As U.S. equity markets have evolved, trading volumes have risen, but liquidity has become increasingly fragmented and more trading is taking place in the dark. Against that backdrop, the U.S. Securities and Exchange Commission (SEC) is proposing to scrap its trade-through protections.
On Thursday, the regulator proposed amendments to its trading rules, which would rescind the prohibition on trade-throughs — rules that were adopted in 2005 to protect investors by preventing trades from executing at worse prices than the best price available across all protected trading venues.
“This proposal is intended to simplify market structure and reduce costs for market participants while allowing competition, innovation, and other market forces to shape the continuing evolution of our equity markets,” said Paul Atkins, chairman of the SEC, in a statement.
In its rule proposal, the SEC noted that the equity market structure “has evolved dramatically” since the trade-through rules were adopted — and, to some extent, that provision has failed to meet one of its basic goals, which was to incentivize displayed liquidity.
“… since its adoption the percentage of orders interacting with non-displayed liquidity on- and off-exchange has consistently increased,” the SEC said.
At the same time, the equity markets have become increasingly fragmented, and complex, it noted.
In this environment, the trade-through rules have raised trading costs, increased market complexity and limited choice in order execution, the regulator said, adding that this has also contributed to the proliferation of trading venues and the resulting fragmentation of liquidity.
Additionally, improvements in the technology for facilitating market access, order handling and routing, have reduced the need for trade-through prohibitions, it said, as markets are better connected than they were when the rules were adopted — and, specific trade-through restrictions aren’t required in addition to brokers’ best execution obligations, it suggested.
Scrapping these rules “would reduce compliance costs and benefit U.S. equity markets by eliminating regulations to allow competition, innovation, and other market forces to shape the U.S. equity market’s continued evolution,” the SEC said.
Looking ahead, that evolution is expected to include near-24 hour equity trading, tokenized securities and the adoption of distributed ledger technology to enable new kinds of trading.
Alongside the proposed repeal of the trade-through provisions, the SEC is also proposing to revoke the provisions that contain restrictions on locked and crossed markets.
The proposals will be out for a 60-day public comment period once they’re published in the Federal Register.