SEC Commissioners Consider Future of Trade-Through Rule
Commentary by Steven Lofchie
At an SEC roundtable on trade-through prohibitions, SEC Commissioners debated whether Rule 611 of Regulation NMS ("Order protection rule") continues to protect investors or instead burdens markets with costs and fragmentation.
SEC Chair Paul Atkins argued that the trade-through rule distorts market structure by forcing participants to prioritize price alone, sidelining other important factors such as execution speed and order type innovation. He warned that the rule has splintered liquidity, driven up compliance costs, and weakened the role of traditional market makers. He said that institutional investors are particularly disadvantaged, as the rule compels them to exhaust limited displayed liquidity before accessing larger blocks, exposing their strategies to the broader market.
Commissioner Hester Peirce said that Rule 611 has remained controversial for two decades, despite repeated reviews and advisory committee discussions. She emphasized that reforming or repealing the rule will be a complex task, given the diversity of market participants and the rapid pace of technological change. She raised questions about whether the rule should be retained, narrowed by volume thresholds, or repealed altogether, and whether related provisions—such as access fees and tick sizes—should also be revisited. She said that durable reform would require a careful, collaborative approach that accounts for both foreseeable and unforeseen market developments.
Commentary
Twenty years ago, SEC Chair (then Commissioner) Atkins and then Commissioner Glassman voted against the adoption of Regulation NMS. (See Dissent of Commissioners Cynthia A. Glassman and Paul S. Atkins to the Adoption of Regulation NMS.) The dissent was notable in its time because it happened in a less partisan era, when dissents at the SEC were particularly rare; in this case, it was even more unusual because the two dissenting Commissioners were Republican and the Republican Chair passed Regulation NMS with the vote of the two Democrats.
The dissent, which runs 44 pages, described Regulation NMS as based on "arbitrary notions and unfounded assumptions" and its policy basis as "unreasonable and anticompetitive." While the dissent challenged Regulation NMS generally, the criticisms "focus principally on the trade-through rule," questioning its statutory basis, economic analysis, policy justifications and costs. On top of that, the dissent warned of a host of unintended negative consequences to come. Many of these consequences, such as increased volatility, are impossible for a lawyer to assess. But at least one of the expected consequences, market fragmentation, is beyond dispute.