how the order protection rule works
the order protection rule along with regulation nms as a whole was instituted to make financial markets more liquid and transparent via better access to data in general and improved quote displays and fairness in prices in particular before the regulation was passed in 2005 by the securities and exchange commission sec existing trade through rules did not protect investors at all times this was especially true on limit trades where investors would sometimes get inferior prices to those being quoted on a different exchange the order protection rule aims to protect quotations for a given security across the board so all market participants can receive the best possible execution price for orders that can be executed immediately it requires trading centers to establish maintain and enforce written policies and procedures that are reasonably designed to prevent the execution of trades at prices that are inferior to protected quotations displayed by other trading centers the rule also established the national best bid and offer nbbo requirement that mandates brokers to route orders to venues that offer the most advantageous displayed price 4 the three other provisions of regulation nms are the access rule the sub penny rule and the market data rules criticism of the order protection rulecritiques of the order protection rule s effectiveness have arisen in the years following its enactment those criticisms include the belief that by mandating stocks trade on exchanges that show the best quoted prices the rule contributes to excess fragmentation among trading venues this was implied to have increased the complexity of the market and the connectivity costs to participants in the market making transactions more expensive overall for example trade through restrictions can force market participants to route orders to lit venues they would otherwise not do business with another criticism of the rule is that it may have indirectly led to an increase in dark trading a practice where stock is bought and sold in such a way that it does not materially affect the market this has been attributed to limits imposed on competition among lit venues with choices being made based on their speed and fees instead of stability and liquidity critics have also cited the order protection rule for potentially harming institutional investors who need to make large volume trades but are forced to access small sized quotations this has the effect of tipping off short term proprietary traders to the trading intentions of institutional investors 