The Securities and Exchange Commission

[thepennyking]

Regulation NMS National Market System Reforms Proposed

The Securities and Exchange Commission today posted a release
proposing new Regulation NMS, which would incorporate proposals designed to
enhance and modernize the regulatory structure of the U.S. equity markets
and would consolidate existing rules governing the national market
system into a single regulation. Release No. 34-49325 (Feb. 26, 2004).
The proposals are intended to prevent trade-throughs (the execution of an
order in its market at a price that is inferior to a price displayed in
another market), to modernize the terms of access to quotations and
execution of orders in the national market system, to require a minimum
pricing increment of one cent (except for securities with a share price
below $1.00), and to revise the rules for disseminating market
information to the public. Comments must be received within 75 days after
publication in the Federal Register. The SEC press release is reproduced
below, and the 346-page proposing release is available, in PDF format
only, at

http://www.sec.gov/rules/proposed/34-49325.pdf

If you have difficulty accessing this large file directly, go to

http://www.sec.gov/rules/proposed.shtml

Find the Regulation NMS proposal, download it to your hard drive, and
open it with Adobe Acrobat Reader.



SEC To Publish Regulation NMS for Public Comment
FOR IMMEDIATE RELEASE
2004-22

Washington, D.C., Feb. 24, 2004 - The Commission today voted to publish
for public comment Regulation NMS, which would contain four
interrelated proposals designed to modernize the regulatory structure of the U.S.
equity markets. The substantive topics addressed by proposed Regulation
NMS are (1) trade-throughs, (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.

1. Trade-Throughs

Regulation NMS would establish a uniform trade-through rule for all
market centers that would affirm the fundamental principle of price
priority, while also addressing problems posed by the inherent difference in
the nature of prices displayed by automated markets, which are
immediately accessible, compared to prices displayed by manual markets, which
are not.

Specifically, the proposal would require self-regulatory organizations
(SROs), as well as any market center that executes orders, to establish
procedures to prevent the execution of an order for national market
system stocks at a price that is inferior to the best bid or offer
displayed by another market center at the time of execution.

At the same time, the proposal would include two exceptions to the
general trade-through rule.

First, a market center would be allowed to execute an order that trades
through a better-priced bid or offer on another market center if the
person entering the order makes an informed decision to affirmatively opt
out of the trade-through protections. Informed consent would need to be
given on an order-by-order basis. This exception is designed to provide
greater flexibility to informed traders while preserving the average
customer's expectation of having his or her orders executed at the best
price.

Second, an automated market - one that provides for an immediate
automated response to incoming orders for the full size of its best displayed
bid or offer, without restriction - would be able to trade through a
better displayed bid or offer on a non-automated market up to a de
minimis amount of one to five cents, depending on the stock's price. This
exception reflects the comparative difficulty of accessing market quotes
of non-automated markets.

Overall, the proposal is designed to be a practical response to
developments in the marketplace that still preserves the important customer
protection and market integrity goals of best execution and the
protection of limit orders.

The proposed trade-through rule would not change a broker-dealer's
existing duty to obtain best execution for customer orders.

2. Intermarket Access

Non-Discriminatory Access

Regulation NMS would establish a uniform market access rule that would
help assure non-discriminatory access to the best prices displayed by
market centers, but without mandating inflexible, "hard" linkages such
as the Intermarket Trading System (ITS).

At its core, the proposal would prohibit a market center from imposing
unfairly discriminatory terms that prevent or inhibit any person from
accessing its quotations indirectly through a member, customer, or
subscriber.

This standard is intended to assure that a member, customer, or
subscriber of a market center can sponsor access to quotes and order execution
without receiving disparate treatment in the handling of those orders
with respect to fees, speed, or other terms.

Quote Standardization

Regulation NMS also would establish an access fee standard. This
standard - designed to promote a common quoting convention - is intended to
harmonize quotations and facilitate the ready comparison of quotes
across the national market system.

The proposal would establish a de minimis fee standard for all market
centers and broker-dealers that display attributable quotes through
SROs. Specifically, access fees would be capped at $0.001 per share, and
the aggregation of this fee would be limited to no more than $0.002 per
share in any transaction.

Locked and Crossed Markets

Finally, the proposed rule would require each SRO to establish and
enforce rules requiring its members to avoid - and prohibiting them from
engaging in a pattern or practice of - locking or crossing the markets.

3. Sub-Penny Pricing

Regulation NMS would ban sub-penny quoting in most stocks.
Specifically, it would prohibit market participants from accepting, ranking, or
displaying orders, quotes, or indications of interest in a pricing
increment finer than a penny in national market system stocks, other than
those with a share price below $1.00.

This proposal is intended to prevent sub-penny pricing from being used
by some market participants to "step-ahead" of customer limit orders
for an economically insignificant amount. This "sub-pennying" could, over
time, discourage investors from placing limit orders, which are an
important source of market liquidity.

4. Market Data

Regulation NMS would amend the existing arrangements for disseminating
market data in order to better reward SROs for their contributions to
public price discovery, as well as implement most of the recommendations
of the Commission's Advisory Committee on Market Information.

Under existing rules and joint industry plans, the trades and best
quotes in thousands of listed and Nasdaq stocks are made available on a
real-time and consolidated basis.

The proposal would replace the current plan formulas for allocating
revenues derived from market data fees to the SROs, which are based solely
on the number of trades or share volume reported by an SRO. This method
of allocation has led to serious economic and regulatory distortions,
creating incentives for "print" facilities, "wash" trades, and
"shredded" trades. In addition, those markets that generate the highest quality
quotes (i.e., the best prices and the largest sizes) are not
necessarily rewarded.

In general, the proposed new formula would divide market data revenues
equally between trading and quoting activity, in order to reward
markets that publish the best accessible quotes.

The proposal also includes a number of improvements that were
recommended by the Advisory Committee on Market Information. For example, the
proposal would broaden participation in plan governance by creating
advisory committees composed of non-SRO representatives. Such committees
would help assure that interested parties have an opportunity to be heard
on plan business, prior to any decision by the plan operating
committees.

In addition, the proposal would authorize market centers to distribute
their own additional data, such as limit order books, separate from
other markets, as well as establish uniform standards for the terms of
such distribution.

Comments on these proposals should be submitted to the Commission
within 75 days of publication in the Federal Register.