Forefront Communications

Pensions & Investments: Institutions At Odds with Retail Over SEC’s Order Protection Rule

Forefront Communications

Mark Dowd

Mark Dowd

For many institutional traders and analysts, getting rid of the Securities and Exchange Commission’s Order Protection Rule is a no-brainer, making it easier to trade in large blocks.

But that’s not the case for retail investors, who value the rule that requires equity trades to be executed on the exchange that offers the best price.

And that institutional vs. retail tug-of-war is being played out in the SEC’s Equity Market Structure Advisory Committee.

“I give (the rule) mixed reviews generally,” said Steven Glass, president and CEO of Zeno Consulting Group, a Bethesda, Md.-based consultant to pension funds on trading issues. “But look at the market structure committee; even they are split. I think there’s a message in that. A lot of people aren’t sure of doing away with OPR.”

Members of the advisory committee, which is tasked with recommending what overall changes should be made on market structure regulation, failed to agree on whether to keep or remove OPR, also known as Rule 611, at their last meeting, April 5.

Committee members representing predominantly retail money managers said the rule protects the smaller investor’s interest in the face of larger investors like pension funds and institutional managers that crowd them out with block trades.

Meanwhile, members from managers with institutional clients said the rule negatively affects larger investors who trade bigger blocks of securities. They say it forces managers to find the exchange with the best price, sometimes in opposition to best execution because trading at a venue based solely on best price doesn’t take into account variables like venue liquidity and cost.

The rule has been in effect since 2005 as part of Regulation National Market Structure, or Reg NMS, created at a time when equity markets were dominated by two exchanges — the New York Stock Exchange and Nasdaq. “It was a good thing initially,” said Mehmet Kinak, vice president and head of global equity market structure and electronic trading at T. Rowe Price Group Inc., Baltimore, and a member of the SEC advisory committee. “One positive was it got NYSE out of the manual process and into electronic trading. Now, 12 years later, 13 exchanges can talk to each other quickly. We’re supportive of that. But we’re not going to go back to manual exchanges if you get rid of OPR.”

Added Peter Maragos, CEO of Dash Financial Technologies, a New York-based trading technology and analytics provider: “Institutions look for liquidity at the right price with minimal impact on the market. They like to put up large blocks and get fair prices on them. They shouldn’t be impacted because of their large footprint. They also want to trade easier. OPR did the opposite; it caused the proliferation of more exchanges. It’s the biggest cause of the fragmentation of the equity market.”

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