SIFMA Executive Emphasizes Complexity of Market Structure Rules

SIFMA Managing Director and Head of Equity and Options Market Structure Katie Kolchin weighed-in on potential changes to trade-through prohibitions, the subject of a recent SEC roundtable. 

In a Pennsylvania + Wall blog post, Ms. Kolchin explained that Rule 611 of Regulation NMS ("Order Protection Rule") was designed to prevent executions at prices worse than protected quotes and ensure investors receive the best available prices. She said that while the rule helped modernize markets when adopted in 2005, today’s equity and options markets are far more automated, complex, and interconnected, raising questions about the continued role of trade-through protections. She also highlighted the historical context of Regulation NMS, which sought to address inefficiencies in earlier systems and improve transparency.

Ms. Kolchin said that market structure operates like an "octopus," where changing one rule without careful consideration could trigger a cascade of unintended consequences throughout the other interconnected rules (the "tentacles"). She highlighted that any adjustments to Rule 611 must consider related rules, including those on access fees, market data, tick sizes, order execution disclosures, and short sale regulation, as well as issues like Securities Information Processor revenue allocation. She stressed that options markets, which function differently from equities, should be analyzed separately, and that any reforms must also take into account FINRA's Best Execution rule, which remains a critical safeguard for investors.

Ms. Kolchin underscored that regulators, industry participants, and investors must weigh the costs, benefits, and potential unintended consequences of reform before moving forward. She concluded that any rule changes should protect execution quality, transparency, and investor confidence while adapting to modern market conditions.