American capital markets — stock exchanges, bond markets, over-the-counter markets for securities and derivatives of all types — are often praised as paragons of free-market dynamism. But beneath that reputation lies a market structure shaped less by entrepreneurial forces than by layers of regulatory design. While market structure may seem like an abstract or technical topic, it directly affects the prices we all pay and receive — for gas at the pump, groceries at the store, or the stocks and bonds in our 401(k)s — because it determines how trades in capital goods are executed and how prices are discovered. The National Market System (NMS) that ties together various stock exchanges and electronic trading venues is not a spontaneous product of competitive, entrepreneurial forces, but rather — and quite ironically — an elaborate bureaucratic construct born of sustained government intervention.
Nowhere is this irony more visible than in Regulation NMS (Reg NMS), adopted by the Securities and Exchange Commission (SEC) in 2005. At the time, the SEC claimed it was modernizing fragmented exchanges into a coherent, investor-friendly system. At the heart of Reg NMS lies Rule 611, the Order Protection Rule, which prohibits trade-throughs — i.e., executing orders at worse prices than those displayed elsewhere. This rule, intended to guarantee the “best price,” also had countless unintended consequences: it spawned an explosion of trading venues, fragmented liquidity, and a hyper-focus on speed and order type engineering.
At the time, two SEC commissioners (Paul Atkins and Cynthia Glassman) dissented from the final rule. Their warning was clear: rather than promoting competition, Reg NMS would ossify it — enshrining one model of execution, suppressing innovation, and ultimately reducing market choice. “Far from enhancing competition,” they wrote, “Regulation NMS will have anticompetitive effects.”
Two decades later, with the SEC now revisiting the rule amid mounting criticism of complexity and gaming, their dissent looks increasingly prescient.
The background to Reg NMS’s adoption is equally revealing. In 2005, fears of a “duopoly” gripped the industry as the New York Stock Exchange merged with the Arca ECN and Nasdaq acquired Instinet. In both cases, two central stock markets bought electronic trading venues that deeply entrenched them in US securities trading. Smaller players like the Philadelphia Stock Exchange (PHLX) scrambled to remain relevant, striking deals with Citadel and Merrill Lynch to form a so-called “tripoly.” This turf war among exchanges wasn’t a natural market realignment — it was driven by the regulatory architecture. If the best quote must be accessed and honored by law, why maintain multiple venues displaying it? The answer became clear: only those who could afford the technological and legal arms race would survive.
Over the following years, dozens of new exchanges and dark pools emerged — not because of entrepreneurial freedom, but because Reg NMS made it profitable to exploit its mechanics. Algorithmic firms like Tradebot launched BATS to capitalize on the guaranteed protection of displayed quotes. Matching engines were designed to game the rules rather than serve human investors and traders. The market became increasingly fragmented: as of 2023, trades in US equities were routed through at least 16 exchanges and over 30 dark pools, with orders often pinging across venues in microseconds to comply with regulatory obligations rather than optimize execution quality.
This complexity wasn’t accidental — it was built. As former SEC Commissioner Daniel Gallagher has noted, today’s market structure is “the product of extraordinary regulatory change,” not spontaneous order. The SEC effectively codified not only how trades must be priced and routed, but also how exchanges must behave, who can compete, and which kinds of data must be purchased. The bastion of capitalism is a product of collectivist planning.
The SEC argues that Reg NMS lowered trading costs and democratized access. That’s partly true. But it did so by standardizing a particular model of trading and empowering firms that could comply with, or arbitrage, the rules. The losers weren’t just inefficient brokers or legacy exchanges — they were also individuals and firms who now face hidden complexity, reduced transparency, and rising market data costs.
As the SEC revisits Rule 611 in its September 2025 roundtable, the real question isn’t about passing judgment on Regulation NMS — it’s about deciding the future path of our markets. Do we allow competitive forces to reshape market structure and move away from the innovation-stifling, one-size-fits-all regime that now governs price formation? Or do we continue to bear the hidden but very real costs of central planning in the most critical arenas of American economic life? Regulation NMS continues to earn praise from the same regulatory bodies that imposed it, but its legacy is a market architecture engineered in Washington, not discovered through market processes.
