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