The US Securities and Exchange Commission proposed eliminating the equities trade-through rule, a regulation in place since 2005 that prevents exchanges, alternative trading systems, and wholesalers from executing trades below the national best bid or offer price [1, 2]. The rule aims to ensure individual investors receive fair prices on equity transactions [1, 2].
SEC Chairman Paul Atkins criticized the rule since its inception, saying it overly focuses brokers on price and encourages unnecessary growth of trading venues. He said, "I’m concerned that the rule incentivised a proliferation of trading venues. It created an increasingly complex, costly and opaque market for order execution" [2].
Along with removing the trade-through rule, the SEC also proposed rescinding a related regulation that bars trading venues from crossing or exceeding a protected quote [2]. The agency believes these changes could simplify trade execution and reduce exchange data and connectivity expenses, though they acknowledge some large retail orders might receive worse prices [2].
However, SEC economists found wholesalers still trade through unprotected odd-lot quotes between 15% and 18% of the time, indicating the rule retains relevance in protecting investors [2]. The proposal could also affect FINRA’s ongoing efforts to modernize best execution guidance for brokers [2].
The SEC opened a 60-day public comment period on June 12 before any final decisions are made [2]. Market participants and investors can submit feedback during this time, after which the SEC will review comments and finalize the rule changes.
