Citadel Securities urges SEC to reconsider proposal to scrap key stock-trading rule

Citadel Securities, a prominent market-making firm, has urged the U.S. Securities and Exchange Commission (SEC) to reconsider a proposal that would eliminate a key regulation requiring stock trades to be executed at the best available price. The firm, founded by billionaire Ken Griffin, argued in a letter to the SEC that scrapping the rule, known as the "order protection rule," could lead to trading being diverted from public exchanges, negatively impact retail investors, and reduce overall market liquidity.

The SEC had proposed to remove the regulation in June, with Chairman Paul Atkins' commission suggesting it drove up costs and complexity and was no longer necessary. This move is part of the Trump administration's broader plans to reshape securities markets.

Stephen John Berger, a managing director at Citadel Securities, described the SEC's economic analysis supporting the proposal as "fatally flawed." The firm contended that the projected compliance savings of approximately $250,000 per trading day are modest when compared to the vast size of the U.S. stock market, and that the SEC had not demonstrated that the proposal's benefits would outweigh its risks.

The order protection rule was initially adopted in 2005 to prevent "trade-throughs," which occur when a trade is executed at a less favorable price than what is publicly displayed on another trading venue. Citadel Securities warned that removing this rule would make it easier for brokers to bypass the best displayed prices, potentially leading to more customer orders being internalized or routed to alternative trading venues instead of public exchanges. This, the firm argued, could diminish price discovery and weaken incentives for market participants to display competitive quotes.

Furthermore, Citadel Securities suggested that eliminating the rule could benefit platforms trading tokenized equities, as these venues might execute trades without matching better prices elsewhere, potentially offering weaker investor protections. As an alternative, Citadel Securities proposed that the Commission consider imposing a minimum volume threshold for exchanges to receive protected quote status.