SEC Proposes Removing Legacy Trade-Through Rule to Pave Way for Tokenized Equities

The Securities and Exchange Commission (SEC) is seeking to dismantle a foundational stock-trading regulation that has shaped Wall Street operations for two decades.

On June 11, the agency introduced a proposal to rescind Rule 611 of Regulation NMS. This “trade-through” rule currently mandates that trading centers prevent stock executions from occurring at prices inferior to protected quotes displayed elsewhere. Additionally, the proposal would eliminate Rule 610(e), which restricts locked and crossed quotations, along with its associated definitions.

While traditional Wall Street participants view this as a structural battle over routing, exchange competition, and execution quality, the move holds deeper significance for banks and crypto firms exploring tokenized shares. The SEC is effectively targeting one of the primary regulatory hurdles that has made blockchain-based stock trading incompatible with the current national market system.

A Legacy Framework in a Digital Age

Adopted in 2005, Rule 611 was designed to protect investors by ensuring orders were not executed at inferior prices when better quotes existed on other exchanges. This system tied trading to the National Best Bid and Offer (NBBO), forcing broker routers and exchanges to build their infrastructure around this strict obligation.

However, this framework is fundamentally incompatible with Automated Market Makers (AMMs)—the software-driven liquidity pools that power decentralized finance (DeFi). Unlike the NYSE or Nasdaq, AMMs determine prices via liquidity pools, bonding curves, and block-time execution.

Alex Thorn, head of research at Galaxy Digital, noted that Rule 611 represents one of the most significant structural barriers to DeFi-based equity trading. “An AMM cannot comply with 611 by construction,” Thorn explained, noting that these systems execute against bonding curves with inherent slippage and block-time granularity.

The challenge is more than technical; an on-chain pool cannot realistically manage intermarket sweep orders or ingest consolidated market data with the millisecond latency required by US equity rules. Under current laws, a pool trading tokenized NMS stocks could be viewed as an unlawful trading center if its prices deviate from protected off-chain quotes.

Rule 610(e) presents similar issues, as AMM prices naturally drift based on liquidity shifts, potentially creating “locked” or “crossed” prices relative to the NBBO—actions the current rules are specifically designed to prohibit.

The Opportunity for Tokenization

Tokenized stocks—blockchain representations of shares or linked claims—promise 24/7 trading, fractional ownership, near-instant settlement, and expanded global access. While the market remains small, interest is surging among asset managers and banks seeking to migrate regulated instruments to public or permissioned blockchains.

Christopher Perkins, CEO of 250 Digital Asset Management, suggests that the removal of Rule 611 and the NBBO constraints would be a “whole new ballgame” and a “major unlock for DeFi,” though he acknowledges that traditional incumbents may resist the shift.

For digital asset advocates, the primary hurdle is not technology, but the regulatory pathway. Since securities are already electronic, tokenization simply updates the ledger and settlement architecture rather than the economic nature of the share. The core question is whether this new architecture can satisfy securities law.

If Rule 611 is rescinded, the regulatory focus would likely shift toward “best execution”—the requirement for broker-dealers to use reasonable diligence to obtain favorable terms for clients. Thorn argues this framework is far more compatible with blockchain trading, as brokers could evaluate execution quality over time and document their routing processes rather than adhering to a per-trade NBBO requirement.

Wider Implications for Market Structure

The proposal’s impact extends beyond crypto. Max Resnick, lead economist at Anza, noted that removing Rule 611 could resolve long-standing disputes over exchange designs, such as asymmetric speed bumps used to neutralize high-frequency trading advantages.

Under the current rule, venues using asymmetric speed bumps faced difficulty gaining approval because they could post tighter quotes that other exchanges were then forced to match, even if it was not economically viable. Removing the rule would fundamentally alter incentives for brokers and exchanges across the entire equity market.

SEC Chairman Paul Atkins has characterized the proposal as a necessary correction of a rule that created unintended consequences, aiming to simplify market structure and foster innovation. This aligns with the broader digital-asset goals shared by Atkins and Commissioner Hester Peirce, who have discussed “innovation exemptions” to allow limited experimentation with tokenized securities through AMMs.

Thorn suggests the SEC is following a strategic sequence: first removing the most rigid structural obstacles, then addressing venue registration through exemptions.

Remaining Challenges

Despite the optimism, significant risks remain. “Tokenized stocks” can refer to various instruments—from direct shares and custodial claims to synthetic derivatives. These distinctions are critical regarding voting rights, dividends, and legal claims.

Rescinding Rule 611 does not automatically legalize tokenized equities. Firms must still navigate registration, custody, corporate actions, and settlement laws. Thorn emphasized that tokenized NMS stocks still face numerous hurdles regarding ATS registration and peer-to-peer trading rules.

Anthony Bassilli of Coinbase Asset Management views the proposal as the clearing of a major hurdle, while SIFMA, representing broker-dealers and investment banks, cautioned that the interconnected nature of US markets requires careful study to avoid fragmenting liquidity or weakening price transparency for retail investors.

The coming public comment period will likely pit crypto supporters, who favor a flexible “best execution” model, against traditionalists who fear that removing Rule 611 will degrade the quality of displayed quotes and market stability.

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