The New York Stock Exchange (NYSE) asked the Securities and Exchange Commission (SEC) for relief from the trade-through rule because it cannot route orders to certain alternative trading systems and the International Stock Exchange that display their quotes on the NASD Alternative Display Facility. The NYSE is requesting relief for a 30-day period, from March 5 until April 5.

Reading between the lines, this means the NYSE is not fully compliant with Reg NMS and is asking the SEC for "a limited no-action" allowing the exchange to trade-through the protected quotes of NASD ADF participants for one month, beginning Monday, March 5th until April 5th.

The problem seems to be that the NYSE is still using the Intermarket Trading System (ITS), to access the other exchanges venues, and doesn’t have access to a few ATSs and the ISE Stock Exchange that are displaying their quotes through the Alternative Display Facility, regulated by the NASD.

“What essentially happened here is that NYSE woke up and said that they can’t access ADF participants such as DirectEdge ECN, Track Data Securities Corporation (Track ECN) and Lava Flow (a.k.a., Citigroup’s NexTrade ECN) according to an industry source who requested anonymity.

Isn’t it a bit late? The Trading Phase of Regulation NMS is due to begin on Monday, when exchanges and other market systems are required to automatically route orders to the market displaying the best price. If the largest U. S. stock exchange cannot route out to all the market centers, can Reg NMS go forward? The NYSE already requested a one-month delay in Reg NMS from Feb. 5 until March 5. So why didn’t’ the exchange request a two-month delay?

It seems odd that the NYSE is still using the ITS to connect to other market centers, when NYSE Arca has direct connectivity to these other markets. Many of the other markets (American Stock Exchange, Boston, ISE, the National Stock Exchange and the Philadelphia Stock Exchange) have established direct connectivity through either Lava Trading or Order Execution Services (OES). Also, the NYSE acknowledges in the filing that the termination of the ITS Plan with the Trading Phase Date which begins on March 5.

I thought the NYSE was going to use NYSE Arca which is connected to the ADF participants and all the venues. But the Hybrid Market is not connected to Arca’s router, notes the source. By April 5th, Hybrid is going to connect to Arca’s router,” says the source.

I'm not picking on the NYSE — I know it's been a tough week with the market decline, a backlog of orders and over 4 billion shares. I realize this practice is only going to last for 30-days, but aren’t investors going to lose money if their order is not routed to the best price?

On Monday, if a customer sends an order to the NYSE and if one of the ADF participants has the best quote in a listed stock, the NYSE would not route the order there and could execute the customer’s order at a worse price, says the source.

In its filing the NYSE contends that this proposed rule change (A) does not significantly affect the protection of investors or the public interest and (B) does not impose any significant burden on competition. But if the venues that display on ADF can't receive orders, then it would seem they are being disadvantaged.

“It does affect the competition. If NYSE starts ignoring ADF quotes, ADF (participants) will lose customers,” says the source.

It’s unclear whether there is going to be a postponement of Reg NMS. Just before 4:00 p.m., CNBC reported that the SEC would not grant NYSE relief and that the March 5 date is a go. I will continue to follow this developing story and whether Reg NMS is go or not. Stay tuned!

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