Since Reg NMS was passed in April 2005, securities firms, exchanges and electronic communications networks (ECNs) have been racing to comply with the next major wave of enforcement, comprising 250 of the most heavily traded securities on U.S. exchanges, scheduled to go into effect June 29. As the deadline draws closer, it is becoming increasingly clear that some firms are struggling to meet it, and there are even rumors that the deadline may be extended, although a decision to do so likely would not come until the last minute, according to sources familiar with the SEC's thinking.
"There is a growing sentiment that it won't happen before January '07," says a highly placed source at a large brokerage firm who has been meeting with regulators. "A smaller contingent believes it will be materially changed or not happen," adds the source, who requested anonymity because of the sensitive nature of the discussions. "There are key unanswered questions, and for the exchanges and some of the smaller firms, there is a significant amount of compliance and technology work to perform - for smaller firms, it may be a cost burden."
Shane Swanson, general counsel and director of compliance at Automated Trading Desk (ATD), bolsters these statements. "I doubt the Street will be ready on June 29," he says. "The bet was that [Reg NMS] would be delayed until mid-2007. ... The public face the SEC has put out is that they are holding the deadline, [but] I don't think anybody believes it."
The level of preparation required for Reg NMS is proportional to the centrality of a given organization in the market structure. Exchanges and ECNs, for example, have the most work to do, since each must be capable of monitoring all the other markets and preventing the execution of orders at prices that are inferior to those offered by other markets.
For their parts, the exchanges seem to be on track to meet the deadline. Spokespeople at the New York Stock Exchange (NYSE) say that 140 stocks now have been brought onto the Phase I pilot of its Hybrid Market trading system, which complies with Reg NMS rules. Phase I is scheduled to be completed March 13, with Phase II rolling out three to four weeks afterward.
Archipelago Exchange officials say the market has to make minor changes to order types, but that it was already structured to achieve best execution. Other markets that have specialist systems, such as the Chicago Stock Exchange (CHX), likely will have more work to do. Advanced Trading was unable to reach CHX officials before press time.