Reg NMS, or Regulation National Market System, is a set of rules proposed by the SEC in the wake of advances in electronic markets and order routing "to modernize and strengthen the regulatory structure of the U.S. equity markets" adopted under Section 11A of the Securities Exchange Act of 1934. The rule was passed and published in The Federal Register in 2005.
Reg NMS encompasses several rules. The Order Protection Rule, also known as the Trade-Through Rule, requires trading centers to route orders to the market that shows the best price. The Access Rule requires markets to display automated quotes that are both electronically accessible and instantaneously executable. The Sub-Penny Rule prohibits market participants from trading in increments smaller than a penny.
Reg NMS was passed in spite of opposition from electronic markets such as The Nasdaq Stock Market, Archipelago and Instinet, as well as big institutions, because they wanted the ability to choose speed and certainty of execution over best price.
Reg NMS (along with Reg ATS) has had a dramatic effect on the structure of the U.S. options markets. Both rules have led to fragmentation of trading venues, the rise of dark pools, a rapid growth in equities trading volume, and the arrival of new players. Many studies suggest that the rules have made the markets more efficient and have decreased trading costs and tightened spreads.