SEC proposes scrapping 2005 trade-through rule for U.S. stock markets

The Securities and Exchange Commission on Thursday proposed scrapping a two-decade-old rule that has required stock trading platforms to fill buy and sell orders at the best available price across all U.S. exchanges. The agency said the change would cut compliance costs for brokerages while arguing that modern market infrastructure has rendered the requirement obsolete.

The so-called trade-through rule, adopted in 2005, forbids any trading venue from completing a trade at a price worse than the best quote available on any competing exchange. At the time, regulators were concerned that slower electronic connections made it possible for a platform to fill an order at an inferior price simply because it lacked real-time access to prices elsewhere.

“Currently, the U.S. 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 wrote in its proposal.

SEC Chairman Paul Atkins has opposed the rule since its inception. As a commissioner in 2005, Atkins voted against the measure alongside a fellow Republican appointee. The rule passed with the support of then-Chairman William Donaldson, also a Republican, along with the commission’s two Democratic members.

Atkins and the SEC’s two other current commissioners now contend that stockbrokers are already bound by a strict legal duty to execute trades on the most favorable terms available for their clients, making the trade-through requirement redundant.

The SEC estimated that eliminating the rule would save the brokerage industry between $54.2 million and $77 million annually. Most of those savings, the agency said, would come from reduced compliance costs and the ability to disconnect from certain exchange data feeds. The industry would face one-time implementation costs of roughly $48.2 million to adjust systems, according to the SEC.

The regulator also argued that the rule has forced brokers to purchase expensive market data feeds from a proliferating number of exchanges — some overlapping — that emerged as a direct consequence of the order-protection requirement.

The SEC is accepting public comment on the proposal for 60 days.

Last week, the SEC proposed overturning a Biden-era rule that had required public companies to disclose climate-related risks and greenhouse gas emissions. The agency is racing to reshape regulatory policy across financial markets.