Order Protection Rule

The Order Protection Rule is one of the provisions of the Regulation National Market System. 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.

The Order Protection Rule requires that each exchange establishes and enforces policies to ensure consistent price quotation for all NMS stocks, which include those on the major stock exchanges as well as many over-the-counter (OTC) stocks. The Order Protection Rule rule is also known as "Rule 611," or the "trade-through rule."

The Order Protection Rule – along with Regulation NMS as a whole – was instituted to make financial markets more liquid and transparent. Before the regulation was passed, existing "trade-through" rules did not protect investors at all times. This was especially true on limit trades where investors would sometimes get inferior prices to those being quoted on a different exchange.

The rule aims to protect quotations for a given security across the board, so all market participants can receive the best possible execution price for orders that can be executed immediately. Regulation NMS was passed in 2005 by the Securities and Exchange Commission (SEC).

The Order Protection Rule also established the National Best Bid and Offer (NBBO) requirement that mandates brokers to route orders to venues that offer the best displayed price.

Critiques of the Order Protection Rule's effectiveness have arisen in the years following its enactment. Those criticisms include some belief that the rule contributed to excess fragmentation among trading venues. This was implied to have increased the complexity of the market and the connectivity costs to participants in the market. For example, trade-through restrictions can force market participants to route orders to lit venues they would otherwise not do business with.

Another criticism of the rule is that it may have indirectly led to an increase in dark trading, a practice where stock is bought and sold in such a way that it does not materially affect the market. This has been attributed to limits imposed on competition among lit venues with choices being made based on their speed and fees instead of stability and liquidity.

Critics have also cited the order protection rule for potentially harming institutional investors who need to make large volume trades but are forced to access small-sized quotations. This has the effect of tipping off short-term proprietary traders to the trading intentions of institutional investors.