SEC Proposes To Scrap Long-Standing Order Protection Rule – What It Means

The U.S. Securities and Exchange Commission proposed eliminating a trading rule introduced in 2005, saying advances in technology have made the regulation largely unnecessary.

• The rule, formally known as Rule 611, was introduced to prevent trade-throughs.
• The proposal is intended to simplify market structure and reduce costs for market participants, SEC Chairperson Paul Atkins said.   
• The proposal also seeks the removal of Rule 610(e), which prevents stock exchanges and trading venues from displaying stock price quotes that are locked or crossed.

The U.S. Securities and Exchange Commission (SEC) on Thursday proposed removing the Order Protection Rule, a market safeguard introduced in 2005 that requires stock trades to be executed at the best available price across exchanges.

The rule, formally known as Rule 611, was introduced in 2005 to prevent trade-throughs, situations where a stock trade is executed at a worse price than one available on another exchange. It required trading venues to route orders to the exchange offering the best displayed price.

Why Does The SEC Want To Scrap It?

SEC officials said advances in technology and major changes in market structure have reduced the rule’s usefulness. According to the agency, the regulation now adds unnecessary complexity, increases compliance and connectivity costs, and provides limited benefits to investors.

SEC Chair Paul Atkins, who opposed the rule when it was first adopted in 2005, said he has consistently criticized the trade-through prevention rule and supports its removal.

“After two decades of Rule 611, it is high time that the Commission review its unintended consequences that have hindered — rather than enhanced — the long-term growth of our markets. This proposal is intended to simplify market structure and reduce costs for market participants while allowing competition, innovation, and other market forces to shape the continuing evolution of our equity markets,” said Atkins.

Proposal Seeks Removal Of Restrictions On Stock Quotations

The proposal, if implemented, would rescind Rule 611 and remove Rule 610(e), which prevents stock exchanges and trading venues from displaying stock price quotes that have been locked or crossed.

While the move would remove protections requiring orders to seek the best quoted price across exchanges, the SEC noted that other rules promoting market transparency and fair pricing would remain in place.

How Did The Markets React?

At the time of writing, the Nasdaq was up 1.7% at 25,606 while the S&P 500 climbed 1.5% higher to 7,372.4.

The SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, gained 0.1%, the SPDR Dow Jones Industrial Average ETF Trust (DIA) rose 0.5%, while the Invesco QQQ Trust ETF (QQQ) jumped 0.7% at the time of writing. Retail sentiment surrounding the three ETFs on Stocktwits was in the ‘bearish’ territory.

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