The SEC's New Regime is Wasting No Time
It’s fair to expect a few months of runway for a new SEC commission to find its footing—but recent headlines suggest they’re already moving with purpose. While legacy rulings like Access Fee and Tick Size remain in legal limbo, the past few weeks have brought fresh momentum around several key initiatives: a review of the Order Protection Rule (611), proposed updates to corporate governance and reporting, and delayed hedge fund disclosure requirements.
The recent SEC roundtable on Rule 611 (Trade-Through Prohibitions) was particularly telling. The panels—diverse in market representation—converged on a few core themes: the original intent of the rule, its unintended consequences, and potential remedies to support a more efficient equity market over the next two decades.
The Consensus? Rule 611 Needs a Rethink
While Reg NMS was well-intentioned, it’s widely seen as the catalyst for today’s fragmented market structure. Pre-NMS, we had fewer exchanges and more market makers. Post-NMS, we’re navigating a maze of venues and a shrinking pool of liquidity providers. Broker-dealers are burdened by mandatory connectivity—onboarding, testing, surveillance, and data costs—all to support protected quotes from exchanges that often carry minimal volume.
Removing the Order Protection Rule won’t solve fragmentation outright, but it could slow the proliferation of new exchanges. A rework of SIP revenue sharing might be part of the solution—should venues below a certain market share threshold continue to participate in fee distribution?
What should that threshold be? 1%? 2%? Per name? The debate is underway, and the direction seems clear: thresholds are coming.
Exchanges Push Back — But Institutions Need Flexibility
Exchanges argue that removing quote protection stifles innovation and threatens the NBBO. But with spreads holding steady and liquidity thinning, institutions are already struggling to move size at the touch. Best execution isn’t just a regulatory standard—it’s a performance metric. Sophisticated routing tools already blend protected and non-protected venues. More autonomy in venue selection could democratize execution and improve outcomes.
Retail participants often see high efficiency and favorable fills. Institutions, however, face a different reality. Rule 611 may have contributed to the deterioration of displayed liquidity, forcing institutions to interact with quotes that don’t reflect true market depth. When moving size, price isn’t always the best barometer—fill quality matters more. Should block exemptions apply to protected quotes? It’s a question worth exploring.
Blocks Still Solve for Risk
While exchanges worry about volume shifting off-exchange, Rule 611 hasn’t stemmed that tide. Routing often avoids exchanges to preserve price integrity. And that’s the crux: healthy institutional volume is the backbone of a healthy market. Yet average trade sizes have dropped sharply in recent years—driven by macro uncertainty, adverse selection risk, and a secular shift toward non-bank market makers sourcing liquidity via ATSs.
Blocks remain the best way to solve for risk variance—though harder to execute in today’s environment. For institutional traders and portfolio managers, fill quality often trumps price. Liquidnet remains the only ATS with top block market share while also maintaining that the pool is predominantly made up of the block shape segment. As seen in the graph below of the last three available months of FINRA data, true block business is rare across ATSs. In a fragmented landscape, concentrated block liquidity is more valuable than ever.
Scope: ATSs with >= 1% of the ATS Block Market Share
Source: FINRA OTC Transparency Data
Note: Excluding Tradeweb Dealerweb, an IDB which only trades ETFs and other non-equities
Written by Jeffrey O’Connor, Head of Equity Market Structure and Sell Side ATS Strategy, Americas and Andrew Carson, US Market Structure and Liquidity Analytics
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