Development of the Need for Trade-At Rule

US Market History

Many events have occurred in modern history that have created what many feel is a need for a Trade-At Rule.   Common practices such as Payment for Order Flow (POF) are causing Exchanges, Regulators and Traders to analyze the current structure of the market and to consider implementing a Trade-At Rule.  

Payment for Order Flow is the agreement that exists when a third-party pays a broker to send their orders to them, rather than to the open market.  This is a cunning strategy we are all well aware of, but yet there seems to be quiet acceptance.  This type of payment incentive developed over time with the introduction of Alternative Trading Systems (ATS) and rapid improvements in computerized algorithmic trading.  This type of payment structure leaves traders fighting for market share.  

Change in Markets due to Advancements in Technology

The combination of ATSs and other off exchange venues along with computerized algorithmic software have had a huge impact on US Markets and how securities are traded today.  Daytraders today dream of a level playing field and efficiency in the market.  

The Stock Exchange of today is not occupied by clamorous traders shouting on the floor while waving papers in the air.  This market today is an age of computer algorithms scanning all available exchanges to buy and sell desired shares in fractions of a second.  

Many of the trades occurring are on an off-exchange venue such as an ATS, an ECN (Electronic Communication Network), or a Dark Pool, where they can act like an exchange but adhere to their own rule set.  These off-exchange venues often offer price improvement, fast execution, and decreased trading costs for investors, making them a desirable way to go.  

This is where a conflict of interest could develops to the firms processing these orders.  Brokers can either route their orders to an off-exchange venue offering the best price with the least costs, or they can send their orders to the venue that pays them the best rebates.  

The introduction of various ECN’s, ATS and Dark Pools has contributed to the development of a fragmented market that now consists of thirteen US Stock Exchanges, over forty dark pools and several ECN’s to choose from.  With so many choices, it is no wonder that people are talking about liquidity, paying for it, and wondering how to keep it flowing within regulations, and in an ethical manner.  While traders are fighting for market share, and wondering where to find liquidity in the market, most traders are also wondering if it’s time for new regulations, or are they long overdue?

Headquartered in Chicago, Great Point Capital, LLC, is a member of FINRA and has been serving the trading community since 2001. Our mission is to be the leader in the equity day trading community by giving the best traders the tools and support to make the most of their trading careers.  Contact Great Point Capital, LLC today, in either our Chicago Office, or our Austin Office, to learn more about how we can successfully trade together with high performance results.