Quote from jimrockford:
I agree with you that the Hybrid rules are a screw job on the public, but I think that Regulation NMS is part of the solution, not part of the problem.
The exchanges (NYSE/AMEX), prior to Regulation NMS, could simply display a bogus quote establishing the NBBO at a price better than the true market. If you tried to interact with that quote, you could not do so, because it was bogus and unexecutable. If you tried to trade at some other market center, at a realistic price reflecting the true market, you were blocked from doing so by the old trade-thru rule in effect prior to Reg NMS. The power of the exchanges, to block other markets from trading for extended periods of time, helped block those other markets from competing with the exchanges, and helped lock everybody into sending much volume to the exchanges, when really it deserved to be executed on places like INET and ARCA.
The exchanges would often freeze out competing market executions when the market was moving rapidly, at precisely those times when traders most urgently wanted to trade. If you sent your marketable order to an exchange, in a desperate effort to execute NOW, your order would often be delayed until the move reached its end, and then you would often be executed at the worst possible price, just before the market reversed. A buyer and seller, who would have agreed to transact at a particular price if allowed to do so timely and efficiently, were routinely blocked by this horse-and-buggy technology and outmoded scheme of corruption.
Regulation NMS deprives the exchanges of this unfair advantage. Regulation NMS frees other market centers to trade thru bogus quotes displayed by the exchanges. This greatly improves the quality of executions away from the exchanges (on ECNs, for example), and gives them a much better position from which to compete against the exchanges.
So Regulation NMS is a good thing, at least for purposes of executing orders away from the exchanges. I don't execute orders at the exchanges, but I will take people's word for it that things have gotten worse for orders executing at the exchanges. But this deterioration isn't due to Regulation NMS, it is due to the exchanges, to the exchange rules, and to inadequate enforcement of exchange rules. If it weren't for Reg NMS, then things would be much worse, because then your opportunities to execute away from the exchanges would be far less, and so you would be forced to eat the NYSE/AMEX dog food to an even greater extent.
Traders who don't execute away from the exchanges perhaps won't notice the benefits I am noting. Traders who execute away from the exchanges, symbols which have a great deal of liquidity away from the exchanges, like SPY, IWM, or DIA, should notice the improvements and benefits to which I refer. The number of symbols which have substantial liquidity away from the exchanges, and the amount of liquidity that they do have, I'm sure is much greater precisely because of Reg NMS, and continue to grow because of Reg NMS.
Traders need to identify their true enemies.
