White Paper Testing Approach for Reg NMS Compliance

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The new Regulation National Market System (Reg NMS) has brought major changes to the structure of the equities markets in the USA. As the original NMS framework dates back almost three decades, it is obvious that the old framework cannot fit into the intricate trading systems of the present era. This white paper aims to address some of the challenges that organizations will face in testing the trading systems to ensure compliance with the new NMS regulations. By following a rigorous testing approach, the organization will reduce the risk of non-compliance and also benefit from having a sound and robust trading platform.

What is Reg NMS?

The NMS (National Market System) consists of many listed companies, representing trillions in market capitalization, trading on nine different market centers across the USA. The NMS is the core of the US Equity Markets, and it was designed in the 1970-80s, well before the technological overhaul in the equity market structure. Furthermore, the competition among market centers has increased drastically. These trends have resulted in the Commission modernizing and strengthening the NMS, and that strengthening consists of four rules: Order Protection, Access, Sub-Penny, and Market Data.

Testing Approach for Reg NMS

IT spending on Reg NMS compliance technology is estimated to be more than a hundred million US dollars. This has clearly revealed the significant impact the new regulations are having on the trading companies. However, as with most initiatives driven by compliance, it requires organizations to invest wisely — both financially and in time — to implement a quality system that will provide additional business benefits. So in making these significant changes, it is imperative that the organization places quality at the forefront of the implementation.

Functional Testing

Trading systems include a variety of applications and front-ends. Test cases are critical entities and hence authored with the complete understanding of the system's behavior and functionality. The validation of Regulation NMS trading platforms includes the testing of various functionalities.

AppLabs has identified the four most critical functional testing areas for Regulation NMS, and the various forms of test cases authored are scenario, unit functional, and regression test cases.

Unit Functional Testing

The whole objective of this testing activity is to validate the working of every single function of the Reg NMS compliance trading system. Each and every individual function is validated and verified against the various unit-level functional test cases.

Smoke Testing

Smoke tests are executed after each new product release of the trading system to ensure the stability of the product and allow its approval to progress it to the next levels of testing.

Scenario Testing

To test the complete functionality in a broader perspective (e.g., real-time scenarios) requires the execution of scenario test cases which include almost all the applications of the trading system. The real-time testing strategy has always resulted in the identification of any bugs or issues.

Authoring the scenario test case is quite a challenge such that a thorough domain and functional understanding is mandatory; AppLabs has experience in providing this specialized service.

Regression Testing

The main purpose of the regression testing is to cut down the time and repetitive manual test execution. Here, Quick Test Pro is used to automate the trading system.

Non-Functional Testing

In the present environment, threats to financial IT systems are increasing daily, so the product's performance and security are the prime factors in determining success. These systems are vulnerable to risks such as fraud or breaches of confidentiality, causing loss of assets and damage to reputations. AppLabs has identified the most critical non-functional testing methodology approaches for Reg NMS trading systems as security and performance testing.

Security and Performance Testing

AppLabs has adopted a security model that integrates security practices by working with the client throughout the different stages of the SDLC. The model also assists with the early identification of security threats through code reviews, functional security tests, and vulnerability checks, with the aid of security testing tools at client/server sides.

Once a trading system goes live, its performance is critical as the transaction of multiple orders takes place at a very rapid pace. AppLabs provides a tailored solution using our remote load testing infrastructure, enabling one to select the performance testing and quickly verify changes prior to implementation. Our in-depth experience in technology development and testing ensures the identification of the source of the problem and that a remedial course of action is subsequently recommended.

Interface and Gateway Testing

Trading systems generally communicate with various systems and sub-systems, both internally and externally. It is a known fact that a stock exchange is connected with multiple exchanges; thus, the various interfaces and gateways become important. Throughout the communication and transactions between the various systems, loss of data is a possibility; thus, interface testing takes a prominent role in order to validate the data and backend logs. The Consolidated Quotation System gives information about market data like BBO (Best Bid and Offer), and by using this data, the trading system arrives with the calculation of NBBO (National Best Bid and Offer).

Simulation Testing

Production testing is always a penultimate activity before going into production. But in the initial stages of testing, it is the simulators which play a significant role in simulating the real-time conditions. Here, two simulators are used in testing compliance.

Exchange Simulator and Trade Test

This is helpful in conditions where the routing of orders is to the away market and when there is a better price available in the buy/sell side. Testing of the order routing is very critical in validating Reg NMS compliance, like the "trade through rule," and this could be achieved by simulating the same conditions using simulators. When there a better price is available, simulators could be helpful in routing orders to the various stock exchanges in the USA.

Trade Test is used as a tool to simulate SIAC multicast feed of other exchanges. The SIAC simulator sends these quotes/trades received from other exchanges as an input to the trading system in the SIAC-specified format. This simulator testing validates the Reg NMS compliance, namely "Market Data."


In order to succeed in the challenging world of Reg NMS, AppLabs believes that quality products are the key factor in assessing the level of readiness in terms of compliance criteria and achieving the substantial business benefits of a robust system. This white paper has highlighted the key areas that organizations should address when implementing a new trading system, and by understanding the detailed requirements of Reg NMS, you will be able to formulate a comprehensive testing approach to meet your business objectives.

About the Author

Ganesh is a seasoned QA consultant and is currently associated with Applabs. He has been contributing QA-related articles and white papers to various publications and has also received a number of industry-recognized certifications in software testing. He is passionate about tracking updates and acquiring knowledge in the capital markets and other related areas.

For more information email info@applabs.com or visit www.applabs.com

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