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by a2h 2170 days ago
Your criticism of my attributing the cause of the 'feature' to Reg NMS is fair. Although it is worth looking at the entirety of Rule 612, especially paragraph (c)[0].

You are correct that brokers are required to execute customer trades at the best available price aka the NBBO. The issue here is that the NBBO is relatively slow as compared to data feeds offered by various exchanges and many brokers use the NBBO simply to satisfy Reg NMS Rule 603(c)[1].

If price data was able to travel instantaneously then the NBBO might represent the true best price(s). But the laws of physics say it isn't so and orders can be executed at a less-than-best price yet still at or better than the NBBO.[2]

Fortunately, more are aware of this these days including the SEC which released a proposed order calling for exchanges to submit revised NMS Plans for consolidated data earlier this year.[3]

A great summary of how money is made with all of this I highly recommend giving this a read: http://www.nanex.net/aqck2/What-Every-Retail-Investor-Needs-...

[0]: https://www.law.cornell.edu/cfr/text/17/242.612 [1]: https://www.sec.gov/comments/4-729/4729-4560068-176205.pdf [2]: https://iextrading.com/docs/The%20Evolution%20of%20the%20Cru... [3]: https://www.sec.gov/rules/sro/nms/2020/34-87906.pdf