What is an Order Protection Rule?

Order protection rule is a National Market System (RMS) regulation meant to ensure that investors get execution price equivalent to all exchanges trading in the security. In other words, it protects investors from getting inferior prices in a fragmented and complex market. The RMS requires all brokers to channel orders to the venue and display the best price. This way, retail investors are able to get an execution price that matches the one on other exchanges.

How Does the Order Protection Rule Work?

Order protection rule is a provision that applies to all stocks under the National Market System aimed at ensuring that greater transparency and liquidity exists in the security market. The stocks include over-the-counter securities as well as those that trade on larger exchanges. However, rule 611 does not do away with all trade-throughs because there are several exceptions with regard to this rule. What this means is that there must be patters of abuse when it comes to exchange vs. those qualifying trades for an exception. The effectiveness of this rule has also been under criticism. Some critics believe that the rule has resulted in excess divisions among trading venues. The fragmentation is said to cause increase complexity in the market as well as connectivity costs to those participating in the market. Another belief from critiques is that the rule has indirectly contributed to an increase in dark trading. This is where traders buy and sell stock in a manner that the market is not materially affected. Those opposed to this rule have also pointed out that the order protection rule, to some extent, does cause harm to institutional investors. These investors, in most cases, wish to trade in large volumes, but the rule limits them to small size quotations.