The SEC is exploring whether to tweak its trade-through prohibition amid criticism that the current rule forces some market participants to worse-than NBBO pricing after fees and rebates are considered.
The SEC aims to reassess the “trade‑through” prohibition enacted by Rule 611 in 2005; the rule forces trading venues to execute at, or route orders to, the national best bid or offeror better. Announcing the event, chair Paul S. Atkins said: “Reg NMS and its Rule 611 have not served investors or broker‑dealers well, given the market distortion and resulting gamesmanship by those that seek to take advantage of the Reg NMS structure.”
Joe Saluzzi, partner and co-founder at Themis Trading told Global Trading that: ”Atkins is correct and Rule 611 should be reviewed. Reg NMS shattered the equity market causing liquidity to disperse amongst dozens of exchanges and off-exchange venues. Displayed liquidity shrunk and the average trade size plummeted. HFTs were quick to jump in to take advantage of latencies between these market centers and the stock exchanges were more than happy to arm them with the tools that were necessary. The SEC needs to figure out a way to put the pieces back together and a review of Rule 611 is a good start.
Several research papers have been presenting evidence supporting this affirmation. Sida Li, Mao Ye and Miles Zheng in their paper from 2021 titled “Refusing the Best Price?” say “As the NBBO ignores exchange fees, 62 % of routings lead to worse net prices.” Their study finds that brokers often bypass the apparent best quote when fee differentials make another venue cheaper once costs are netted out.
In the paper “Does maker-taker limit order subsidy improve market outcomes?”, Yiping Lin, Peter L. Swan and Frederick H. de B. Harris go further: “The regulatory requirement that trading and order flow depend only on raw (nominal) spreads and prices underpins the multi‑billion‑dollar subsidy to limit orders
Our own Global trading study of lit continuous trading finds that 2% of trades happen at worse prices than the NBBO.
Read more: Price improvements fell to US$253 million as retail volume increased in May
Rule 611 was introduced in 2005 to prevent one marketplace from selling stock at a price inferior to a protected quotation displayed elsewhere. Critics argue that the rule looks only at the nominal price and ignores the exchange access fees and rebates that determine an investor’s net execution cost.
The roundtable planned for 18 September gives market participants the opportunity to express their view on the need for it to still exist.
