Treading Through Trade-Through: A Law and Economics Analysis of Sec Proposed Regulation Nms

Abstract

The Note, being the first comprehensive critique of the SEC's Reproposed Regulation NMS, tries to evaluate the core Trade-Through Rule from an interdisciplinary perspective, expose some of the problems that can arise as a consequence of the rule and expound on certain approaches which may offer better alternatives. To be sure, the newly reproposed Regulation NMS scores many strong points in making regulations more align with the evolving market realities. Even the much criticized trade-through rule reflects laudable efforts by the SEC to reconcile divergent interests of various market constituents. Nevertheless, the unbalanced competitive strengths of NYSE, which holds the largest liquidity pool and offers best opportunities for price improvement but lags behind in terms of fast execution and other dimensions of execution quality, would make SEC's balancing act of engrafting flexible exceptions on a rigid best price rule untenable to improving liquidity and price discovery, and unappealing to electronic markets competing on multiple dimensions of execution quality. In light of a new environment where investors now demand more than low execution costs and markets compete not just on the basis of price, an all encompassing standard of best execution would be better suited, to balancing multidimensional needs of investors with a necessary degree of uniformity in regulating a broker's duty to seek best price across markets. The bottom line is that a piecemeal approach within the confine of the old NMS framework and without the recognition of changing governance structures and evolving economic function of stock exchanges will never prove to be satisfactory and the time has ripened to a point where the SEC should reassess its role in market regulation before articulating a new set of guidelines for the future of U.S. securities market.