SEC takes aim at 20-year-old rules, Tokenized stocks next?

On June 11, the United States Securities and Exchange Commission (SEC) proposed to repeal rules 611 and 610(e) of the Reg NMS. The two regulations represent key regulations governing the equity markets in the United States.

A 60-day public comment period is now open, with the revised regulation expected to be completed in the first quarter of 2027, according to TD Cowen managing director Jaret Seiberg.

Rule 611, referred to as the trade-through or order protection rule, does not allow anyone to enter an order for any stock in question below the prices available on other trading facilities. While Rule 610(e) does not allow any exchange to provide quotations that will create locked or crossed quotations compared to competing markets.

Why SEC want to scrap Rules 611 and 610?

The adoption of rules 611 and 610 was meant to ensure that there was no occurrence of a bad execution price on the network of fragmented exchanges. Nonetheless, it is widely believed by most people, including SEC Chairman Paul Atkins, that the two rules have failed because all they have done is fragment the trading venues and incur costs associated with connectivity for the benefit of intermediaries.

The trade-through rule has been opposed by Atkins since its first enactment by the SEC over 20 years ago. According to his statement released alongside the vote on Wednesday, Atkins referred to the proposed revisions as “high time,” adding that the rules had “hindered, rather than enhanced, the long-term growth of our markets.” The view held by Atkins is similar to the one he expressed in a dissent, along with former Commissioner Cynthia Glassman at the time of the enactment of Rule 611. Both argued the Commission was substituting its own assumptions for outcomes that competition and market forces would produce more efficiently.

The proposal did not happen all of a sudden. The SEC held two public consultations on equity-market structure last year, gathering inputs from exchanges, broker-dealers, and market makers. Atkins referred to those meetings in his open-meeting statement, saying that the agency began this discussion “transparently” before proposing the revision.

Reg NMS changes may unlock tokenized stocks

In a May 28 talk at Stanford’s Rock Center for Corporate Governance, Atkins outlined a more comprehensive plan of deregulation designed to revitalize public markets. He said that there is a decline of about 40% in the number of US-listed companies since the mid-1990s, and that there is a need to eliminate “regulatory frictions” that made companies retreat from public exchanges. The Reg NMS proposal fits squarely within that campaign.

For the tokenized securities sector, the effects extend far beyond the borders of the United States. The U.S. equity markets have set the standard on which all others base themselves. A go-ahead for on-chain stock trading on the world’s largest capital market will create a sense of urgency for securities authorities around the world to define their positions concerning tokenized equities.

As Alex Thorn, Galaxy Digital Research’s chief executive, said about the proposal, “This is one of the biggest unlocks yet for tokenized stock trading on decentralized exchanges”. This has something to do with the technical aspect of the problem. Since automated market makers (AMMs) that determine the prices on decentralized exchanges cannot comply with the Regulation of Rule 611, because of the fact that they operate according to the bonding curve principle with whatever price is available in the liquidity pool at the moment of block validation, without pausing a transaction, since the order could have been better on the Nasdaq and New York Stock Exchanges.

The rescission of two rules does not make the market for tokenized equities a completely operational one. Registration on the Exchange or an Alternative Trading System, clearance, settlement facilities, and a variety of other securities regulations have all been formulated for centralized, intermediary-based markets. None of those requirements vanish with this proposal.