On April 6, 2005, the SEC finally put to
rest the 15-month long debate over the future of the US equity markets. By
the weakest of margins, the SEC voted to approve Regulation NMS, a set of
sweeping market reforms intended to modernize the regulatory structure of
the National Market System created in the 1970s. The effects of Reg NMS
will be felt by exchanges, ECNs, alternative trading systems, brokers,
dealers, institutional and retail investors, and the technology vendors
that provide the links between all these puzzle pieces. In a new report, Regulation
NMS: One Rule to Bind Them All, Celent provides an analysis of the
winners and losers, and predicts what events may arise in the future.
The report begins with a contextual
overview of the problems Regulation NMS is intended to solve. Problems
such as inaccessible markets, uneven regulation and technology, and opaque
market data distribution systems are discussed. Celent’s analysis then
moves to the specific details of the four major reforms embedded in
Regulation NMS and provides a granular explanation of how trading
practices will change as a result. The report then examines the specific
impact of these rule changes on exchanges, ECNs and block trading
platforms, front-end technology providers, the sell-side and buy-side
communities, connectivity providers, and market data vendors.
Celent believes that connectivity
providers, such as extranet, direct market access, and FIX engine vendors,
are the biggest beneficiaries of Reg NMS. Connectivity becomes
increasingly important as the markets become more electronic and more
formally linked. While the SEC’s intention was for investors to reap the
biggest benefits, this unfortunately is not the case. The typical retail
investor will likely see no difference in the way he or she participates
in the equity markets, and the typical institutional investor’s job just
got harder.
Celent’s analysis also predicts that life
for the manual exchanges, like the NYSE and some regional exchanges, will
be more difficult going forward. They will be forced to adopt electronic
trading capabilities or cease to exist. ECNs and electronic exchanges will
be fine in the new Reg NMS world, and will likely reap the benefits of the
changes forced upon their manual competitors.
