What is Order Protection Rule?

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The Order Protection Rule is one of the four main provisions of the Regulation National Market System (NMS). The rule is meant to ensure that investors receive an execution price that is equivalent to what is being quoted on any other exchange where the security is traded. The rule eliminates the possibility of orders being traded through, which means executed at a suboptimal price.

Definition

The Order Protection Rule is one of the four main provisions of the National Market System (NMS) regulations. It aims to ensure that investors receive execution prices equal to those quoted on other exchanges, eliminating the possibility of orders being executed at inferior prices. The Order Protection Rule is also known as "Rule 611" or the "Trade-Through Rule".

Origin

The Order Protection Rule was introduced in 2005 by the U.S. Securities and Exchange Commission (SEC) as part of the National Market System regulations. Its purpose is to protect investors' interests by ensuring price consistency across all exchanges.

Categories and Features

The Order Protection Rule applies to all NMS stocks, including those on major stock exchanges and many over-the-counter (OTC) stocks. Its main feature is the requirement for each exchange to establish and enforce policies to ensure consistent price quotations. This means that investors can receive the best market price regardless of which exchange they place their order on.

Case Studies

A typical case involves stock trading between NASDAQ and the New York Stock Exchange (NYSE). Suppose a stock is quoted at $50 per share on NASDAQ and $49.50 per share on NYSE. According to the Order Protection Rule, the investor's order will be routed to NYSE to obtain the lower price. Another case involves a company's stock traded on multiple OTC platforms, where the Order Protection Rule ensures investors receive the best consistent price across these platforms.

Common Issues

Investors might misunderstand the rule, thinking it guarantees the execution of all orders, whereas it actually ensures price consistency. Additionally, some smaller exchanges may face technical challenges in fully complying with the rule.

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