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NYSE: The "Trade-through Rule": Quoted Price Competition In NYSE Stocks

Date 05/02/2004

Companies listed on the New York Stock Exchange are traded on the New York and regional stock exchanges, Nasdaq dealers, and Electronic Communications Networks (ECNs). These various markets attract orders from stockbrokers by competitively quoting bid and ask prices, with orders flowing to the markets with the best-quoted prices. One or more markets may simultaneously quote the most competitive prices. Other markets may quote worse prices and consequently not receive many orders until their quotes improve. If one stock exchange displays a better quote than is available on another market, then specialists and market makers are generally required by SEC regulation (“trade-through rule”) to route orders to the market with the better price. This helps assure that investors receive the best available price. At the same time it encourages the competitive vitality of markets by assuring that investors who provide the most competitive quotes and priced limit orders do not have their orders ignored (“traded-through”). In today’s market, most quotes reflect the public orders of customers, who are thus protected by the trade-through rule.

In February, 2004, NYSE Research released information on the Potential Costs of Weakening the Trade-through Rule, available in .pdf.