Regulation NMS - Discussion

Discussion

The order protection rule has been controversial because it requires traders to transact on a trading venue at the lowest price rather than on a venue offering the quickest execution or the most reliability. Thus, some have described it as an improper government intervention into private business affairs. Defenders of the rule argue that it really just requires what brokers should be doing if they are acting in their customer's best interests. Still others have argued that the rule is too lax because it only protects the quotes at the top of the book. For example, if the best two quotes in one market are superior to the best quote in another market, a portion of an incoming market order may still trade at the inferior market at the inferior price even though the second best quote on the superior market is still available. If more than just the top of the book (the best quote) were protected by the order rule, the market order would have transacted at a superior price and the limit order offering the superior price would have transacted more quickly.

Firms Affected

  • SROs/Exchanges
  • ECNs and other executing broker-dealers (e.g., market makers, block positioners)
  • Broker-dealers routing ISOs

Read more about this topic:  Regulation NMS

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