Regulations and Trade-At Rule

RegATS, RegNMS and the effect on Markets

RegATS was established in 1999, and actually increased the popularity of ATS (Alternative Trading Systems), as they then became allowed to register as a broker dealer, rather than as an exchange that must adhere to more stringent rules. This caused the volume traded on ATS systems to increase, having the opposite effect on the markets as they quickly lost liquidity. 

The SEC responded in 2005 with RegNMS, which was aimed to unify and streamline the ATS market share by requiring that all orders coming from an ATS be routed through a national market system, creating one combined network. 

RegNMS also required that all exchanges route all orders, regardless of where they originated,  to the trading venue with the best displayed price, which did not necessarily have to be on an exchange. 

These regulations dramatically decreased the strong position that exchanges had on the market, as they lost even more liquidity.  Prior to RegNMS, for example, the NYSE traded approximately 85% of total market share, while after RegNMS that volume dropped to about 30%, and went as low as 20% in 2014. 

Trading in ATS venues and Dark Pools was even more attractive with these regulations, along with a loophole in RegATS which allows trading with hidden prices as long as the total volume of those trades is less than 5% of the volume trading of the stock nationally.  Investors were allowed to go into dark pools and trade anonymously to avoid alerting the HFT firms of what their intentions were.  As more and more investors went to dark pools, exchanges again lost market share. 

SEC Begins a Tick Size Pilot Program to address Trade-At Rule

Various proposals have been addressed to the SEC as options to implement a Trade-at Rule to address the liquidity of the markets and off exchange trading.  One proposal referred to as a Tick Size Pilot Program is in process currently and will evaluate the effect of widening the tick size.  Under this pilot program, the tick size will be increased from one cent ($.01) to five cents ($.05), only on certain piloted securities. 

Three groups and one controlled group were put into place, each with separate rules to trade by. One of the groups is actually using a trade-at rule, while another is required to quote in increments of $.05, and yet another must quote and trade in $.05 increments. 

This Tick Size Pilot Program just started last year in October of 2016, and is schedule to run for two years  For more information on this pilot program, and to receive email updates of the program, visit FINRA.org.

Other systems proposed include the “Grand Bargain” which was suggested by the Intercontinental Exchange, ICE, which suggests a trade at rule combined with reduced access fees 

Another proposed plan by Nasdaq suggests merely a decrease in fees with no trade-at rule at all. 

Our View on Trade-At

Currently the trader's public quote acts as a reference price for POF firms and dark pools to trade in front of him.  If a trader decides to display a quote in the public markets, that trader should get executions when orders come in at or through his displayed price.  The trader only gets executed once POF firms do not feel there is an advantage any longer at that price.  This means that the trader that risks the most in displaying a bid or offer is the last to be filled at that price.

That is not a fair system, and de minimis price improvements should not be used to justify the practice.

Most traders competing with this pricing model agree – a Trade-At Rule is necessary.  

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.