The Trade-Through Rule and Crossed Markets Provisions of Regulation NMS

Summary

SIFMA ¹ and SIFMA AMG ² provided comments to the U.S. Securities and Exchange Comission (SEC) on its proposed amendments to Regulation NMS under the Securities Exchange Act of 1934 ("Exchange Act"), which would rescind Rule 611 (the trade-through rule, also referred to as the Order Protection Rule) and Rule 610(e) (the prohibition on displaying locking and crossing quotations), together with certain related defined terms (the "Proposal"). ³

Excerpt

SIFMA appreciates the Commission's reassessment of Regulation NMS and acknowledges the importance of reducing unnecessary complexity, venue proliferation, and forced connectivity. SIFMA shares the Commission's objective of reducing regulatory-driven fragmentation.

I. Introduction

Rules 611 and 610(e) do not operate in isolation. They are embedded in a broader market structure framework that includes best execution, consolidated market data, the national best bid and offer ("NBBO"), execution-quality reporting, short-sale restrictions, access fees, SRO rules, and NMS plans. SIFMA has described Rule 611 as the "head of an octopus" precisely because moving it can move many other pieces of market structure as well. ⁴ The NBBO sits at the center of that framework. ⁵ It is referenced, directly or indirectly, throughout the Commission's rules, SRO rules, the NMS plans, and commercial/contractual arrangements, and it supplies the reference price and regulatory benchmark on which customer displays, execution-quality statistics, pegged and stop orders, short-sale price tests, issuer repurchase and stabilization conditions, and volatility controls all depend. Rule 611 also supplied a practical floor beneath the quality of the NBBO. Because trading centers were obliged not to trade-through protected quotations, and because Rule 610 obliged venues to make those quotations accessible, a quotation that established the NBBO was generally a quotation that could be reached. Rescission of Rule 611 would remove that floor while leaving the NBBO in place at a time when the number and variety of quotation venues may well increase. Rescission of certain related Rule 600 definitions6 could also potentially increase the variety of different quotations (in terms of accessibility) that contribute to the NBBO. Quotations disseminated through a potentially reactivated Alternative Display Facility ("ADF"), and quotations from existing venues that adopt certain access delays (in light of the deletion of the definition of an "automated quotation"), conditional cancellation features, or materially higher access fees (if access fee caps are eliminated), would each remain an input into the NBBO.