White House reviews ban on trading through best price on stocks

The White House is reviewing whether to amend and potentially scrap a decades-old rule governing stock trading that’s meant to make sure investors get better prices for their transactions.

A proposal to modify the so-called trade-through rule was posted Monday on the Office of Management and Budget’s website. The Securities and Exchange Commission adopted the current version of the rule in 2005, when now-Chairman Paul Atkins was a commissioner there.

The measure prohibits exchanges, alternative trading systems and wholesalers like Citadel Securities or Virtu Financial Inc. from executing trades that ignore or “trade through” the national best bid or offer, which has helped ensure individual investors receive fair treatment.


Atkins opposed the measure at the time. A spokesman for the SEC said that Atkins noted in a 2005 dissent that it could have unintended consequences on the long-term growth of financial markets.

The chairman has previously said that the trade-through rule has forced brokers to focus solely on the price a trade executes at, rather than other factors that contribute to whether investors received “best execution” for their trades, such as speed or preferred trading venue.

“The subsequent fragmentation and increased costs the trade-through rule has imposed demonstrate Chairman Atkins’ prescience, which is why he has called for the Commission to reexamine the rule in a manner that avoids repeating the same mistakes made over 20 years ago,” the spokesman said.

Changes to the rule could have far-reaching impact on many other aspects of market structure, such as rebates exchanges offer to brokers for their business and fee caps some exchanges impose on brokers to access their protected quotes.

The White House can take as long as it wants to review and edit the proposed rule text. Once it completes that process, the measure goes back to the SEC where the commissioners, currently three Republicans on what’s intended to be a bipartisan, five-person panel, must vote on it.

Once that happens, the proposed rule will go out for public comment. The SEC incorporates feedback into a final version of the rule, which must again be voted on by the commission before it could take effect.