The Trade-Through Rule (CRS Report for Congress)
| Release Date |
Revised June 6, 2005 |
| Report Number |
RS21871 |
| Report Type |
Report |
| Authors |
Mark Jickling, Government and Finance Division |
| Source Agency |
Congressional Research Service |
| Older Revisions |
-
Premium June 22, 2004 (6 pages, $24.95)
add
|
Summary:
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.
