(Bloomberg) — The Securities and Exchange Commission proposed eliminating a rule that aims to ensure investors get better prices for their transactions.
The current version of the so-called trade-through rule has been in place since 2005. It prohibits exchanges, alternative trading systems and wholesalers like Citadel Securities or Virtu Financial Inc. from executing trades that “trade-through” or execute below the national best bid or offer price, which has helped ensure individual investors receive fair treatment.
SEC Chairman Paul Atkins has been a critic of the rule since its inception, dissenting against it when he was a Republican commissioner. He has said the measure forces brokers to focus solely on the price a trade executes at rather than other factors such as speed or preferred trading venue.
“I’m concerned that the rule incentivized a proliferation of trading venues,” Atkins said Thursday shortly before the commission voted on the plan, adding it created an increasingly complex, costly and opaque market for order execution.
The agency also proposed rescinding another rule that is meant to prevent trading venues from “crossing” or going above a protected quote.
Eliminating the rules could have far-reaching impacts, including how brokers choose to route their orders to exchanges and other trading venues. SEC officials said at the meeting that rescinding them could simplify trade execution and lower exchange data and market connectivity costs. However, an official added the action could result in worse prices for some large retail orders, though staff did not expect the vast majority of retail orders to be significantly impacted in price.
According to the proposal, the agency’s economists found that wholesalers will trade through unprotected odd-lot quotes between 15% to 18% of the time. That finding “suggests that the trade-through rule is still relevant in today’s market,” said Mark Donohue, founder of consulting firm Thirty4 Advisory and former advisor to the SEC Division of Trading and Markets.
If the rescission is finalized, it may also impact efforts underway at the Financial Industry Regulatory Authority, which regulates brokers. Finra has said it plans to “modernize best execution guidance” for brokers, according to an agenda the group released earlier this week.
The SEC will take public comment on the proposal for 60 days. After that, the agency will incorporate feedback into a final version of the measure, which must be voted on again.
(Updates with additional comment from former SEC official beginning in paragraph seven.)
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