Over-regulating the “Free Markets”

Just got an email about some more changes for the way we trade. It’s definately tough to be a trader in this day and age when your being hit left and right with this and that change,but we all press on for the most part,and some fall by the wayside.Oh and then there are the one’s who take the easy road,I’m sure you have all heard that story about the latest trading scandal.Anyways I was sent an email after the market close “surprise”, more changes coming in the way orders are handled. The implementation of the first phase of REG NMS is taking effect on Monday,March 5th.Hey thanks for the heads up on that one so soon guys:(sarcasm).I’m still getting up to date on what it all means,but her are a few snippets for your reading pleasure.

Overview - What’s Reg NMS?

It’s difficult to craft an effective advisory communication that could possibly address each Reg NMS question that might potentially arise . However, here’s some information that we hope is somewhat helpful . So, first off, if you haven’t yet done so, take a moment to enter “Reg NMS” into Google Web or News, and read up on this topic . This may give you a better sense of the context in which Reg NMS was enacted and what the regulations are geared for at a high level. Preparing for the implementation has driven many industry initiatives over the past year, including exchanges aligning themselves with other exchanges and the creation of new platforms and order handling protocols such as The NYSE Hybrid Market System, RASH Orders within Nasdaq’s Single Book, etc… Reg NMS and its effects will continue to increase the competition levels amongst the various market centers. While they are all required to route out to others when their respective books cannot immediately fill certain orders, each market center will be doing whatever they can to ensure that the liquidity levels exist within their book in order to execute your order .

Reg NMS is a series of provisions that have their origins going back to the 70’s when the framework for the National Market System was developed. Reg NMS is comprised of four components, but in practical terms, for most traders, it will be felt most by expanding the scope of the trade-through rule. As some of you may be aware, almost a year ago, on the listed side, the major market centers implemented the trade through rule.
What’s the Trade Rule In Simple Terms I Can Understand?

Simply stated, applying the trade through rule means that trades cannot trade through or “ignore” a market center that is offering a better “price”. Where a better displayed price (i.e. not hidden or reserved) is posted and that better price represents the top of book for that market center, traders must attempt to “hit” that quote before proceeding ahead with an order on another market center. So, traders who have focused on trading listed stocks, more so perhaps than those traders who have concentrated on Nasdaq stocks, have already by now become accustomed to what the Reg NMS trading environment will be like.

ISO Orders - New Order Types Tailored for the Reg NMS Environment

In the Reg NMS environment, a brand new order type will be introduced called the “Inter Market Sweep Order” (ISO). ISO Order types guarantee the possibility of price improvement, whether you specifiy that objective or not. As a means of attempting to hit a better priced quote first, which Reg NMS requires, Anvil will automatically send ISO IOC Orders to other market centers at the same time an ISO order is originated. These ISO orders essentially “announce” to the market centers that you have made a proper attempt to hit other, better priced quotes that may be posted on other market centers first before the market center receives your order. A key premise of an ISO order is that at the time it was created, your order origination system took all relevant market data variables into account before the ISO order was sent. Thus, the Anvil trading system — the most current release — will control when an ISO order will be sent. In simple terms, in the latest Anvil release, we have taken the “guesswork” factor out of the equation for traders. Anvil will AUTOMATICALLY send ISO orders when it knows that your order is at the inside price, or when you are using the Smart Swipe or Swipe keys.

ISO Order Verification & The Assent “ISO Checker”

But, sending ISO orders also carries an important responsibility for broker - dealers, as we must dynamically verify that the conditions are in place (i.e. all market data feeds are performing as necessary) in order for us to assure that an order was allowed to be sent as an ISO order. {Within Assent, we refer to this dynamic verification process as the “ISO Checker”}. So, for an Assent office to be permissioned to send ISO orders, the office itself must be set up to receive all market data feeds. In certain cases, an office may need to utilize some data compression modules. We will discuss the details individually with offices that may require such.

Because of the effects of bandwidth consumption, we are rolling out our dynamic, real time ISO order validation process to the Assent branch network first. If all proceeds as planned, we will work out the refinements we will need in order to extend support for the ISO order type to the remote trading platform, as well as other users such as black boxes and API users. Traders, including remote access users, who don’t have access initially to ISO orders should very strongly consider sending more pro-active orders, as doing so will result in the market centers handling the required routing to other market centers until your order can be filled. Orders which cannot be sent ISO or which are sent non ISO proactive may likely not be filled as much in the fast paced market that the industry expects Reg NMS to foster.

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