Reg NMS, Protected Quotes, and Smart Order Routing Questions

Summary

The document raises questions about how US equity market structure works under Regulation NMS. It focuses on the requirement to protect the national best bid and offer, the handling of orders when another venue displays a better price, and the relationship between exchange routing and a broker’s smart order router. It also asks how high frequency traders might learn about an order during routing and what sources explain exchange architecture.

No answers or supporting references are supplied, so the document does not establish how intermarket routing works or whether the described front running account is accurate. It does, however, identify useful distinctions for studying execution: an exchange’s own routing functionality and a broker’s venue selection are separate parts of the process, and protected quotations do not by themselves explain every order path. The questions are a useful map of topics for further research, but readers need authoritative market structure sources to resolve the mechanics and assess claims about information leakage.

Key ideas

• The document asks how Regulation NMS relates to protected national best bid and offer quotations.
• It distinguishes, as a question, exchange routing from broker smart order routing.
• It raises the issue of how order information may become visible during intervenue routing.
• It provides no answers or evidence, so its account of high frequency trading remains unverified.
• Understanding the topic requires sources that explain venue rules, routing paths, and quotation protection.

Tags

# RegNMS, National best bid/offer and Smart Order Routing


# RegNMS, National best bid/offer and Smart Order Routing












I read Flash Boys when it first came out. If memory serves correctly it said US exchanges are required to forward received orders to another exchange if it has better prices, to achieve the best national bid/offer (due to RegNMS).

This process (apparently) allowed HFTs to "front" the orders and get to the second exchange before the order.

I have a few questions:

-How would the HFT firm even see the order, if the first exchange didn't execute it locally and simply forwarded it?

-If exchanges forward orders to other exchanges with a better price, isn't this removing some of the need for smart order routing?

-What are the best resources for understanding US equity exchange architecture, across the various exchanges?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.