Summary: The Securities and Exchange Commission unveiled a proposal to eliminate the trade-through rule that has required market participants to avoid executing trades below the national best bid or offer (NBBO) since 2005. The agency concurrently proposed removing a separate rule that stops trading venues from exceeding a protected quote. The measures, discussed at an SEC meeting, could alter brokers' order-routing practices and affect price outcomes for some large retail orders.
The trade-through rule, in place since 2005, has prevented exchanges, alternative trading systems and wholesalers such as Citadel Securities and Virtu Financial Inc. from executing trades at prices worse than the national best bid or offer. By proposing to repeal this rule, the SEC is considering a change to the regulatory framework that currently prioritizes execution price relative to the NBBO.
At the commission meeting, former Republican commissioner Paul Atkins - who opposed the rule when it was introduced - reiterated his earlier criticism. "I’m concerned that the rule incentivized a proliferation of trading venues," Atkins said Thursday before the commission voted on the plan. He added the rule "created an increasingly complex, costly and opaque market for order execution." Atkins has previously argued that the rule forces brokers to focus primarily on execution price at the expense of factors such as speed or a preferred trading venue.
SEC officials at the meeting said removing these rules could simplify trade execution and lower costs tied to exchange data and market connectivity. They noted, however, that the change may have uneven effects: an agency official cautioned it could lead to worse prices for some large retail orders even though staff did not expect the vast majority of retail orders to experience significant price changes.
The proposal is now subject to a 60-day public comment period. After receiving input, SEC staff will incorporate feedback into a final version of the rulemaking, which must be brought back to the commission for another vote before any repeal could take effect.
Key points
- The SEC proposed removing the trade-through rule that prevents executions below the national best bid or offer, a regulation that has been active since 2005.
- The agency also proposed eliminating a separate rule that bars trading venues from exceeding a protected quote; both changes could alter brokers' order-routing behavior and reduce exchange data and connectivity costs.
- Market participants potentially affected include exchanges, alternative trading systems and wholesalers such as Citadel Securities and Virtu Financial Inc.; equity market structure and brokerage operations are the primary sectors impacted.
Risks and uncertainties
- An SEC official warned the repeal could produce worse prices for some large retail orders, representing a direct risk to retail trade execution quality.
- There is uncertainty about how brokers will change order-routing practices if the rules are rescinded, and how that will affect execution speed and venue choice.
- The final outcome depends on the results of the 60-day public comment period and a subsequent commission vote, leaving the timing and exact details of any change uncertain.
The SEC's proposal signals a potential shift in regulatory priorities for equity market structure, balancing execution-price protections against concerns about complexity, cost and opacity in routing and venue proliferation. The agency's next steps - a public comment period followed by revision and another vote - will determine whether the proposed rescissions proceed.