Rule Creates Frenzy to Develop Private Market Exchanges and Broker Linkages
TABB Group in a new report released today, âThe Reg NMS Order Protection Rule: Preparing for the Impact,â says implementing the Securities and Exchange Commissionâs Regulation NMS Order Protection Rule 611 will have an unprecedented and drastic impact on the equities markets. Using conservative estimates, TABB Group predicts that the number of intermarket trades will grow at a rate of over 73% a year between 2006 and 2008. By 2009, that number could surpass 6 million per day.
To handle this rising number of trades and messaging rates, the latter projected to grow by 225% to 2 billion a day in 2009, co-authors Larry Tabb, founder and CEO, and Jeromee Johnson, senior research analyst, believe âmarket trading centers will be forced to expand their already large investments in routing power, bandwidth and compliance.â
As the markets become more automated and trades are driven by computer programs rather than human intervention, latency and low bandwidth rates will become intolerable. âTrading centers that wish to compete for this most demanding of flow must not only automate, deal with a consistent doubling of messages and be smarter about where and how they route orders,â explains Johnson, âbut also be forced to do it faster than ever before. Whatâs more, these exchanges and brokers will not only need to be compliant, they will also need to prove that compliance.â
TABB Group also believes that many on the buy-side, preoccupied by a search for liquidity, will not universally adapt technologies such as FIX Adapted for Streaming (FAST) in time before Reg NMS goes into effect. âUnfortunately,â says Johnson, âthey ignore the tidal wave of market data bearing down on them. Although theyâre aware, we feel that the magnitude of this challenge hasnât been fully recognized.â
Adds Tabb, âWith the new regulations such as the intermarket sweep in Rule 611 acting as an enabler for improved routing, firms removing liquidity a fraction of a second faster will win.â
The TABB report, in summarizing the National Market Structure (NMS) Rule 611 and its impact, explains the need for private linkages, how participants are repositioning themselves, the importance of being an exchange under the Order Protection Rule and the effect of the rule on best execution, intermarket routing and the various exemptions to the rule, including an intermarket sweep order. Five exhibits cover the evolving market landscape, intermarket trade routing, intermarket message traffic, storage requirements and compliance data.