Good morning. Welcome to our second Roundtable on the Trade-Through Prohibitions of Regulation NMS, including those watching online. I’m Jamie Selway, the Director of the Division of Trading and Markets. Thank you, Chairman Atkins for your remarks and for your leadership on a policy issue that is central to equity market structure. Thank you, Commissioners Peirce, Crenshaw and Uyeda, for your remarks as well. Thank you to my dedicated Division colleagues, including Ted Venuti, Arisa Kettig, David Liu and Kevin Brennan for gathering us here today and Jon Kroeper, Kelly Riley, Peggy Sullivan, and David Dimitrious, who join me as moderators. Thank you to the University of Austin, a new institution successfully bringing two of our favorite forces – innovation and competition – to bear to disrupt the market for undergraduate education, for allowing us to use its facilities for today’s event. And most importantly, thank you to our panelists. Today’s participants represent a wide variety of expert perspectives in equity markets shaped by nearly twenty years of operational experience with Regulation NMS. We are confident that your contributions will meaningfully inform the Commission’s next steps.
Before proceeding further, please note that my remarks today are provided in my official capacity as the Commission’s Director of the Division of Trading and Markets, and do not necessarily reflect the views of the Commission, the Commissioners, or members of the staff. This disclaimer also applies to the comments of my Division colleagues who will join me to moderate today’s panels.
On November 4, the citizens of the great state of Texas approved a ballot measure to make certain securities transaction taxes unconstitutional. Now, to anyone whose professional life, or private enthusiasms, involves “trading” or “markets,” this was a welcome development. Our Nation’s laboratories of democracy are a potent force for progress. The free air of Texas inspires and invigorates—and reminds us that markets work.
Today’s event continues a journey that the Division began earlier this year. In July, we invited public comment on the trade-through prohibitions applicable to the equities and options markets. In September, we hosted a Roundtable to discuss the issues associated with such prohibitions. We heard informed points of view and received thoughtful feedback. Many participants voiced concern with the status quo and supported a reexamination of the trade-through prohibitions applicable to NMS stocks contained in Rule 611 of Regulation NMS, commonly known as the Trade-Through Rule. As many noted, the Trade-Through Rule is intertwined with other rules and regulations that must be carefully considered should the Commission decide to rescind or modify the Trade-Through Rule. At the time the Trade-Through Rule was adopted, many, including Chairman Atkins, warned that its complexity would lead to negative unintended consequences. Twenty years later, we acknowledge this complexity, and we pay keen attention to such warnings. Accordingly, today’s Roundtable aims to illuminate the Trade-Through Rule’s entanglements with other requirements, so that if the Rule is removed or altered, our market structure is improved, not damaged.
We expect another lively, thought-provoking discussion today. We have designed the panels to more deeply consider the ramifications of rescinding or modifying the Trade-Through Rule. When the Trade-Through Rule was proposed as part of Regulation NMS, commenters emphasized the futility of protecting the best displayed prices against trade-throughs if those prices were not fairly and efficiently accessible. Rule 610 promotes fair and non-discriminatory access to quotations displayed in the national market system. As adopted, Rule 610 sets forth standards governing access to quotations in NMS stocks, with the stated goal of promoting access in three ways: enabling private linkages, limiting access fees, and restricting locking or crossing quotations. During the September Roundtable and in comments received, contributors urged consideration of the contrapositive—are all of the requirements included in Rule 610 necessary if the Trade Through Rule is rescinded or modified? Our first panel will tackle this question.
Much of Regulation NMS’s substance is contained in its defined terms. Our second panel will drill down on the necessary changes, if any, that may need to be made to the definitions contained in Rule 600 if the Trade-Through Rule was to be modified or rescinded. Of particular importance is any effect on the national best bid and national best offer – the NBBO. A robust, transparent, reliable NBBO is essential in promoting fair, efficient, and liquid markets—and the U.S. capital markets are rightly known as the most liquid in the world. For this reason, decades of Commission oversight of consolidated market data have centered on ensuring that the NBBO remains ground zero for price discovery and a consistent baseline for best execution. The second panel will also consider the incentives associated with the current formula for market data revenue allocation and how these incentives affect the marketplace.
Finally, our third panel will consider potential enhancements to the best execution requirements, including whether additional guidance is necessary if changes to the Trade-Through Rule and associated rules are made. During the September Roundtable and through comments submitted, many highlighted the relationship between the Trade-Through Rule and best execution, suggesting that Trade-Through Rule changes could raise questions about how a broker-dealer should handle and execute customer orders. The duty of best execution predates the federal securities laws. Its origin lies in the “common law agency obligations of undivided loyalty and reasonable care that an agent owes to his principal.”[1] These duties are not merely historical—they remain essential today because executing customer orders is a core function of broker-dealers. Upholding best execution is not an empty tradition. Best execution is an evergreen obligation at the core of a broker-dealer’s relationship with its customer. Over the years, a number of considerations have been identified by the courts, the Commission, and FINRA as relevant to best execution. These include not only price, but also speed of execution, clearing costs, size of the order, and the cost and difficulty of executing in a particular market, among others. As then-Commissioner Atkins and Commissioner Cynthia Glassman pointed out at the time of Regulation NMS’s adoption, the Trade-Through Rule seemed to elevate “price [as] the sole criterion for determining how and where orders will be executed” and believed that the Trade-Through Rule restricted “investor choice and ability to obtain best execution.”[2] Of course, FINRA’s role in this area is critical. A best execution rule was first introduced in 1968 by its predecessor, the NASD, laying the groundwork for what would become FINRA’s current rule, approved in 2011. Built on decades of experience with the predecessor rule and guidance, this framework has helped shape how market participants fulfill their obligations. As we consider the evolving market structure and the potential for changes to the Trade-Through Rule, we welcome a thorough examination of FINRA’s best execution rule, its accompanying guidance, and any enhancements that could strengthen its ability to serve investors effectively.
Again, many thanks to all for participating in today’s Roundtable. We have our boots on—and we’re ready to ride.
[1] See, e.g., Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 270 (3d Cir.), cert. denied, 525 U.S. 811 (1998).
