The latest buy-side comments on the SEC’s proposal to rescind Rule 611 of Regulation NMS show a split over how much flexibility institutional investors need when executing orders and how much price protection should remain in the market.
Vanguard, Fidelity Investments and T. Rowe Price all supported rescinding the trade-through rule in comments filed on August 17, while the Managed Funds Association argued against the proposal in its current form. An institutional investor group including Acadian Asset Management offered a middle ground, backing changes to protected quotations rather than eliminating them outright.
T. Rowe Price, which had $1.9 trillion in assets under management as of June 30, said it “support[s] the Proposal’s core element (rescinding the Trade-Through Rule).” T. Rowe Price’s vice president and global head of equity trading, Mehmet Kinak, and Jonathan Siegel, vice president and managing legal counsel for legislative and regulatory affairs, wrote that the rule can work against institutional investors by requiring them to interact with individual displayed quotes even when doing so may not be the best way to complete a larger parent order.
“Requiring interaction with small, dispersed quotations can increase information leakage, market impact, and execution costs without meaningfully advancing completion of the order,” Kinak and Siegel wrote.
The firm said institutional investors consider factors including liquidity, market impact, information leakage, speed of execution, quote stability and the likelihood of completing an order. “Rescission should allow market participants to make connectivity and routing decisions based more directly on the execution value offered by individual venues,” Kinak and Siegel wrote.
T. Rowe Price nevertheless wants the NBBO to remain an important reference after Rule 611 is rescinded. “The NBBO should remain a reliable and widely available benchmark for best-execution analysis and transaction-cost measurement,” they wrote.
The Vanguard Group also backed repeal, saying it could give institutional traders more flexibility when handling large and complex orders. “Rescinding Rule 611’s trade-through prohibition could provide Vanguard’s institutional trading desk with additional flexibility in pursuing best execution for large, complex transactions on behalf of Vanguard funds shareholders,” the firm wrote.
Vanguard said that for orders that cannot be fully executed at the NBBO, greater flexibility could allow brokers to reach deeper sources of liquidity and potentially reduce trading costs. But the asset manager also warned that removing protected quotations could weaken displayed liquidity. “There is also a risk that eliminating protected quotes could weaken the incentives that have historically supported quote competition and displayed liquidity,” Vanguard wrote.
Fidelity Investments also supported rescission but called for changes to the best-execution framework that would accompany it. Fidelity Investments General Counsel Roberto Braceras wrote that the firm continues to support an approach that considers liquidity, execution certainty, market impact and transaction costs. “Best execution should not be reduced to a single benchmark or routing outcome,” Fidelity wrote. Fidelity wants any rescission coordinated with updated FINRA guidance under Rule 5310 and wants the SEC to maintain the NBBO as an important benchmark for execution quality.
Price Protection Remains a Fault Line
Meanwhile, the Managed Funds Association takes a different view. In its August 17 comment letter, MFA said it does not support the SEC’s proposal in its current form. MFA represents alternative asset managers, including hedge funds and other investment firms whose clients include institutional investors. “MFA does not believe the Commission should proceed with the Proposal as currently formulated,” the association wrote.
MFA argued that Rule 611 continues to provide benefits by encouraging market participants to display competitively priced trading interest. “The Trade-Through Rule provides important benefits to investors and the market by encouraging market participants to display competitively priced trading interest,” MFA wrote.
The association also pushed back against the argument that Rule 611 necessarily makes institutional execution more difficult. While acknowledging that the rule can affect large orders, MFA said institutional investors have developed ways to manage those effects. “Institutional investors have for years refined their execution techniques to reduce the likelihood and impact of such effects,” MFA wrote.
A separate group of institutional investors has proposed a middle ground. An August 12 letter backed by Acadian Asset Management, Baillie Gifford Overseas, California State Teachers’ Retirement System, Ontario Teachers’ Pension Plan Board, GW&K Investment Management and Pershing Square Capital Management, among others, represents more than $1.45 trillion in assets. “The NBBO is a foundational benchmark for measuring execution quality throughout the equity markets, and it must be preserved under any revised framework,” the investors wrote. Rather than eliminate protected quotations, the group proposed a minimum market-share threshold, with 1% cited as an example, for exchanges to qualify for protected status. It also proposed a trial period for new exchanges to build market share.
Sterling Trading Tech, an order-management and trading-connectivity technology provider, also supports the SEC’s direction but cautioned against assuming that technology alone will resolve the market-structure issues created by repeal. “Connectivity to trading venues is indeed widely available. But resolving a crossed market depends on smart-order-routing and arbitrage decisioning performed by the broker-dealer or its chosen provider,” the firm wrote.
Sterling also argued that rescinding Rule 611 would put greater weight on best-execution oversight. “With Rule 611 removed, the broker-dealer’s duty of best execution becomes the primary protection against inferior executions,” the firm wrote.
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