Group Co.
Order Protection Rule Tug-of-War
Traders Magazine Online News, April 28, 2017
There is still uncertainty around the fate of the Order Protection Rule, a key rule governing U.S. stock trading that has led to more complexity, speed and order types, but also protects retail investors from receiving inferior prices on their orders.
Also known as the trade-through rule, Rule 611 has been and still is a central tenet of Regulation National Market Structure (Reg NMS), which requires brokers to route orders to the venue displaying the best price. It ensures that investors receive an execution price that is equivalent to what is being quoted on other exchanges.
Ivy Schmerken
On April 5, the Securities and Exchange Commission’s Equity Market Structure Advisory Committee (EMSAC) held an open meeting to hear findings from its subcommittee on Regulation NMS.
Rather than recommend a clear direction on whether to keep or remove the trade-through rule, representatives of buy- and sell-side firms indicated they had “struggled to come to produce conclusive evidence that would drive a clear or compelling future direction.”
“We are not at the stage of making any recommendations,” said Kevin Cronin, head of global trading at Invesco, who noted there were strong arguments on both sides of the issue.
“As it pertains to 611, I think it’s less clear that people conclude something needs to be done. Even for the crowd that believes something needs to be done, it’s much less clear ‘what’ is the something that needs to be done,” added Cronin.
Instead, the subcommittee provided a framework for conducting a potential pilot on the order protection rule, should the SEC prioritize the initiative, which would help the agency gather data for a quantitative assessment of the impact and effectiveness of Reg NMS.
“The no. 1 issue we struggled with was it’s difficult to resolve the 611 question in a data driven capacity,” said Joseph Mecane, Managing Director in the Electronic Equities and Credit Product Business at Barclay’s. “It wasn’t necessarily clear whether 611 had a meaningful impact on displayed limit orders or whether the burdens of compliance with 611 would outweigh those benefits,” said Mecane at the meeting.
One of the key arguments for keeping the trade-through rule is that it has served as a “back-stop” protection for displayed limit orders particularly from retail investors. A second argument is fear of a new compliance burden that would fall on brokers if the rule were scrapped. If 611 were eliminated, firms would need to prove that limit orders posted on a trading venue were not getting traded through, noted Mecane.
Retail brokerages have come to rely on rule 611 to ensure they are providing individual investors with the best price available across all exchanges and off-exchange trading venues.
For more information on related topics, visit the following channels:
Comments (0)