Summary of "2025 09 18 Roundtable on Trade Through Prohibitions 1"

Summary of Key Financial Strategies, Market Analyses, and Business Trends from the Roundtable on Trade Through Prohibitions (Rule 611)

Context and Overview

The roundtable focused on Rule 611 of Regulation NMS (Order Protection Rule, OPR), which prevents trading through better-priced quotes on other exchanges.
Rule 611, adopted in 2005, remains controversial—credited for protecting investors and fostering competition but criticized for increasing market complexity, fragmentation, and costs.
The SEC is considering whether to retain, repeal, or amend Rule 611, including possible volume thresholds for application and related changes to other rules (e.g., access fee caps, minimum tick size).
The discussion also covered whether the equity market’s experience should inform options markets, which operate under a similar but distinct trade through regime.

Main Financial Strategies and Market Analyses

market fragmentation and Exchange Proliferation
- Since 2005, the number of equity exchanges increased from 11 to 16, with many small venues holding less than 1% market share.
- Proliferation of exchanges has led to increased complexity and costs for broker-dealers, who must connect to multiple venues, incurring significant technology, compliance, and data fees.
- Many smaller broker-dealers outsource execution to larger firms to avoid these costs.
- The rise of many small “copycat” exchanges has not brought significant innovation but has increased costs and market fragmentation.
Costs of Compliance and Market Complexity
- Direct costs include onboarding (~$1.5 million per exchange) and ongoing maintenance (~$200,000/year per exchange) for connectivity, data feeds, surveillance, and compliance.
- Industry-wide estimated cost due to small venues is approximately $375 million annually, representing about two-thirds of those venues’ total revenue.
- Costs have not decreased significantly even if trade through rules were removed, due to best execution obligations requiring connectivity to multiple venues.
- market data fees and access fees remain a major cost driver, with suggestions to revise SIP revenue allocation and fee caps.
Trade Through Rates and Liquidity Analysis
- Trade through rates for equities are low: below 2.4% without a one-second look-back, and below 0.55% with it.
- During regular trading hours, round lot trade throughs are exceptionally rare (~0.06%).
- Displayed liquidity at the National Best Bid Offer (NBBO) has increased modestly since 2015, with more stocks showing deeper liquidity.
- Odd lots (trades below standard round lots) represent about 70% of trades today, but are mostly unprotected under Rule 611.
- Hidden (non-displayed) liquidity is significant, accounting for roughly 39% of executed volume overall and up to 83% for high-priced stocks.
best execution vs. trade through rule
- best execution obligations require brokers to seek the best overall outcome for clients, considering price, speed, likelihood of execution, and other factors.
- Rule 611 is seen as a minimum standard or backstop for best execution but has effectively become a substitute for it in practice.
- There is concern that best execution rules are unenforced or unenforceable, especially for retail investors.
- Removing or weakening Rule 611 without strengthening best execution enforcement risks harming retail investor outcomes.
- Some argue that a BestX (best execution) framework could replace trade through protections but would require robust enforcement and transparency.
Market Structure Differences: Equities vs. Options
- options markets operate under a different trade through regime (Options Order Protection Plan).
- options markets have no off-exchange trading; all orders are exposed for competition.
- The options market is quote-driven, with complex order types and significantly more order books (~2 million strikes vs. a few thousand equity listings).
- Retail participation in options is growing and healthy.
- Panelists generally agreed that options markets are strong and resilient, with less need for changes to trade through rules compared to equities.
- However, options markets face their own cost and complexity issues, including high messaging volumes and regulatory fees.
International Comparisons and Alternative Approaches
- Canada implemented a market share threshold rule (2.5%) that excludes smaller venues from order protection, which slowed exchange proliferation and market data fee increases.
- European markets have no trade through rule but rely on best execution policies; they have more off-exchange trading and fragmented clearing.
- Panelists caution against directly transplanting foreign models to the US due to differences in market size, retail participation, and market structure.
- The Canadian experience suggests thresholds can reduce proliferation but do not necessarily reduce connectivity costs or cause venue disconnections.
Innovation and Market Evolution
- The proliferation of exchanges has not translated into significant innovation; most new venues are