DEFINITION of 'Trade Through'

A trade-through is an order that is carried out at a suboptimal price, even though a better price was available on the same exchange or another exchange. Regulations to protect against trade-throughs were first passed in the 1970s and were later improved upon in Rule 611 of Regulation NMS that passed in 2007.

BREAKING DOWN 'Trade Through'

Trade-throughs are illegal since regulations state that an order must be executed at the best available price. If a better price is quoted elsewhere, the trade must be routed there for execution, and not "traded through" at its current exchange. Alternatively, the exchange may decide to adjust its bid or offer to become the new best bid or offer and execute the order on its own.

Rule 611 of Regulation NMS, also known as the Order Protection Rule, aims to ensure that both institutional and retail investors get the best possible price for a given trade by comparing quotes on multiple exchanges. These regulations extend the old trade-through provisions that existed at the NYSE to all NASDAQ and AMEX-listed stocks, as well as many smaller exchanges.

The current Order Protection Rule also protects share blocks of less than 100 shares, which in the past could be traded through by brokerages without penalty. In many ways, these regulations have helped smaller retail investors avoid unfair price execution and compete on level playing fields with larger institutional investors that purchase stock in large blocks.

Exceptions to Trade-Through Regulations

Trade-throughs are defined as the purchase or sale of an stock that is listed on an exchange with consolidated market data disseminated, during regular trading hours, either as agent or principal, at a price that is lower than a protected bid or higher than a protected offer. While Regulation NMS applies broadly to all types of venues that execute trades in modern equity markets, including registered exchanges, ATSs (dark pools and ECNs), off-exchange market makers, and other broker-dealers that execute trades internally as either a principal or agent, there are a few instances where trade-through regulations may not apply.

Manual quotes are not considered protected by Regulation NMS since consolidated market data is not disseminated electronically. Only electronically-delivered price quotes fall under the new regulations and the best prices, or top-of-book orders, must be posted across all exchanges that are subject Regulation NMS.

The other big exception is the so-called "one-second window" that is designed to deal with the practical difficulties of preventing intramarket trade-throughs during a fast-moving market when quotes are rapidly changing. If a trade is executed at a price taht would have not been a trade-through within the previous one second, then the trade is exempted from trade-through regulations.

There are also several other minor exemptions, such as the intermarket sweep order, or ISO, exemption.

RELATED TERMS
  1. Alternative Trading System (ATS)

    An alternative trading system (ATS) is one that is not regulated ...
  2. Execution

    Execution is the completion of a buy or sell order for a security.
  3. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee ...
  4. Price-Cap Regulation

    A price-cap regulation is a form of economic regulation that ...
  5. Regulated Market

    A regulated market is a market over which government bodies or, ...
  6. Regulation X

    Regulation X is a rule that limits the amount of credit foreign ...
Related Articles
  1. Insights

    If You Buy Stocks Online, You Are Involved in HFTs

    Many people don't realise that some half to two-thirds of all trades use high-frequency trading in some fashion.
  2. Trading

    The Global Electronic Stock Market

    The way trading is conducted is changing rapidly as exchanges turn toward automation.
  3. Trading

    High-Frequency Trading: A Primer

    An in depth look at how high-frequency trading works and who the players are.
  4. Insights

    Free Markets: What's The Cost?

    Some argue that when the free market fails to protect consumers, government regulation is required.
  5. Trading

    For Individual Investors, These May Be The Best Of Times

    The raging debate on high frequency trading may lead the average retail investor to think that he/she continues to get a raw deal in the stock market. The reality is that these are probably the ...
  6. Insights

    Getting to Know the Stock Exchanges

    Here are the answers to all the questions you have about stock exchanges but are too afraid to ask.
  7. Insights

    Trump's Executive Orders (So Far)

    Trump has been fulfilling campaign promises by issuing executive orders.
  8. Taxes

    How A Company Files With The SEC

    Filing with the SEC is not as complicated as you might thing -- just be meticulous about following the steps.
  9. Investing

    The Basics of Trading a Stock: Know Your Orders

    Taking control of your portfolio means knowing what orders to use when buying or selling stocks.
RELATED FAQS
  1. What impact does government regulation have on the financial services sector?

    Learn about how the financial services industry is affected by government regulation, and the different types of regulations ... Read Answer >>
  2. What exactly is being done when shares are bought and sold?

    Most stocks are traded on physical or virtual exchanges. The New York Stock Exchange (NYSE), for example, is a physical exchange ... Read Answer >>
  3. How strongly does government regulation impact the utilities sector?

    Read about the impact of government regulation on the utilities sector, particularly as is pertains to the water and electricity ... Read Answer >>
  4. How are asset management firms regulated?

    Find out how the asset management industry is regulated and how those regulations fit within the broader scope of financial ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center