Exchanges at prices that differ from more favorable prices on other exchanges are prohibited by Rule 611. Electronic quoting and monitoring systems make it difficult to accidentally commit a trade and limit the actions of unscrupulous brokers. The SEC can investigate and fine traders who violate trading regulations.
An exchange is a sale of a security at a price that differs from the more favorable price on another exchange. Business transactions used to be common before the advent of electronic quoting and monitoring systems because the people doing the trading would not be aware of better prices. Today, such systems make it more difficult to accidentally commit a trade and also limit the actions of unscrupulous brokers. There are also specific regulations to prohibit such exchanges, as they are not in the best interest of investors.
When a buy or sell order is placed on an exchange, it may not be possible to get the best price on that exchange. The person placing the order should check the quotes of other exchanges to see if there is a lower ask price for someone looking to buy or a higher bid price for someone looking to sell. Sometimes the best price goes to a competitor, but there is still an ethical obligation to put the deal at the best price, no matter who is offering it.
Historically, people “bargained,” executing the trade on their exchange house regardless of the prices that might be available elsewhere. In the 1970s and again in the 2000s, the United States Securities and Exchange Commission (SEC) regulated business transactions, stipulating that when people used electronic quotes, they could not ignore better prices elsewhere and execute a business transaction.
The relevant regulation is Rule 611, also known as the Order Protection Rule. Specifically, identifying and prohibiting trading through settlements allows the SEC to identify traders who are not acting in the best interest of their clients. The ban on trade is also intended to promote competition through transparency. When exchanges know they are competing with each other, this creates an incentive to do business in a way that appeals to traders, such as keeping prices competitive compared to other exchanges.
If a trader or market maker appears to be violating the rules on trading transactions, a report may be filed with the SEC. The SEC can investigate and fine the trader or suspend trading privileges. In addition to acting on tips, the SEC must also investigate on its own, monitoring businesses large and small in the markets in order to protect investors, consumers, and the broader economy from the consequences of unfair trade practices.
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