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Elaine Wah

Modern Markets, Modern Metrics - A Blog By IEX

In this blog by IEX's Elaine Wah, the newest public exchange looks to refute public claims that the metrics it uses are designed to inflate its own volume numbers and mislead people.

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July 15, 2007

SIFMA's NMS Trade-Through Victory

By Peter Chapman

The Securities Industry and Financial Markets Association got the exemptions it sought to the Securities and Exchange Commission's new trade-through rule.

The organization's trading committee had petitioned the SEC in a letter on May 1 for the right to trade through those public quotes that are protected under Regulation NMS's order-protection rule in two specific scenarios.

The pass from the SEC came on June 8 and brings to 13 the number of exceptions and exemptions to the sweeping new rule won by SIFMA. (See feature on page 58 for details.)

Under the new exemptions, broker-dealers will be able to put up prints inferior to the market's protected quotes when they are correcting trades done in error or resolving depth-of-book trade-throughs.

Trades done in error include those where customer orders have been mishandled with either incorrect prices, share quantities, names or market sides.

Depth-of-book trade-throughs are those where a customer order that is not at the top of the book is traded through. The order, although it has been traded through, is not subject to redress under Reg NMS because it is not top-of-book. It may be second or third in line, for instance.

Resolving trade-throughs of orders priced at worse than top-of-book is known as "print protection." Some brokers want to be able to offer the service to their customers without worrying about Reg NMS penalties.

In both cases, under the SEC's exemptions, broker-dealers may "fix" the trades for their customers even if the new prints are inferior to the market's protected top-of-book quotes.

The SEC, in its approval order, states the exemptions will "promote efficiency and the best execution of investor orders."