The Securities and Exchange Commission will offer guidance on implementing Regulation National Market Structure within a month. The guidance will cover order protection and market access issues raised by brokerages over the last few months, said Robert Colby, acting director of market regulation. "We hope to reflect and respond to many of their questions," he told WSL. The guidance will come in the form of a Q&A--the same form the Commission took recently in addressing the less controversial subpenny issue that is also a part of Reg. NMS.
Colby declined to discuss topics within order protection and market access that the new Q&A would address, but market participants speculated as to what may be included. Under order protection and the trade-through rule--a hotly contested issue prior to the regulation's approval by the SEC last year--market participants expect some clarity on exactly how "fast" and "slow" markets and execution are quantified and what a violation of trade through will mean in terms of fines. Another sore spot is best execution--such as whether a broker has to check out a slow or manual market's quotes even if it is unlikely the broker can get the order filled.
"If a floor has a better quote [but it's doubtful they can execute at that price], am I violating my best-execution obligations by not sending the order there?" asked one market expert. "In my view, of course not. But brokers just want the SEC to come out and say so."
Another issue is what to do if a group of brokers and liquidity providers want to shift their order flow, perhaps to put pressure on someone to lower their costs. "The SEC may not have intended to make market share more volatile, but if at any moment you can shift your order flow, you just might do that because the orders are protected. Prior to Reg. NMS they weren't," said Adam Sussman, senior consultant with TABB Group. On market access issues the SEC may address what will govern the communications between the exchanges and who has to bear the costs of the connectivity and routing issues.
Some Wall Streeters were dubious, however, that guidance would come on such an important issue before a new head of market regulation is appointed. "I didn't think they'd come out with guidance on order protection and market access without having a leader for market regulation," said Jamie Selway, founder and managing director at insitutional brokerage White Cap Trading. A former SEC senior official said: "No one at market regulation is going to put their head on the line on something as controversial as Reg. NMS. A career government person is risk averse." Colby denied that market regulation needs a new director before it puts out its guidance. Colby, an SEC veteran, was named acting director in November. The post has been open several months. An SEC spokesman declined to comment.