CandleFocus Glossary Editor
The goal of the Order Protection Rule is to prevent trade-throughs and internalization.
Trade-throughs are when a market center (e.g., a stock exchange) trades a customer order at a worse price than could be obtained elsewhere in the market. Internalization is when a broker-dealer trades a customer order with an inventory owned by the broker-dealer or an affiliate, or routes the order to an affiliate without looking for the best price in the marketplace. Internalization can be beneficial when a broker-dealer can offer a better price than is available in the marketplace, but it can also hurt the investor if the broker-dealer is looking to gain a higher profit.
The Order Protection Rule mandates that firms always quote the best price in the marketplace, even if that costs the firm more money. The firm must immediately and automatically route orders to the best price, which is available across all trading center markets. By doing this, all investors receive the best available prices and are not disadvantaged by low-priced trade-throughs.
The Order Protection Rule requires firms to have written policies and procedures to prevent trade-throughs and internalization. For example, if a firm finds it can offer a better price than is available on certain exchanges, they must quickly adjust their bids and offers to match prices on these exchanges. The firm must document and keep records of their compliance to the Order Protection Rule, and must submit these records to the SEC upon request.
Although the Order Protection Rule prevents trade-throughs and internalization, it does not prevent flash orders, which is when high-frequency traders can utilize a brief pre-view period to view the best available quotes in the marketplace. This has led to criticism of the Order Protection Rule as it does not provide a level playing field for investors.
Overall, the Order Protection Rule is an important component of the National Market System and was intended to ensure that investors get the best price for their orders. By preventing trade-throughs and internalization, investors are assured that their orders are being executed at the best available prices. Furthermore, the Order Protection Rule is a valuable tool for addressing conflicts of interest by ensuring that companies don’t take advantage of customers by trading orders internally at worse prices. Despite its criticisms, the Order Protection Rule remains an important component of the National Market System, and will continue to protect investors.
Trade-throughs are when a market center (e.g., a stock exchange) trades a customer order at a worse price than could be obtained elsewhere in the market. Internalization is when a broker-dealer trades a customer order with an inventory owned by the broker-dealer or an affiliate, or routes the order to an affiliate without looking for the best price in the marketplace. Internalization can be beneficial when a broker-dealer can offer a better price than is available in the marketplace, but it can also hurt the investor if the broker-dealer is looking to gain a higher profit.
The Order Protection Rule mandates that firms always quote the best price in the marketplace, even if that costs the firm more money. The firm must immediately and automatically route orders to the best price, which is available across all trading center markets. By doing this, all investors receive the best available prices and are not disadvantaged by low-priced trade-throughs.
The Order Protection Rule requires firms to have written policies and procedures to prevent trade-throughs and internalization. For example, if a firm finds it can offer a better price than is available on certain exchanges, they must quickly adjust their bids and offers to match prices on these exchanges. The firm must document and keep records of their compliance to the Order Protection Rule, and must submit these records to the SEC upon request.
Although the Order Protection Rule prevents trade-throughs and internalization, it does not prevent flash orders, which is when high-frequency traders can utilize a brief pre-view period to view the best available quotes in the marketplace. This has led to criticism of the Order Protection Rule as it does not provide a level playing field for investors.
Overall, the Order Protection Rule is an important component of the National Market System and was intended to ensure that investors get the best price for their orders. By preventing trade-throughs and internalization, investors are assured that their orders are being executed at the best available prices. Furthermore, the Order Protection Rule is a valuable tool for addressing conflicts of interest by ensuring that companies don’t take advantage of customers by trading orders internally at worse prices. Despite its criticisms, the Order Protection Rule remains an important component of the National Market System, and will continue to protect investors.