SEC Proposes to Rescind "Trade-Through" Rule

The SEC proposed to rescind NMS Rule 611 ("Order Protection Rule") which contains the "trade-through" prohibition for national market system stocks and NMS Rule 610(e)("Access to quotations") which contains restrictions on locking and crossing quotations in national market system stocks.

In the proposal, the SEC contended that both rules were designed for a market environment that no longer exists: one where exchanges were less electronically connected, linkages were slow, and there was a genuine risk that investors would be denied the best available displayed price. The agency said that today, the U.S. equity markets are highly automated, deeply interconnected, and operate at microsecond speeds, and that the technological advances in order routing and market data access have made these protections obsolete.

The SEC argued that both rules have produced meaningful unintended consequences, including increased compliance costs, greater market structure complexity, limitations on broker order-handling discretion, and a proliferation of stock exchanges that has contributed to fragmentation of trading across lit venues. The SEC stated that Rule 611’s original goal of incentivizing displayed liquidity has gone largely unmet: since 2005, the share of orders interacting with non-displayed liquidity (through dark pools, internalization, and hidden orders) has grown consistently. The SEC contended that Rule 611 is no longer needed as an investor safeguard because broker-dealers remain subject to their duty of best execution, which requires them to seek the most favorable terms reasonably available for customer orders.

If finalized, the rescission would give broker-dealers substantially more discretion in routing and execution, remove a key competitive advantage for displayed lit venues, and allow market forces, competition, and innovation to shape the continued evolution of U.S. equity market structure.

SEC Chair Paul Atkins stated that the rule had been a failure in its purpose of increasing displayed liquidity, instead resulting in a "proliferation of new trading venues, which in turn fragmented liquidity and created an increasingly complex, costly, and opaque marketplace for order execution."

Commissioner Uyeda described the proposal as the start of a broader review of the SEC's equity market-structure rules. He said that market participants told the SEC the rules often introduced complexities, burdens, and inefficiencies in a technology-driven trading environment. He said removing Rule 611 would unsettle long-standing assumptions and raise questions about best execution, transparency, trading mechanics, and investor confidence, and that public comment and economic analysis would be needed to address them. 

Comments on the proposal are due sixty days after publication in the Federal Register.