The NMS regulation controls the National Market System for OTC stocks, aiming to improve fairness in pricing and access to information. It includes four main rules, including the order protection and sub-penny rules, and also deals with information distribution and revenue allocation.
The NMS regulation is the set of regulations that control the National Market System, a system designed to facilitate the trading of certain over-the-counter (OTC) stocks. The objective of the NMS Regulation is to improve the NMS through fairness in pricing and listing prices. Four main rules make up the NMS regulation. The order protection rule and the access rule work together to promote equal access to price information, while the sub-cent rule controls how securities are priced, and the market data rules allocate income to agencies based on the value of their operations.
The national market system deals with OTC securities. These securities are sold on a decentralized market and are not traded on the stock exchange. Instead, the securities are traded through dealers who carry inventories of them. The NMS is sponsored by the National Association of Securities Dealers (NASD) and Nasdaq.
Rule 610 of the NMS Regulation is the access rule. Requires business facilities to provide fair and equal access to pricing information. The rule also sets limits on fees associated with price quotes. If the price per share is $1 United States Dollar (USD) or more, and fees cannot exceed $0.003 USD per share. If the price is less than $1 USD, the fees cannot be higher than 0.3 percent per share.
The order protection rule is sometimes known as the 611 rule. It requires that when investors buy a security on one exchange, they get it for the same price that is traded on other exchanges. The rule also requires each exchange to create and enforce policies to make sure this happens. The predecessor of the order protection rule was known as the swap rule. It had many exceptions that allowed price variations in certain types of operations.
NMS Rule 612 is known as the sub-penny rule. Establishes minimum price requirements for securities. The price of securities trading above $1 USD should be rounded to the nearest cent. If the security is trading for less than $1 USD, the minimum price increment is $0.0001 USD.
The remainder of the 371-page Regulation NMS deals with how information will be distributed and how revenue will be allocated. Brokers and market centers can publish their own data independently, but they must still disseminate their best quotes and trades through official channels. Markets will earn income based on the value of quotes and transactions provided to investors. Those with the best prices and the largest orders will get the most money.
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