SEC Proposed Order Competition Rule

The Securities and Exchange Commission (SEC) recently proposed amending the order competition requirements of the National Market System (NMS). The proposed regulation would promote competition, protect individual investor interests, and further the NMS objectives of ensuring transparency and full disclosure in relation to equity price quotations and trade execution. With its proposal, the SEC seeks to level the market playing field, and it believes its proposal will advance the five Congressional objectives defined for a transaction in Section 11A of the Exchange Act.¹

Specifically, the proposed requirement would prohibit a restricted competition trading center, such as a wholesaler, from internally executing segmented orders of individual investors at a price unless the orders are first exposed to competition at that price. The price would need to be exposed in a qualified auction operated by an open competition trading center. Segmented orders are orders for NMS stocks made for a natural person’s account or an account held in legal form on behalf of a natural person or group of related family members and in which the average daily number of trades executed in NMS stock was less than 40 in each of the six preceding calendar months. 

The proposed rule would also include the following limited exceptions to the general prohibition: 

• Segmented orders received and executed in cases where no qualified auction was being operated for such orders. 
• Segmented orders with a market value of at least $200,000. 
• Segmented orders executed at prices equal to or more favorable for the orders than the midpoint of the national best bid and offer (NBBO) when the orders were received. 
• Segmented orders with customer-selected limit prices equal to or more favorable for the orders than the midpoint of the NBBO when the orders were received. 
• The fractional share portion of a segmented order received and executed in cases where no qualified auction was being operated for such order that would accept the fractional share portion. 

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The compliance environment has never been more complex or demanding. The SEC has proposed and implemented a number of new amendments and rules. You must meet these new expectations and demands while putting client interests ahead of your own, putting a strain on your time and resources. We can help you to navigate the evolving regulatory landscape while considering the complexity of your firm’s unique compliance requirements.   

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^{1. These objectives are (1) economically efficient execution of securities transactions; (2) fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets; (3) the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities; (4) the practicability of brokers executing investors’ orders in the best market; and (5) an opportunity, consistent with objectives 1 and 4, for investors’ orders to be executed without the participation of a dealer.}