The SEC’s trade rule, in effect for a bit over 20 years, requires trading platforms operating in the US to execute investors’ trades at the best price available across the market, even if that means one platform must go to another platform to execute the trade. The SEC wants to rescind that rule as no longer necessary. The SEC says,
Currently, the US equity markets are highly automated and interconnected and the Commission’s concerns expressed at the time of [the rule’s] adoption in 2005 regarding the lack of mechanisms to connect markets is no longer an issue[.]
The SEC now argues that (as paraphrased by The Wall Street Journal)
stockbrokers already have a strict legal duty to execute trades with the most favorable terms for their clients, making the trade-through rule superfluous.
The exchanges’ “legal duty” is all well and good, but then there are the enforcement costs for violations of that rule. These costs are incurred by the government (i.e., us taxpayers) from enforcing compliance with a case’s outcome, incurred by individual (and institutional) investors from raising a ruckus in the first place, and incurred as opportunity costs during the time between detection of a violation and final adjudication.
Then there’s the difficulty of detecting a violation in the first place, especially for retail investors.
The SEC also argues that rule rescission would save the platforms the cost of buy[ing] expensive market data feeds linked to a bevy of exchanges.
Yet, in order to satisfy that legal duty, the platforms still would need access to some version of those data feeds, or at least to the data in them, in order, in real time (which is microseconds in today’s interconnectivity), to identify that best price available.
This is a rule that should remain in effect. The cost to the platforms is trivial: $54.2 million to $77 million annually, compared with nearly $30 billion in aggregated US platform income. Violations of the trade-through rule, importantly, are far more easily detected, including by retail investors.