U.S. SEC Proposes Repeal of Rule 611: The Biggest Obstacle for Tokenized Stocks is Disappearing

Original author: KarenZ, Foresight News

On June 11, the U.S. SEC proposed a market structure reform that appears very TradFi: rescinding Rule 611 and Rule 610(e) of Regulation NMS (National Market System).

The former is the so-called trade-through rule, and the latter restricts locked and crossed quotations. Simply put, the SEC is considering removing a set of rigid rules that protect the best quotes in the U.S. stock market, giving trading venues and brokers greater flexibility in order routing, quote display, and trading mechanisms.

This is not yet an enacted regulation. The SEC has currently published a proposed rule. The public comment period is 60 days from the publication of the proposal in the Federal Register.

Why is it attracting attention in the Web3 space? Because the SEC explicitly mentions in the proposal's background that the stock market is approaching 24-hour trading, distributed ledger technology allows issuers to tokenize securities as crypto assets, and smart contracts and AMMs are introducing new ways to trade securities. It is essentially debating whether the underlying trading rules of the U.S. stock market are still suitable for today's technology.

Alex Thorn, Head of Research at Galaxy Digital, called this a "tradfi story," considering it a potential significant breakthrough for tokenized stocks.

What exactly does Rule 611 govern?

Rule 611 can be understood as a rule in the U.S. stock market that says "don't bypass a better quote."

For example, if a particular stock has an automatically accessible asking price of $10 at exchange A, while exchange B has an asking price of $10.01, the basic logic of Rule 611 is: a trading center cannot, without an applicable exception, bypass Exchange A's better offer and execute a buy order at $10.01 on Exchange B.

The issue is that the market in 2026 is vastly different from the market in 2005. The SEC states in the proposal that the U.S. stock market is now highly automated, interconnected, fast, and competitive. While Rule 611 was originally intended to encourage displayed liquidity, the SEC argues that trading is increasingly shifting towards non-displayed liquidity and off-exchange execution, making the market more fragmented and complex.

According to the SEC, the side effects of Rule 611 include: increased compliance costs, limitations on order processing and execution choices, proliferation of exchanges, exacerbated trading fragmentation, and market participants investing significant resources to chase lower latency. The SEC also believes that brokers already have a best execution obligation, meaning they must seek the most favorable terms for their clients under reasonably available conditions. Therefore, Rule 611 may no longer be necessary to serve the same protective role.

What about Rule 610(e)?

Rule 610(e) restricts locked and crossed quotations for NMS stocks.

A locked quotation occurs when a bid displayed at one trading venue equals an ask displayed at another. A crossed quotation goes further, occurring when a displayed bid price is higher than a displayed ask price. On a trading screen, the former looks like buyers and sellers "locked" at the same price, while the latter appears as a temporary dislocation in quotes, theoretically creating an arbitrage opportunity.

The current Rule 610(e) did not directly prohibit every single locked or crossed quotation. Instead, it required exchanges, FINRA, and other self-regulatory organizations (SROs) to establish, maintain, and enforce rules requiring their members to avoid displaying orders that would lock or cross protected quotations, and to handle such quotations when they appear. Consequently, over the past two decades, the U.S. stock trading system has developed numerous order types and automatic price adjustment mechanisms around this requirement, such as re-pricing orders to levels that wouldn't lock or cross the market.

What the SEC is now proposing to rescind is precisely this federal rule (Rule 610(e)) requiring the prevention of locked and crossed quotations. According to the SEC, the market is far more automated and interconnected than in 2005, and market participants have a greater ability to access market data, reducing the necessity of retaining this rule.

The SEC provides three main reasons for this. First, a locked quotation could sometimes be a natural result of competitive quoting; prohibiting it might artificially widen the bid-ask spread. Allowing locked quotations could potentially narrow spreads for some stocks, lowering transaction costs for investors. Second, the current restrictions encourage exchanges and brokers to design complex order types, automatic re-pricing functions, and compliance processes, increasing system complexity and maintenance costs. Third, even if crossed quotations occur in the future, the SEC believes high-speed trading technology and arbitrage incentives would push the market towards quick correction.

Access fee caps, however, will be retained. These caps limit the fees trading venues can charge external participants for accessing their quotes and executing trades, preventing venues from displaying attractive quotes while using high fees to inflate actual transaction costs.

Nevertheless, the SEC acknowledges that rescinding Rule 610(e) could introduce new problems. For example, crossed quotations might impact execution quality statistics, some less liquid stocks could experience longer periods of quote dislocation, and retail investors might be confused by locked or crossed quotes appearing on their screens. Therefore, this rescission is still in the public comment stage, and the SEC is requesting data and feedback from market participants.

What does this have to do with tokenized stocks?

The aspect truly worthy of Web3 readers' attention is that this could loosen a layer of centralized coordination logic in the U.S. stock market.

For tokenized stocks to scale, merely solving the problem of "mapping stocks onto the chain" isn't enough. The more challenging part is the trading structure: on-chain markets are naturally more inclined towards 24/7 operation, smart contract matching, AMMs or hybrid order books, and cross-venue liquidity.

Traditional U.S. stock markets, conversely, are built upon a foundation of exchanges, brokers, quote protection, order routing, SRO rules, and clearing/settlement systems. The rhythm, quoting logic, and technical interfaces of these two systems are not inherently compatible.

The existence of Rule 611 requires trading centers not to easily bypass protected quotations. While this is protective for the traditional stock market, it also forces new trading mechanisms to be designed around the existing quote protection framework. If the SEC ultimately rescinds this rule, trading venues and ATSs (Alternative Trading Systems) may gain more experimental space regarding matching mechanisms, auction mechanisms, priority design, and block trade mechanisms.

However, this remains just a possibility. The proposal doesn't change securities issuance registration requirements, nor does it address issues related to custody, clearing, shareholder rights, cross-border sales, KYC/AML, broker responsibilities for tokenized stocks. Most critically, even if the SEC rescinds Rule 610(e), the related rules already established by exchanges and FINRA will not automatically disappear. They will still need to decide whether to modify their own regulations.

Summary

In its economic analysis evaluating the rescission of Regulation NMS's Rule 611 and Rule 610(e), the SEC estimates that upon repeal, relevant market participants could realize quantifiable cost savings of approximately $54.2 million to $77 million annually. These savings primarily accrue to trading centers, ATSs, brokers operating smart order routing systems, and OTC market makers: they would no longer need to maintain certain compliance policies, monitoring processes, order routing logic, and connectivity arrangements related to Rule 611 / Rule 610(e).

These numbers aren't huge, but they illustrate a point: the SEC is not just discussing "principles." It views this reform as a market structure simplification, aiming to reduce rule-driven complexity and allow trading venues to compete for orders based on price, speed, liquidity, and mechanism design.

For tokenized stocks, perhaps the most important word is precisely "complexity." The advantages of on-chain assets are often summarized as 24/7 operation, composability, and transparent settlement. But if the underlying securities trading rules still require all innovations to be squeezed back into a quote protection framework designed in 2005, the blockchain just adds another layer of packaging. After the rules loosen, the real test is whether new trading venues can deliver better execution quality within a compliant framework, rather than merely changing stocks into token form.

References:

https://www.sec.gov/newsroom/press-releases/2026-54-sec-proposes-rescission-regulation-nms-rules-611-610e

https://www.sec.gov/files/rules/proposed/2026/34-105655.pdf