Be Wary of Lemmings (Rule 611 OPR)

Once upon a time, in the year 2010, the SEC asked our entire industry to weigh in on its assessment of existing equity market structure. It issued the 2010 Equity Market Structure Concept Release, where the SEC expressed concern about dark liquidity, fair access and two tiered markets, market data pricing, HFT, and Reg NMS in general, including the functioning of markets with the Order Protection Rule (OPR), and even asked whether the SEC should consider  a Trade-At Rule. They received hundreds of comment letters.


Amazingly, pre-May 6th Flash Crash, HFT firms, stock exchanges, and broker dealers tripped over themselves proclaiming the virtues and successes of modern market structure left as is. As one example, allow us to draw your attention to the April 21st 2010 letter from CSFB’s Dan Mathisson:


Regulation NMS, which went into effect in 2007, built further on this competitive approach. Twelve years into this experiment, it cannot be called anything other than a complete success. Exactly as intended, Regulation ATS and Regulation NMS fostered a marketplace with many trading venues engaged in a vibrant and healthy competition. [See trading venue market share chart in Appendix A] Today, there are 10 exchanges, 3 Electronic Communication Networks (“ECNs”), and over 20 ATSs that execute trades daily. And despite initial fears that fragmentation would create chaos, the consolidated tape and the creation of smart order routing systems have effectively stitched all these market centers together into a true national market system.

 For the typical investor, the presence of all these venues remains behind-the-scenes and opaque, but they have certainly benefited from the decrease in their commissions as well as the improvements in bid/ask spreads, speed of execution, reliability, and service.

 The numbers tell the story. Bid/ask spreads in the U.S. are currently the tightest in the developed world, benefiting retail investors. [See the bid/ask spreads chart in Appendix B] Retail commissions are the lowest they have ever been, while average institutional commissions have dropped 65% since 1998, and 31% since 2006. [See the institutional commissions chart in Appendix C] As trading costs have dropped due to competition among executing venues, volumes have risen. [See the historical volume chart in Appendix D] Volume is the most important measure of a market’s health. When a market is corrupt, expensive, or unreliable, investors avoid the marketplace.


Of course, HFT and brokers alike loved the ways that the equity market structure functioned. HFT’s had their best years during the financial crisis. The opacity worked to their advantage. Brokers ran their own HFT prop trading, and seeded their dark pools with this same flow, providing commissions and prop trading alpha.

Since then, dark pools like CSFB have incurred record-breaking fines. Exchanges were fined as well for order types, and improper data practices. Order-types were disclosed and changed. Exchange routing practices were changed. Loopholes were increasingly closed. New free-market solutions have been introduced that help investors (like IEX – whose execution statistics are excellent, and who provide a level playing field, free trading, and free market data that leaks less, as there is no individual order attribution publicly released).

It is our considered opinion that the functioning of modern markets today, while imperfect, are so drastically improved in 2017 as compared to their state in 2010. Well… for investors anyway.

 Anyway, lets fast-forward to today.

Over recent weeks there has been a very orchestrated effort by “our industry” – including pundits like Larry Tabb, David Weisberger, and HFT lobbyists like Modern Markets – to proclaim that our markets need to function better, and that specifically Reg NMS’s Rule 611 – the Order Protection Rule (OPR) – should be eliminated. Broker dealers are also weighing in on this issue, calling for the SEC to examine whether it should be repealed. In fact, SIFMA, the lobbying group representing hundreds of securities trading firms, broker dealers, and asset managers, has just released its new letter to the SEC calling for revisions to Reg NMS, which you can read here. While some of SIFMA’s recommendations are in fact quite thoughtful, we disagree with their recommendation for the SEC to re-evaluate Rule 611 (OPR):

Order Protection Rule: To address market fragmentation and complexity, the SEC should evaluate the OPR and consider whether modifications or exemptions are needed, potentially including a volume threshold for protected quotation status and a block exemption for orders of significant size. The SEC also could consider an elimination of the OPR coupled with enhanced best execution principles or maintaining the status quo. 

Let’s think about this. All these firms…


  • who proclaimed the robustness of modern markets during the financial crisis, and just before the May 6th Flash Crash, and countless other market structure events,
  • and who profited from the opacity, boom-boom rooms, hideyslideys, and illegal short sale enabling,
  • and who made billions off of investors profiting off the rampant scalping and order leakage,
  • and who today are hurting and making much less money,
  • and who were universally wrong on market structure


… all these firms now want to change the rules.


This should make every one of us think hard. If there is no OPR, there will be new algorithmic gaming. In today’s markets, retail orders are tagged, HFT orders flicker, and institutional orders stick out as a result. Institutional orders are the ones that short-term traders prefer to trade ahead of – in the same direction, and institutional orders are the ones that short term traders experience the most adverse selection. And in this environment, they want to eliminate the OPR, and will be able to pick and choose at lightning speed which orders to interact with, and which ones to… well you know.

Be aware of the orchestrated efforts taking place right now to influence an SEC that only has two commissioners, under a new anti-regulatory political regime.

At least consider the possibility that the changes being advocated for might not be in your interests – the interests of investors, the ultimate owners of the market place.