SEC Order-Handling Rules

The Securities and Exchange Commission (SEC) enacted some big changes in their Order-Handling Rules (OHR) in 1997. The SEC rules include the "Limit Order Display Rule" and the "Quote Rule".

Limit Order Display Rule

Limit orders represent orders to purchase or sell securities at a certain price. The Limit Order Display Rule states that market makers and specialists should display publicly the limit orders they receive from customers when they (the orders) are better than the market maker or specialist's quote. The new rule ensures that the general public will be able to compete directly with market makers in the quote-setting process. It benefits investors since this publication of trading interest at prices that are better than the market makers' and specialists' quotes provide improved pricing opportunities for investors.

Quote Rule

The second SEC rule, the Quote Rule, states that specialists and market makers should provide their most competitive quotes - the lowest price at which the dealer will sell the securities to a customer and the highest price the dealer will agree to pay a customer in order to buy the securities.

Specialists or market makers may still trade at better prices in electronic communications networks (ECNs) without publishing an improved quote but the ECN itself should publish the improved prices and make them available to the investing public. Thus, the Quote Rule ensures public access to superior quotes posted by specialists and market makers - even if those better prices are in private trading systems.

Note that the Quote Rule itself mainly increases transparency; it does not lead to a potential change in the available supply of limit orders, in contrast to the Limit Order Display Rule. Together the Limit Order Display Rule and the Quote Rule aim to increase the publicly available information about the prices at which investors can purchase and sell securities.

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