Regulation NMS, which passed two years ago but didn’t go into effect until last month, has many exchange traded fund (ETF) providers asking the SEC for an exemption from one aspect of the rule. ETF providers say the order-protection part of the regulation is damaging to the liquidity of ETFs. The rule requires trading centers to obtain the best possible price for the trade regardless of the speed or convenience some large investors seek from trade-throughs, reports Edward Hayes of CCH Wall Street.
Because ETFs are actively traded portfolios of stocks, they have constant price fluctuations. To meet the needs of Regulation NMS, a broker-dealer needs to record the inner-market sweep orders for all securities, including ETFs. But the problem is that by the time the information is out, the prices have moved, making the order meaningless. Releasing the information creates another problem: By announcing their trades, brokers are left vulnerable to the possibility that another broker will come in and buy at a better price.
The SEC has not made any decisions or responded on these issues yet.
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