Politically-aware announcement: PTG endorses the public push for the reversal of trade-through prohibition ban
In the world of financial markets, the Securities and Exchange Commission (SEC) is considering a significant change: the repeal or amendment of Rule 611, also known as the Order Protection Rule (OPR). This rule, designed to prevent trade-throughs, has been a topic of debate among industry experts.
One of the key voices in this discussion is market-infrastructure firm McKay Brothers/Quincy Data. They propose an Observer Best Bid Offer (BBO) to account for geographical latency in the future of latency arbitrages. Additionally, they suggest that the OPR should only be available to immediately accessible quotes and should not be granted automatically to exchanges or venues offering speed bumps.
Another proposal from McKay Brothers/Quincy Data is a small but sustained market-share threshold (2.5%) for exchanges. This would help curb exchange proliferation and ensure that only those with significant market presence benefit from the OPR.
The FIA Principal Traders Group (PTG), representing major American market makers such as Citadel Securities, Jane Street, Hudson River Trading, IMC, and Wolverine, also supports a repeal of Rule 611. They argue that the rule has outlived its purpose, inflated costs, and distorted incentives around quoting, fees, and venue proliferation.
The FIA PTG also advocates for amendments to how securities information processor (SIP) revenues are shared. They believe that changing SIP revenues allocation could reward displayed liquidity that trades and help stop exchange proliferation.
Cboe, another significant player in the market, supports a more balanced approach. They advocate for modernizing Rule 611 to enhance market quality, preserving a reliable National Best Bid and Offer (NBBO) while allowing greater operational flexibility. Cboe conditions protected status and quote credits for new exchanges on demonstrated demand through market shares.
However, not everyone agrees with these proposals. Opponents argue that weakening Rule 611 would privilege speed advantages and erode competition. Market structure advocate R.T. Leuchtkafer warns against this, stating that the rule still disciplines routing and protects investors.
Georgetown University's James J. Angel believes the OPR is redundant with brokers' best-execution duty. He suggests considering the depth of the consolidated order book using an indicative best bid offer (IBBO) and an effective best bid offer (EBBO) to reflect available liquidity.
It's worth noting that most developed markets function without the OPR, according to James J. Angel. Retail execution would not be affected by changes to the OPR, as it is already internalized in most cases, according to Angel.
The SEC's new Chair, Atkins, has been against Rule 611, adding another voice to the call for reform. The SEC staff's data supports the case for reform, as measured trade-throughs are minimal.
As the SEC deliberates, the future of Rule 611 and its impact on market structure remains a topic of intense interest and debate among industry experts.
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