Order Protection Rule
What Is the Order Protection Rule?
The Order Protection Rule is one of the four primary provisions of the Regulation National Market System (NMS). The rule is intended to guarantee that investors receive an execution price that is equivalent to what is being quoted on whatever other exchange where the security is traded. The rule kills the possibility of orders being traded through, and that means executed at a suboptimal price.
The Order Protection Rule expects that each exchange lays out and enforces policies to guarantee predictable price quotation for all NMS stocks, which remember those for the major stock exchanges as well as numerous over-the-counter (OTC) stocks. The Order Protection rule is otherwise called "Rule 611," or the "trade-through rule."
How the Order Protection Rule Works
The Order Protection Rule — alongside Regulation NMS all in all — was established to make financial markets more liquid and transparent through better access to data overall and further developed quote presentations and fairness in prices specifically. Before the regulation was passed in 2005 by the Securities and Exchange Commission (SEC), existing "trade-through" rules didn't safeguard investors consistently. This was particularly true on limit trades where investors would sometimes get inferior prices to those being quoted on an alternate exchange.
The Order Protection Rule intends to safeguard quotations for a given security across the board, so all market participants can receive the best conceivable execution price for orders that can be executed right away. It requires trading centers to lay out, keep up with, and enforce written policies and procedures that are sensibly intended to forestall the execution of trades at prices that are inferior to protected quotations showed by other trading centers. The rule likewise settled the National Best Bid and Offer (NBBO) requirement that commands brokers to route orders to scenes that offer the most beneficial showed price.
The three other provisions of Regulation NMS are the Access Rule, the Sub-Penny Rule, and the Market Data Rules.
Analysis of the Order Protection Rule
Scrutinizes of the Order Protection Rule's effectiveness have emerged soon after its authorization. Those reactions incorporate the conviction that, by commanding stocks trade on exchanges that show the best-quoted prices, the rule adds to excess fragmentation among trading scenes. This was implied to have increased the complexity of the market and the network costs to participants in the market, making transactions more costly overall. For instance, trade-through limitations can force market participants to route orders to lit scenes they would otherwise not work with.
Another analysis of the rule is that it might have by implication prompted an increase in dark trading, a practice where stock is bought and sold so as to not physically influence the market. This has been ascribed to limits forced on competition among lit scenes with decisions being made in view of their speed and fees rather than stability and liquidity.
Pundits have additionally refered to the order protection rule for possibly hurting institutional investors who need to make large volume trades yet are forced to access little measured quotations. This warns short-term proprietary traders to the trading goals of institutional investors.
Features
- The Order Protection Rule is a provision of the Regulation National Market System (NMS), a set of rules passed by the SEC in 2005, and furthermore goes by the name, "trade-through rule".
- It commands stocks must be traded on exchanges that show the best quotes, and requires trading centers to lay out and enforce written policies and procedures that guarantee this.
- The Order Protection Rule means to guarantee that investors receive the best price when their order is executed by eliminating the ability to have orders traded through (executed at a more regrettable price).
