Trade Through

A trade-through is an order that is carried out at a suboptimal price, even though a better price was available on the same exchange or another exchange. Regulations to protect against trade-throughs were first passed in the 1970s and were later improved upon in Rule 611 of Regulation NMS that passed in 2007.

Trade-throughs are illegal since regulations state that an order must be executed at the best available price. If a better price is quoted elsewhere, the trade must be routed there for execution, and not "traded through" at its current exchange. Alternatively, the exchange may decide to adjust its bid or offer to become the new best bid or offer and execute the order on its own.

Rule 611 of Regulation NMS, also known as the Order Protection Rule, aims to ensure that both institutional and retail investors get the best possible price for a given trade by comparing quotes on multiple exchanges. These regulations extend the old trade-through provisions that existed at the NYSE to all NASDAQ and AMEX-listed stocks, as well as many smaller exchanges.

The current Order Protection Rule also protects share blocks of less than 100 shares, which in the past could be traded through by brokerages without penalty. In many ways, these regulations have helped smaller retail investors avoid unfair price execution and compete on level playing fields with larger institutional investors that purchase stock in large blocks.

Trade-throughs are defined as the purchase or sale of an stock that is listed on an exchange with consolidated market data disseminated, during regular trading hours, either as agent or principal, at a price that is lower than a protected bid or higher than a protected offer. While Regulation NMS applies broadly to all types of venues that execute trades in modern equity markets, including registered exchanges, ATSs (dark pools and ECNs), off-exchange market makers, and other broker-dealers that execute trades internally as either a principal or agent, there are a few instances where trade-through regulations may not apply.

Manual quotes are not considered protected by Regulation NMS since consolidated market data is not disseminated electronically. Only electronically-delivered price quotes fall under the new regulations and the best prices, or top-of-book orders, must be posted across all exchanges that are subject Regulation NMS.

The other big exception is the so-called "one-second window" that is designed to deal with the practical difficulties of preventing intramarket trade-throughs during a fast-moving market when quotes are rapidly changing. If a trade is executed at a price taht would have not been a trade-through within the previous one second, then the trade is exempted from trade-through regulations.

There are also several other minor exemptions, such as the intermarket sweep order, or ISO, exemption.