The Market Structure Implications of Removing Order Protection (Rule 611) in the US

Peter Haynes (0:12)

Welcome to Bid Out, a market structure podcast from North of 49 I'm your host, Peter Haynes, and today we will discuss Rule 611, otherwise known as the Order Protection or Trade Through Rule, and a well-known rule for the market structure nerds that are listening in here today. But for those of you that aren't familiar with it, we will give you some background information on Rule 611 so you understand the context of this discussion. Today's discussion follows on the heels of a much anticipated meeting at the SEC recently, where the agency invited 31 industry experts together on three panels to discuss the pros and cons of Rule 611 Joining me here today to debate this issue are two of the panelists that participated in the Roundtable, Hubert DeJesus from Blackrock and Professor James Angel from Georgetown University, and as well we're joined by Doug Clark, one of Canada's leading market structure voices who currently serves as head of product for the TMX group in Toronto. Doug was a spectator, but he had a vested interest in the Roundtable discussion, given the linkages between the Canadian and the US markets, as well as the fact that the TMX is now a US market operator. Gentlemen, thank you for joining today's podcast.

James Angel (1:24)

It's a pleasure to be here and an honor. Thank you.

Hubert DeJesus (1:27)

Peter, thank you for finally having me on. I feel like I can now cross this off my bucket list.

Peter Haynes (1:34)

Clark is a return guest. What do you have to say? Are you worried about what I'm going to ask you today?

Doug Clark (1:38)

No, because I learned many, many years ago from you that if I don't like a question, I just answer something else and blame you for asking the wrong question. That's a true story.

Peter Haynes (1:47)

I'm going to try to stick to the right questions today, and the right questions are going to be related to OPR. And as I mentioned at the opening here, I do want to thank you all for joining. I do want to just spend a minute here giving some background for those who might not be familiar with trading rules in detail. Rule 611 is an important one as it underpins every aspect of trading in the equity market. It is the rule that requires brokers to always get the best price before executing a trade at a worse price subject to a few exceptions. This rule serves to connect all exchanges together and critics, including SEC Chair Atkins believe it has resulted in unnecessary complexity in the markets and that it stifles exchange innovation. Now with that behind us, Jim, I'm going to start with you who I'm referring to today as the MVP of the recent SEC Roundtable, most valuable panelist. And I'm not discounting performances of other panelists like Hubert DeJesus, who was with us today, who did a great job of outlining the important issues for the SEC to consider in its rulemaking around 611 However, between your very thoughtful and detailed letter to the SEC that outlines the history leading up to the introduction of the rule, 611 in 2005, and that is required reading, by the way, for any market structure buff, is your passionate plea to eliminate the rule at the Roundtable. Between all of that, you brought a lot of spice to the debate. So, Jim, explain why 611, as you described it, is like scaffolding. And why do you, like Chair Atkins, believe its best before date has long since passed?

James Angel (3:19)

Way back when, when this rule was put into place, the NYSE was still a manual market in many aspects. It was not automated, and that was what they used to keep competitors out. What Rule 611 did was it forced the exchange to automate and interconnect with other markets. That is basically what it did. And it helped to bring the NYSE's market share down from over 80 percent down to 20 percent. Now, if that was the intent, it was achieved. If the intent was to force the US market to become an automated market, it was achieved. So when you're building a building, you often put up scaffolding to help the construction crew get it to where it needs to go. But once the building is complete, you don't need it anymore. Now, what Rule 611 does is it says that market centers are supposed to have rules to prevent trade throughs. In effect, what it is saying is if somebody gives you an order and somebody else pretends to have a better price, you have to ship that order off to your arch competitors. Is there any other business where people are required to send orders to their competitors? Now, I believe this rule is completely unnecessary because brokers already have incredibly strong incentives to send the order to the best place.