Sec Speeches Cryptocurrency Disorder Protection Rule: Statement on the Proposed Amendments to Rule 611 and Other Provisions of Regulation NMS

Thank you, Mr. Chairman. I am pleased to support these proposed amendments, which remove rules that technological advances have rendered unnecessary, if they ever were necessary, and reflect a thoughtful, deliberative effort to simplify and foster innovation in our markets. 
The trade-through rule—or, as some refer to it, the “order protection rule”—has been controversial since its adoption.[1] Whatever one thinks of the rule’s past effects on the market, the release makes clear that the concerns about market connectedness that drove the Commission to adopt the rule have fallen away long since. Indeed, the release shows that, in today’s markets, the trade-through rule has helped fuel disorder by encouraging the proliferation of exchanges, dampening innovation within them, and inspiring ever more complex order types on those exchanges. The result is a market that, despite its many strengths, is fragmented, costlier than it needs to be, and needlessly complex. Rescinding the trade-through rule, as well as the prohibitions on locked and crossed quotations which also have outlived their usefulness, should encourage innovation and competition in our markets.

However, as supportive as I am of these proposed amendments, the very complexity of our markets—partially created by the trade-through rule—always has given me pause when considering the rule’s removal.[2] Because regulation encrusts the equity markets, we must be exceedingly careful to avoid doing more harm than good when we seek to break off a piece of that crust. In advance of this rulemaking, recognizing the complexity of our markets and the rulebook we held two roundtables featuring market participants, academics, and investor advocates,[3] and received comments from a broad array of interested parties.[4] Much of today’s proposal reflects the input from the comment letters and our panelists. Yet, I suspect that, for some, this proposal will not go far enough, while for others this proposal will have gone too far. Such divergence is common when the Commission engages with the intricacies of our equity market structure, upon which investor outcomes and market participants’ business models so heavily depend. I hope and expect that commenters will not be shy in letting us know their views.

I want to highlight the Division of Trading and Markets, the Division of Economic and Risk Analysis, the Office of General Counsel, and others, for their diligent work on this proposing release. I expect you will all soon be diligently working through a sizable comment file as you continue the same thoughtful engagement reflected in today’s proposal. Thank you for your work so far and for the work to come.

I do have one question for the Division of Trading and Markets:

1. A recent comment letter predicted that a post-611 marketplace would be characterized by even more exchanges and ATSs, a proliferation of order types, and new market complexity. Should we be concerned about these outcomes?[5]

I also have questions for the Division of Economic and Risk Analysis:

1. The success and failure of our markets turns on so many causes or factors. If we adopt this proposal, what do you plan to do to measure the effects of the elimination of the trade-through rule? What metrics will you use in your analysis?
2. I am not a fan of rules that override market choice, unless there is a good reason for doing so. Is there a market failure here that warrants the continued existence of Rule 611?