Shouldn't internalizers be required to use direct feeds instead of the SIP? The SIP, by construction, will always be lagging the 'real' (if that even means anything) NBBO.

Internalizers use both. The give retail the slower price, and buy and sell on their own account at the faster price. Nanex has uncovered a document from the NYSE stating that this is the case.

Let me be more clear -- if internalizers are regulated to use anything, why aren't they regulated to use the direct feeds specifically? If the regulation specifically allows them to use the SIP, that seems to be a failure of the regulation itself.