Chart showing the rise in the spread between bid/ask prices from Jan. 2007 to Jan. 2012. This spread is also known as NBBO.

Eric Scott Hunsader from research firm Nanex has brought us yet another great animated chart on NBBO Flutter. NBBO stands for National Best Bid and Offer. When you purchase a security you must first look at the Bid and Ask to see what the market is willing to buy or sale a companies shares at. A tight margin between the Bid/Ask is a good thing and indicates strong liquidity in the underlying security. A wide margin between the Bid/Ask indicates less liquidity for the underlying security. The implementation of Regulation NMS in 2007 has decreased the stability of the Bid/Ask spread causing less liquidity. The very thing Regulation NMS was trying to improve (i.e. bid/ask spreads) has actually only made things worse. Here is the definition of Regulation NMS via Investopedia:

National Market System (NMS) is a set of rules passed by the Securities and Exchange Commission (SEC), which looks to improve the U.S. exchanges through improved fairness in price execution as well as improve the displaying of quotes and amount and access to market data.