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A trade through is a sale of a security at a price that differs from that of the most favorable price at another exchange. Trade throughs used to be common before the advent of electronic quotes and monitoring systems because people executing trades would not be aware of better prices. Today, such systems make it more difficult to accidentally commit a trade through and also limit the actions of unscrupulous brokers. There are also specific regulations in place to ban such trades, as they are not in the best interests of investors.
When an order to buy or sell is made at one exchange, it may not be possible to obtain the best price at that exchange. The person executing the order must consult quotes for other exchanges to see if there is a lower ask price for someone looking to buy or a higher bid price for someone who wants to sell. Sometimes, the best price rests with a competitor, but there is still an ethical obligation to put the deal through at the best price, no matter who is offering it.
Historically, people would “trade through,” executing the trade at their home exchange no matter what prices might be available elsewhere. In the 1970s and again in the 2000s, the Securities and Exchange Commission (SEC) in the United States regulated trade throughs, stipulating that when people used electronic quotes, they could not ignore better prices elsewhere and execute a trade through.
The relevant regulation is Rule 611, also known as the Order Protection Rule. Specifically identifying and banning trade through deals allows the SEC to identify traders who are not acting in the best interests of their clients. The ban on trade throughs is also intended to promote competition through transparency. When exchanges know that they are competing with each other, this creates an incentive to practice business in a way that will attract traders, such as keeping prices competitive when compared to other changes.
If a trader or market maker appears to be violating the rules on trade throughs, a report can 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 is also required to investigate on its own, keeping track of deals large and small across the markets for the purpose of protecting investors, consumers, and the economy at large from the consequences of unfair business practices.
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