December 04, 2004

The SEC's NMS: One Price to rule them all, One Price to find them, One Price to bring them all and in the market bind them

With apologies to JRR Tolkein! Still, the comparison seems apt - the SEC is blessing the market with a new regulation. And this time they are apparently serious about binding the market to the old "one price" rule found in the legislation of the National Market System.

The one price rule probably needs some explanation. We have to go right back to the days of the 1929 crash, the Great Depression, and the creation of the SEC. The Congress of the day decided it would be a mighty fine idea if all investors should have one only price for a given stock, across all markets. So they wrote in the SEC's defining act a rule that said that all exchanges must work to one price. To be sure, what they said was "best price" but we can skip over the 3rd grade analysis here.

It was called, in essence, the National Market System ("NMS"). This was always known to be a mistake. For some reason, within the bastion of modern capitalism's most exalted high temple of the market process - the American trading markets - Congress thought that they should turn off the very notion of competition by flicking the regulatory switch. Why they thought that competitive markets could be improved by non-competitive prices is not recorded, but the SEC wisely ignored the regulation. Or, to be more precise, what the SEC did was to craft an exception, or many exceptions, and allow participants to find themselves in the exceptions.

Now, however, it seems that they've changed their minds. Or their minds have been changed for them. Now, the SEC has decided to turn off competition between markets. Why now, of all times, can only be wondered at.

Posted by iang at December 4, 2004 10:27 AM | TrackBack