National Market System (NMS)

What is the National Market System (NMS)?

The National Market System (NMS) is a regulatory mechanism that governs the operations of securities trading in the United States. It covers all entities and facilities, both public and private, that are involved in the buying and selling of stocks. It includes stock exchanges, trade clearinghouses, and market price quotation providers. The National Market System is co-sponsored by the National Association of Securities Dealers (NASD) and the NASDAQ Stock Exchange.

The primary focus of the National Market System is on ensuring transparency and full disclosure in relation to equity price quotations and trade execution. Its regulations govern how stock market prices are quoted and how stock trades are executed.

The National Market System functions in concert with other major regulatory entities, such as the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC), to oversee and monitor securities trading so as to ensure legal and fair trading practices are followed.

The Purpose of the National Market System

The National Market System was created by an act of the U.S. Congress in 1975 (the Securities Act Amendments of 1975). The basic purpose of the National Market System is to help ensure a level playing field for all equity investors.

Before the NMS’s creation in 1975, no consolidated data feeds existed to ensure uniform stock price quotations across all trading exchanges in the United States. It represented a major problem in equity trading, as some traders would receive more favorable pricing than other traders.

The responsibilities of the National Market System are essentially five-fold, as follows:

• Fair market competition – To ensure fair competition among all stock trading exchanges and markets, including OTC trading
• Efficient order execution – To ensure that all equity trading orders are executed in a timely and efficient manner
• Transparency in price quotations – To ensure that all price quotations of securities and buy and sell equity transactions are freely and equally available to all market participants
• Best price execution – To ensure that all stock trading orders are executed at the best possible price for both buyers and sellers
• Direct matching of buy and sell orders – To ensure that buy and sell orders for stocks are executed, whenever possible in keeping with the other four goals of the National Market System, without using a dealer (which usually increases transaction costs for investors – since the advent of electronic trading, nearly all stock trading transactions are executed by direct matching of buyers and sellers)

In 2005, the SEC updated the National Market System with new rules primarily aimed at lowering market data and quotation access fees in order to make the current bid and ask price quotations more freely available to all equity traders. The new rules also required increased consolidation of price quotes between different trading exchanges.

Criticism of the NMS

As with most government-created agencies, the rules promulgated by the National Market System over the years have increased in number and have become increasingly detailed. It has led to some major criticisms of the NMS regulations.

For example, NMS rules include what is known as the “trade-through rule.” The rule basically states that an order entered on one trading exchange, such as the New York Stock Exchange (NYSE), be executed on a different exchange, such as the NASDAQ, if doing so offers a better price. Critics argue that it slows down trade execution to the detriment of investors whose primary interest is immediate execution rather than the best price.

Critics of the NMS have also pointed out that transparency rules requiring that all bids and offers for a stock be publicly available have led to the creation of “dark pools,” which are private trading exchanges that enable large institutional investors to hide their trades until after the trades have been executed. In short, the rules intended to create greater trading transparency have, in fact, created less transparency.

Learn More

CFI is the official provider of the global Capital Markets & Securities Analyst (CMSA)™ certification program, designed to help anyone become a world-class financial analyst. The following CFI resources will be helpful in furthering your financial education and advancing your career:

• Automated Clearing House (ACH)
• Direct Quote
• Financial Industry Regulatory Authority (FINRA)
• Trade Execution
• See all wealth management resources