(June 18): A proposal by the top US securities regulator to eliminate a rule that mandates stock investors get the best possible prices for their transactions will benefit a new and growing corner of the financial market: crypto.
The Securities and Exchange Commission (SEC) last week proposed eliminating the so-called trade through rule, which prohibits exchanges, alternative trading systems and other market participants from executing trades that “trade through” or execute at prices worse than the national best bid or offer. The rule has helped ensure individual investors as well as institutions get a fair deal in a highly competitive and fragmented stock market.
In place since 2005, the rule made speed a paramount trait of today’s computer-driven stock market. Stock exchanges scrambled to attract high-frequency firms capable of aggressively posting bids and offers at lightning speeds in a race to dominate the order book.
The problem for crypto platforms trading digital versions of stocks, known as tokenised equities, is that they would struggle to compete with stock exchanges and other trading venues that have evolved to adapt to the high-velocity marketplace. If crypto firms need to route to stock exchanges or other well-established venues posting the best orders, they would rarely be able to execute trades on their own platforms, market experts said.
“It’s really hard to have tokenised equities if you have a trade through rule,” said Larry Tabb, a director of market structure research at Bloomberg Intelligence. “These markets move in microseconds.”
The SEC is planning other moves to bolster crypto firms looking to trade tokenised stocks. It has been preparing a so-called innovation exemption for decentralised finance platforms, or DeFi, to list tokens without requiring them to abide by requirements such as the trade through rule.
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Trading firms would still need to provide the most favourable orders for investors, a less stringent regulatory requirement than the trade through rule. SEC chairman Paul Atkins, a long-time critic of the trade through rule, has argued that it puts too much priority on price as opposed to other measurements of what's known as best execution, such as the likelihood of making a trade.
Alex Thorn, the head of firmwide research at crypto giant Galaxy Digital Inc, said in a recent post on X that the SEC’s move to rescind the trade through rule is “one of the biggest unlocks yet for tokenised stocks”. Due to “structural barriers to tokenised US equities trading in DeFi today” crypto platforms trading regulated stocks “would commit trade throughs constantly and arguable be an illegal trading centre”, he wrote.
US stock markets are racing to prepare for a tokenised, around-the-clock trading future as the SEC eases rules governing the crypto industry. Bullish, the crypto exchange run by former New York Stock Exchange president Tom Farley, recently agreed to acquire transfer agent Equiniti in a US$4.2 billion ($5.4 billion) deal. The New York Stock Exchange is building a venue using blockchain technology to allow for trading tokenised stocks and exchange-traded funds. Nasdaq has said it is working on a token design that gives publicly traded companies more control over their shares in tokenised form.
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Crypto exchange operator Coinbase Global Inc unveiled plans on Tuesday to launch tokenised stock trading outside the US. The tokenised securities would provide dividends to investors, the company said. “For the first time, these are real 1:1 backed tokenised stocks you can trust. You own an actual chunk of the company onchain,” Coinbase chief executive Brian Armstrong posted on X.
Coinbase has lobbied against the trade through rule, arguing that it prioritises price and speed over the size of an order. The rule causes “distortions that introduce worse order execution outcomes, tremendous complexity and perverse incentives”, the firm wrote in a letter to the SEC last year.
The SEC will take public comment on the proposal for 60 days. After that, the agency will incorporate feedback into a final version of the measure, which must be voted on again.
Critics say the SEC, by seeking to eliminate the trade through rule, is rewriting decades of market structure regulations that have reshaped the US stock market to accommodate an industry that has struggled to fit within those rules. An SEC spokesperson declined to comment beyond the original press release.
Joe Saluzzi, a partner at Themis Trading, a Chatham, New Jersey-based brokerage firm, said that while he opposed the trade through rule when it was implemented two decades ago, he believes the market has adapted to it and that changes could harm regular investors. By seeking to eliminate the rule, the SEC is catering to crypto firms rather than established market participants, he said.
“I thought we had the best most liquid markets in the world,” he said. “So why do we need to change that? Who’s benefitting here?”
Uploaded by Tham Yek Lee
