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SEC Committee Weighs Need for Order Protection Rule
Traders Magazine Online News, April 5, 2017
(this story originally appeared on Reuters)
A U.S. Security and Exchange Commission advisory committee will meet on Wednesday to review a stock market rule that effectively forces stock orders to be sent to the exchange displaying the best quoted price.
The "order protection rule" was put in place in 2005 as part of a broader framework known as Regulation National Market System, or Reg NMS. It was aimed largely at ensuring retail investors get the best price possible and prevents trades from being executed at prices that are inferior to bids and offers displayed on other trading venues.
But critics of the rule say it has created a more expensive, fragmented market where high-speed traders have an advantage, and that it should be replaced with more robust rules around best execution.
In September, the SEC included Reg NMS in a list of rules to be reviewed under the Regulatory Flexibility Act. The regulator asked the public to comment on whether the rules should be retained without change, amended or rescinded.
The SEC's Equity Market Structure Advisory Committee, comprised of industry experts, will discuss the impact of the order protection rule and make preliminary recommendations to the regulator on potential changes.
Some traders take issue with the rule because it forces brokers to cover the expense of connecting to all 13 U.S. stock exchanges to ensure they can access all protected stock quotes, regardless of how much - or little - trading occurs on those exchanges.
One industry trade group has called for a minimum threshold of 1 percent of market share for an exchange to qualify as a protected quote venue, which at least two exchanges would not meet. If the threshold were 5 percent, seven exchanges would not qualify.
The order protection rule has also come under fire for making it harder for institutional investors, which hold 80 percent of U.S. stocks, to complete large trades.
For example, a quote on an exchange for 100 shares priced a penny better than a quote for 10,000 shares on another exchange must be hit first, with the price of the larger order on the other exchange invariably moving in the next instant.
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