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Comment by tpeng | Hacker News Reader

I will refer you to page 96 of the book. The specific example is 100 shares of MSFT asking $30.00 and 10,000 shares asking $30.01. Because of Reg NMS, your broker is required to take down the 100 shares first ("NBBO"), allowing the HFTs to then start buying the $30.01 offer and front run the remainder of your bid. The problem with this requirement, according to Lewis, is the NBBO is priced off SIP rather than direct feeds. I don't disagree with the literal point that you are making, however, there is no need for this kind of intermediation. Why should natural traders pay intermediaries for this function? Why shouldn't they coordinate on an exchange where they don't face this tax?

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RegNMS requires exchanges and trading centers to honor the Order Protection rule to route trades to the trading center with the best listed bid/ask price.

I don't think RegNMS requires a broker-dealer like RBC to route its order to any particular exchange.

Brokers already have a duty of best execution to their clients. They are allowed to use their judgement to send orders to any given exchange regardless of the NBBO. That's what enabled RBC to implement "Thor".

I'm not an expert but I believe you are incorrect. What you are suggesting is that the broker could perform a "trade-through", which was allowed under the old ITS rules. Under the Order Protection rule, trade-throughs of even 100 shares are explicitly prohibited. Reg NMS is very strict and that's why it is so controversial. My understanding of Thor is that it does not trade through, but it executes at all relevant exchanges near-simultaneously by delaying order routing to lower-latency exchanges. This prevents HFTs from sniffing your order at one exchange and beating you to the next.

I too raise my "not an expert" flag and await corrections from 'yummyfajitas or 'kasey_junk.

There are a number of possibilities depending on whether you send in a routable order (it's a flag you can set -- route or don't route, and there can be fees associated with routing). What a sophisticated trader would do is send two orders simultaneously taking out the small 100 lot at 30.01 and the 10,000 at 30. The exchange with the larger but worse price order will accept your order if you set the ISO flag, indicating you have sent orders to clear out better priced orders at any market centers displaying a better protected quote.

That's correct. As long as the exchange to which the order is routed is presenting NBBO at the time the order is executed, then the broker is compliant with Reg NMS.

Also note, if that exchange is not offering NBBO, it is bound by Reg NMS to route onward to the actual venue that has NBBO. The exchanges are also bound by Reg NMS, not just broker dealers.

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