United States’ equity trade and fulfillment system, has changed very little since its inception in the 1970s. This is despite drastic changes to the data utilized in trade since then, along with many rapid technological changes. In February, the Securities and Exchange Commission (SEC) issued a press release entitled “SEC Proposes to Modernize Key Market Infrastructure Responsible for Collecting, Consolidating, and Disseminating Securities Market Data: Seeks to Introduce Competitive Forces to Core Components of the System for the First Time.” If passed, the proposal would be one of the more significant regulatory improvements in the history of the NMS. Under the newly proposed rules, investors would be able to access more complete data about certain stock prices, sales, auctions, and other market information more quickly and easily than they can right now.

Background: National Market System

The National Market System (NMS) was created by the Securities Acts Amendments of 1975 to foster free market transparency on NASDAQ and all other formal U.S. stock exchanges. Under the NMS, all exchanges must provide data regarding bids and offers to individual and institutional investors. The NMS regulates trade execution and disclosures. Aside from trade, other NMS functions include quote distribution, deposits, and clearing.

Interestingly, the nature of NMS data makes large trades quite visible. That’s why some people have created off-exchange alternatives called dark pools.

To strengthen the NMS, the SEC issued the Regulation National Market System (Reg NMS) in 2005. Among other provisions, Reg NMS included the Order Protection Rule, which stipulated that trades must occur at the best price. Notably, that means that even if investors would rather do business on a different trading venue, they must use the one that offers the lowest price. That may sometimes mean using a slower or less reliable platform than would otherwise be available to an investor.

In October 2019, the SEC revisited the NMS, proposing an NMS plan amendment to “establish or change a fee or other charge (Proposed Fee Change) to be subject to the standard procedure for NMS plan amendments.” According to standard procedure, when the amendment gets published the public has an opportunity to comment. After which, a Commission order approves the amendment. "This rulemaking will help ensure that NMS plan fee changes benefit from review and comment by investors and market participants before those fees can be charged," said SEC Jay Clayton in a statement.

Specifics of SEC’s Most Recent Proposed Changes

February’s SEC proposal comes on the heels of a January 2020 SEC order requiring the proposal of a New Consolidated Data Plan intended to address concerns about how Equity Data Plans are governed and how equity market data is made available. This proposed order directly lead to February’s proposal because it solicited comments from stakeholders and the public.

The proposed expansions to market and trade data, as quoted in February’s SEC press release, include:

“(1) information about orders in share amounts smaller than the current round lot size (e.g., 100 shares) for higher priced stocks;

(2) information about certain orders that are outside of an exchange’s best bid and best offer (i.e., certain depth of book data); and

(3) information about orders that are participating in opening, closing and other auctions.”

For instance, current NMS market data includes the best bid and best offer (BBO) for each SRO in a current round lot, 100-share sizes. In contrast, the SEC’s proposal decreases the size of a round lot based on stock prices, making more data available to issuers and investors who deal with fewer shares of higher-priced stock.

The SEC also proposed updates to the currently restrictive auction data sharing systems. Under the new proposal, investors and issuers could view auction data from beginning to end. This may assist those in real estate, among other investments. In contrast to exclusive SIPs that currently have a monopoly on information sharing between markets, the SEC’s proposal called for data sharing among both self-aggregators (which are broker-dealers collecting data for internal use) and decentralized competing consolidators. The new model would facilitate both competition and data sharing. Furthermore, as the national securities exchanges and the Financial Industry Regulatory Authority (together called SROs) share their data, current quotations, and pricing conditions would be clearer to both issuers and investors.

In conclusion, the SEC’s recently proposed changes would improve the quality and transparency of NMS data, and all market participants would have increased access. Furthermore, faster, more accurate data sharing would enable quicker, more informed decisions at the pace of modern markets.