Former SEC commissioner Paul Atkins writes in today's WSJ:
Lest we forget, the SEC itself sowed the seeds of today’s distorted equity-market structure when it adopted Reg NMS in 2005 and began enforcing it in 2007. The regulation mandated that stock-market participants prioritize price and speed above all other considerations, regardless of the trader’s preference or other factors like convenience or whether the amount of stock was enough to satisfy the trader’s order.
No other market functions that way and in fast-moving stock markets, the price can change quickly, making it harder to get the stock at the price and quantity that a trader wants. Subsequent informal SEC attempts to fix the problems added to the complexity. Ultimately, the regulation caused the atomization of orders in the market through gamesmanship as small orders proliferated on a variety of exchanges.
As a sitting member of the commission at that time, I opposed the regulation because I firmly believed it would adversely affect competition and innovation in our capital markets. In a joint dissent, then-Commissioner Cynthia Glassman and I warned that Reg NMS was nothing more than a series of unnecessarily complex, nonmarket-based rules inviting exploitation that could create unforeseen market distortions.
Our fears were warranted. Contrary to the false narrative that Reg NMS was the driver of today’s high-tech, efficient markets, investor demand and technology were already driving improvements more than a decade ago. Reg NMS and other convoluted rules actually skewed trading by causing widespread market fragmentation and diminished transparency. Reg NMS has driven order flow away from exchanges toward dark pools, fueled unhealthy trading volatility, and exposed the markets to flash crashes.
As former SEC Commissioner Daniel Gallagher stated last May during the SEC’s first Equity Market Structure Advisory Committee meeting, Reg NMS has become the agency’s “poster child of unintended consequences.”