The Trade-Through Rule
Publication Date: June 2005
Publisher(s): Library of Congress. Congressional Research Service
The trade-through rule mandates that when a stock is traded in more than one market, transactions may not occur in one market if a better price is offered on another market. Defenders of the rule portray it as an essential protection for investors, particularly small investors who find it difficult to monitor their brokers' performance. Opponents argue that its principal effect is anti-competitive; that it protects traditional exchanges -- where brokers and dealers meet face to face on trading floors -- from newer forms of trading based on automatic matching of buy and sell orders. In April 2005, the Securities and Exchange Commission (SEC) adopted new regulations modifying the trade-through rule, which it described as antiquated. The new Regulation NMS requires that investors receive the best price available among price quotations that are displayed electronically and immediately available for execution. The new rules also mandate improved market access, to allow brokers and traders in one market to get the best price for their customers, wherever that price is quoted. Since the adoption of Regulation NMS, both major U.S. stock markets, the New York Stock Exchange (NYSE) and the Nasdaq, have announced plans to merge with computer-based trading systems known as alternative trading systems (ATSs). This market response suggests that Regulation NMS may have its desired effect of increasing price competition by adapting regulatory structures to technological innovations that have transformed stock markets in recent years. This report will be updated as events warrant.