SEC proposes scrapping 2005 best-price rule in market overhaul

The SEC's proposal to scrap the trade-through rule would dismantle a two-decade-old pillar of US equity market structure, reshaping how retail orders are executed across thousands of trading venues.

The Securities and Exchange Commission proposed scrapping the 2005 trade-through rule Thursday, eliminating a requirement that trading platforms execute buy and sell orders at the best available price across all US venues.

"The rule was designed for a market structure that no longer exists," the SEC said in its proposal, arguing that technological changes over the past two decades have rendered the mandate obsolete while creating inefficiencies for modern trading strategies.

The trade-through rule, also known as the order protection rule, was adopted in 2005 as part of Regulation NMS. It requires trading centers to establish policies ensuring trades are executed at the best quoted price — a principle known as best execution. The rule currently governs more than 50 registered exchanges and alternative trading systems handling billions of shares daily.

Scrapping the rule would represent the most significant overhaul of US equity market structure since Reg NMS itself. It could benefit high-frequency trading firms and dark pools that offer faster execution or lower fees at the expense of price improvement, while potentially reducing protections for retail investors who rely on best-execution guarantees. The proposal now enters a public comment period before any final vote.

The SEC's move represents a major deregulatory shift, following years of industry criticism that the trade-through rule fragments liquidity and slows execution. Critics have argued the rule forces orders to be routed to venues displaying the best quote even when alternative venues could offer better overall execution quality when factoring in fees, rebates, and speed. The last significant attempt to modify Reg NMS came in 2020, when the SEC proposed amendments to modernize market structure, though those efforts stalled as industry disagreement grew. The current proposal goes further by eliminating the rule entirely rather than updating it.

Winners and Losers in a Post-Trade-Through Market

If enacted, the repeal would reshape competitive dynamics across US equity markets. Traditional exchanges such as NYSE and Nasdaq could lose order flow to off-exchange venues, which have already captured roughly 40 percent of US equity trading volume, according to Bloomberg Intelligence data. Wholesale brokers like Citadel Securities and Virtu Financial, which internalize retail orders, would gain greater flexibility in execution decisions.

Retail investors, whose orders are currently protected by best-execution requirements, could face a more fragmented market where execution quality varies more widely across brokers. The SEC's proposal acknowledges these trade-offs, stating that "investor protection remains paramount" while arguing that market participants can negotiate execution terms through competition. The agency estimates that eliminating the rule could reduce compliance costs for trading platforms by hundreds of millions of dollars annually, though it did not provide a specific figure in the proposal.

What Comes Next

The proposal enters a 60-day public comment period, after which the SEC could hold a final vote. Industry lobbying is expected to be intense, with exchange operators, broker-dealers, and investor advocacy groups all seeking to shape the outcome. Legal challenges are also likely if the rule is adopted, given the sweeping nature of the change. Any final rule would take effect at least 12 months after adoption, the SEC said, giving market participants time to adjust their systems and routing practices.

This article is for informational purposes only and does not constitute investment advice.