What’s the role of trade-through prohibitions in today’s electronic marketplace?
That topic was discussed as part of the U.S. Securities and Exchange Commission’s Roundtable on Trade-Through Provisions, in a panel sandwiched between sessions assessing the past and the future of trade-throughs.
The 10 panelists were in broad consensus on two aspects of the debate: one, that 20 years after Rule 611 was codified in Regulation National Market Structure (Reg NMS), it’s high time to revisit the rule; and two, in a highly interconnected market structure, any changes to Rule 611 need to be considered holistically and not in isolation.
To the bottom-line question of what to do with Rule 611, Chris Nagy, Co-founder of Healthy Markets Association, was generally constructive on trade-through prohibitions, while most other panelists leaned toward scrapping the so-called order protection rule.
Nagy, a 38-year Wall Street veteran, recalled how the OPR provided “pretty extreme” price improvement for retail investors when it was implemented back in 2005. “We needed a backstop for ‘best ex’ and that’s what OPR is,” Nagy said. “The rules could be improved, but any weakening must be accompanied by improvements to best ex” provisions, he said.
Jim Angel, Associate Professor at Georgetown University, said the OPR served as a helpful scaffolding to a market that in 2005 was in its early days of automation and electronic interconnectivity. “We don’t need that scaffolding anymore. It adds tons of complexity to the market,” Angel said, adding that best obligation rules are sufficient for investor protection.
Hubert De Jesus, Global Head of Market Structure and Electronic Trading at BlackRock, said Reg NMS, including Rule 611, has been instrumental in integrating independent marketplaces into a cohesive market structure, and U.S. equity markets functions well.
Regarding Rule 611, De Jesus noted the trade-through prohibition is closely connected to other regulations, and scrapping it by itself would be like removing the keystone from an arch. “You would need to review other rules,” he said.
Adam Nunes, Head of Business Development at electronic liquidity provider Hudson River Trading, said leadership at his firm didn’t believe there was a strong rationale for Rule 611 back when it was first implemented, and the case is even weaker now since competition and innovation have solved some problems over the years.
MEMX CEO Jonathan Kellner said the SEC needs to review ancillary rules and broader market structure with any changes to Rule 611, with an emphasis on strengthening displayed liquidity.
Nasdaq was the other exchange represented on the panel. Kevin Kennedy, Head of North American Market Services, said Rule 611 stifles competition and exchanges can’t compete fairly with off-exchange market centers – scrapping the rule would reduce complexity and signal the SEC is moving away from prescriptive regulation and toward a more competition-based rules framework.