STA Warns SEC on Proposed Trade-Through Rule Rescission

The Security Traders Association ("STA") warned the SEC that its proposal to rescind the trade-through rule and eliminate restrictions on locked and crossed markets could lead to systemic "unnatural" locked quotes designed to capture liquidity rebates.

In a letter to the SEC, STA expressed support for the goal of reducing market complexity but flagged risks around locked quotes. The letter responds to the SEC's proposal to rescind NMS Rule 242.611 ("Order protection rule") and paragraph (e) of NMS Rule 242.610 ("Access to quotations"), which restricts locking and crossing quotations in NMS stocks (see prior coverage).

STA said "natural" locked markets can reflect competitive quoting, but drew a contrast with "unnatural" locks, which the association broadly defines as situations with minimal volume trading on the locked market where the intent is solely to capture a liquidity rebate or to identify short-term directional trading information. Those locks, STA argued, would impede the handling and execution of retail orders and create a disorderly market.

The association also cautioned that removing intermarket price-priority protections would alter the baseline assumptions underlying ongoing tick size and access fee reforms, and urged the SEC to analyze these initiatives together, warning that smaller ticks and revised access fees without trade-through protections could accelerate order flow migration away from publicly displayed markets.

Finally, STA noted that without the trade-through rule, broker-dealers' best-execution obligations under FINRA Rule 5310 ("Best Execution and Interpositioning") would become the primary safeguard against inferior executions and, citing FINRA's recent request for comment on modernizing its best-execution guidance, recommended that the SEC and FINRA collaborate on consistent standards.