Trade-Through Review Going Slowly


After making its recommendation to the U.S. Securities and Exchange Commission for an access fee pilot the Reg NMS subcommittee of the regulator’s Equities Market Structure Advisory Committee has come up short for a pilot that would alter or eliminate Rule 611, or the trade-through rule.

“The subcommittee is not ready to make any official recommendations,” said Kevin Cronin, managing director, global head of trading at Invesco and chair of the Reg NMS Subcommittee during an open SEC meeting.

Unlike the access fee pilot that the subcommittee officially recommended in July 2016, “it is a little less clear that something needs to be done,” he said. “Even with the crowd that says that something needs to be done, it is much less clear what needs to be done.”

Identifying whether Rule 611 had a meaningful impact on displayed limit orders and if the cost of complying with the rule outweighed its benefits was difficult to determine using the data provided by the SEC staff, added Joseph Mecane, managing director, global head of Electronic Equities Products at Barclays and fellow subcommittee member.

Joe Mecane, Barclays

“We wound up having a lot of philosophical arguments about the benefits and the harm Rule 611 continues to cause the market,” he added.

Instead of developing a pilot proposal, the subcommittee would like to provide the Commission with its recommendations if the regulator decides to move forward with a framework to evaluate changing or eliminating Rule 611.

Mecane suggested that any framework should include quantitative measurement of Rule 611’s effect of displayed limit orders and, in the longer term, whether the possible elimination of the rule would lead to more competition between marketplaces beyond the speed and price dimensions.

If the SEC decides to implement a Rule 611 pilot, it would not be similar to the recommended access fee pilot.

“The access fee pilot was designed to control one variable and not introduce a lot of other components of Reg NMS into the access-fee pilot to draw a definitive conclusion around what effects access fee have on displayed liquidity and execution quality in the marketplace,” Mecane explained. “As we went down the Rule 611 path, we reached the conclusion that a 611 pilot is difficult to address in isolation.”

Instead of the pilot examining potential changes by separating stocks into individual buckets and comparing their results, a Rule 611 pilot would need to be implemented on a market-wide basis.

“What we are calling a ‘pilot’ would be the ability to stop the pilot if we see unintended consequences,” he said.

The pilot also would need to address other elements of Reg NMS, such as the ban on locked/crossed markets as well as access fees.

“You just can’t untangle one from another,” said Paul Russo, Global Co-COO, Equities at Goldman Sachs.” Trying to do just one thing without doing another thing, you can never get to any commonality without taking a holistic look.”

When asked by Jamil Nazarali, head of Citadel Execution Services at is Citadel Securities, why the SEC hasn’t taken a more holistic review of Reg NMS since 2010, Acting Chair Michael Piwowar responded that Dodd-Frank took out all of the capacity out of the staff to do important things.

“We had the Flash Crash and 77 months of Dodd-Frank,” he added. “I’ve been calling for a comprehensive review. We likely will have a chance with a new chairman coming in. I’d love to do that.”

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