A recent proposal from the U.S. Securities and Exchange Commission to rescind the so-called "trade-through rule," which aims to promote fair competition across national securities exchanges, has led to debate among marketplaces and global trade associations about how the repeal should be structured and what impacts it could have on companies.

If adopted, the repeal of Rule 611 of Regulation National Market System (NMS) would give broker-dealers and trading venues greater flexibility to weigh speed, certainty of execution, liquidity, fees, market impact, and total transaction costs when routing or executing orders. But the proposal also could weaken incentives to display liquidity and complicate reliance on the National Best Bid and Offer (NBBO). The practical impact will depend heavily on SEC guidance and related market-structure reforms.

Regulation NMS was adopted in 2005 to modernize U.S. equity market structure and promote fair competition across national securities exchanges. The accompanying Rule 611, also known as the "order protection rule" or the "trade-through rule," aims to prevent trading centers from executing trades at prices inferior to a publicly displayed, automated quote of the NBBO price displayed elsewhere.

This "protected quote" creates consistent pricing for all stocks traded on major stock exchanges and many over-the-counter pink slip stocks as a means to ensure investors receive the best NBBO available, regardless of the exchange. A broker executing a trade cannot avoid the NBBO and place the order on another platform at a less favorable price. With an integrated system of stock exchanges that creates the benefit price of disclosure through a publicly displayed price, the NBBO provides reliable information regarding market liquidity. However, the existence of markets, including crypto-asset securities and tokenized versions of traditional exchange traded securities, has created unpublished markets that may affect the price of a security traded through blockchain that is not incorporated into the NBBO. This has led national exchanges and self-regulatory organizations (SROs) to question whether Rule 611 still improves investor outcomes or instead adds complexity and the cost of order execution across an increasingly fragmented marketplace across a growing number of new trading venues.

SEC Chair Paul Atkins takes the position that while Rule 611 was intended to better inform markets and investors of the liquidity of an asset, it instead has resulted in the "proliferation of new trading venues" that fragmented liquidity, decreasing the usefulness of the NBBO system relied upon by brokers to fulfill their best execution obligation. Supporters of the proposed repeal argue that competition and best execution duties could lower costs and reduce complexity. Others warn that weakening incentives to display liquidity could impair price discovery, widen spreads, or make execution benchmarks less reliable. Comment letters from NYSE Group, Inc. (NYSE) and the World Federation of Exchanges (WFE) highlight the main debate: whether Rule 611 should be rescinded outright or changed only as part of broader market-structure reform.

NYSE and WFE Comments Demonstrate Conflicting Views on Proposal

NYSE supports rescinding Rule 611. It argues that the rule has distorted market structure by giving protected-quote benefits and related revenue to venues that may not contribute meaningful liquidity or execution quality. NYSE says repeal could reduce fragmentation, costs, and complexity, but only if the SEC also addresses best execution guidance, NBBO integrity, securities information processor (SIP) revenue allocation, access fees, locked and crossed markets, and related disclosure and monitoring issues.

WFE is more cautious in its support for rescinding the rule, emphasizing that market participants have longstanding compliance systems and order routing procedures in place specifically designed around the decades-long trade-through rule. It agrees that repeal may be justified because markets have evolved, but stresses that Rule 611 is not just deregulatory, but a structural change that will create fundamental changes in the U.S. market.

The SEC should consider repeal as part of a broader review of rules around off-exchange trading, exchange flexibility, SIP incentives, and best execution obligations. There is broad agreement that the SEC’s proposal requires greater clarity regarding the scope of changes to the regulatory framework and identifiable expectations of regulators to reduce uncertainty for both traditional and emerging trading platforms and guidance on promoting consistency across markets, once markets move away from relying on the NBBO and other centralized metrics.

Best Execution Obligation and Regulatory Expectations

The SEC’s proposal would effectively give broker-dealers more flexibility to route orders based on overall execution quality, not just the best displayed price. Relevant factors could include speed, certainty of execution, liquidity, market impact, fees, and total transaction cost. The equities markets have evolved significantly through the use of automated tools, high-speed trading, and increased connectivity resulting in greater price transparency and faster, more efficient order routing. These and other technological advances are cited in the proposal as reasons to eliminate the prescriptive trade-through rule. The brokers’ best execution obligation to fill customer orders at the best available price is the primary mechanism to protect investors. If Rule 611 is rescinded, a broker may determine that factors beyond price are more beneficial to the individual customer. The SEC should issue guidance regarding which factors may take priority over the order price and how the factors should be weighed against one another.

Without clear regulatory guidance regarding the scope and limits of the best execution analysis, brokers may be exposed to uncertainty and potential regulatory action as the markets transition away from the prohibitions of the trade-through rule. The SEC should provide clear guidance regarding the use of discretion in assessing the best execution of customer trades. A common understanding of regulatory expectations is necessary to ensure consistent investor protection across both traditional and alternative trading systems.

Potential Effects of Modifying or Rescinding the Trade-Through Rule

We took a look at both the NYSE and WFE letters and found the following potential benefits of rescinding or amending the trade-through rule. Supporters of the SEC’s proposal to rescind Rule 611 see the prospect of less complex, more competitive markets.

• Less fragmentation and complexity. Repeal could reduce economic incentives that drive new venues to seek protected-quote status even when not meaningfully improving market quality.
   
• More flexible order routing. Broker-dealers could consider total execution quality, including speed, certainty, liquidity, fees, and market impact, factors that may affect the best overall execution outcome, rather than focusing only on price.
   
• More exchange competition and innovation. Exchanges could have greater flexibility to compete with off-exchange venues on pricing, incentives, and market design.
   
• Lower regulatory burdens. Eliminating exchange filings required for rule, product, pricing, and functionality changes will level the playing field with non-exchange venues that are not subject to filing requirements, providing exchanges the ability to adapt quickly.
   
• Better SIP incentives. Reform could shift revenue allocation to facilitate quotes and trades that contribute to real price discovery.

What risks could be associated with changing the trade-through rule? What about costs? Those who oppose rescinding the trade-through rule anticipate price disparity between markets, increased fees on trades, and loss of liquidity through proliferation of trading venues that operate beyond any centralized, consolidated market system.

• Weaker displayed liquidity and price discovery. If fewer participants display quotes on exchanges, price transparency could erode and the NBBO may become less reliable.
   
• Wider spreads. If profitable order flow continues moving off exchange, liquidity providers for exchanges may widen quotes to compensate for a decrease in profitable executions.
   
• Unclear best execution standards. Without SEC or SRO guidance, broker-dealers may be uncertain when they can prioritize factors other than the best displayed price resulting in inconsistent market protection and regulatory actions.
   
• Less consistent NBBO benchmarks. If firms disconnect from some exchanges, their view of the NBBO may differ from the SIP-published NBBO and lead to divergent views of how to meet the best execution obligation.
   
• Revenue-driven quoting. Without SIP reform, participants may post quotes mainly to earn revenue rather than to provide real liquidity in the market.
   
• Transition costs. Related rules, reports, fee caps, and SRO rulebooks would need coordinated updates to avoid operational and legal uncertainty.

Market Competition Could Affect Investor Prices

The effect on investor prices will depend on how the trade-through rule is repealed and how any accompanying reforms are implemented. On the positive side, allowing broker-dealers to consider net execution quality rather than mechanically routing to protected quotes could reduce unnecessary costs, improve speed and certainty, and permit venues to compete more effectively on price and liquidity. Allowing locked markets could also compress spreads by letting market participants display the prices at which they are actually willing to trade.

On the negative side, if displayed exchange liquidity declines or SIP incentives continue to reward quote activity without execution, investors could face wider spreads, less reliable reference prices, and more fragmented views of market value. This could mean the principal economic tradeoff is between increased routing flexibility and market competition, on one hand, and the preservation of transparent exchange-based price discovery, on the other.

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