US 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 seemingly very TradFi market structure reform: 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 more leeway in order routing, quote display, and trading mechanisms.

This is not yet an effective new regulation. The SEC has currently published a proposed rule. The public comment period is 60 days after the proposal is published in the Federal Register.

Why is it attracting attention from the Web3 community? Because the SEC explicitly stated in the proposal's background that the stock market is approaching 24-hour trading, that distributed ledger technology allows issuers to tokenize securities as crypto assets, and that smart contracts and AMMs bring new ways of trading securities. What it is genuinely discussing is whether the underlying trading rules of the U.S. stock market are still suitable for today's technological conditions.

Alex Thorn, Head of Research at Galaxy Digital, called this a "tradfi story" and believes it could be one of the significant breakthroughs for tokenized stocks.

What exactly does Rule 611 govern?

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

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

The problem is that the market in 2026 is very different from the market in 2005. The SEC stated in the proposal that the U.S. stock market is now highly automated, interconnected, fast, and competitive. Rule 611 was originally intended to encourage displayed liquidity, but the SEC believes that the proportion of trading shifting to non-displayed liquidity and off-exchange execution is still rising, and the market has become more fragmented and complex.

In the SEC's description, the side effects of Rule 611 include increasing compliance costs, limiting order handling and execution choices, encouraging an increase in the number of exchanges, exacerbating trading fragmentation, and causing market participants to invest significant resources in pursuing lower latency. The SEC also argues that brokers already have a best execution obligation, meaning they must seek the most favorable terms for their clients under reasonably available conditions, so Rule 611 may no longer be necessary to serve as the same protective backstop.

What about Rule 610(e)?

Rule 610(e) restricts locked and crossed quotations for NMS stocks, i.e., stocks under the National Market System.

A locked quotation occurs when a displayed bid price at one trading venue equals a displayed ask price 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 appears as if buyers and sellers are "jammed" at the same price, while the latter resembles a temporary quote dislocation, theoretically creating an arbitrage opportunity.

Current Rule 610(e) does not directly prohibit every single locked or crossed quotation. Instead, it requires exchanges, FINRA, and other self-regulatory organizations (SROs) to adopt, 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 occur. Therefore, over the past two decades, the U.S. stock trading system has developed many order types and automatic price adjustment mechanisms around this requirement, such as re-pricing orders to a level that will not lock or cross the market.

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

The SEC provides three main reasons. First, locked quotations might sometimes be a natural result of competitive quoting, and prohibiting them could artificially widen bid-ask spreads; allowing locked quotations could potentially narrow spreads for some stocks and lower transaction costs for investors. Second, the current restrictions compel 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 rapid correction.

Meanwhile, access fee caps will be retained. Access fee caps set a limit on the fees a trading venue can charge external participants for accessing and executing against its quotations, preventing venues from displaying seemingly attractive quotes while using excessive fees to inflate actual execution costs.

However, the SEC also acknowledges that rescinding Rule 610(e) could introduce new problems. For instance, crossed quotations could affect execution quality statistics; less liquid stocks might experience longer periods of quote dislocation; and average investors might be confused by locked or crossed quotes appearing on their screens. Therefore, this rescission is still in the comment-seeking phase, and the SEC is requesting data and feedback from market participants.

What is the connection to tokenized stocks?

The aspect truly worth the attention of Web3 readers is that it could potentially loosen a layer of centralized coordination logic in the U.S. stock market.

For tokenized stocks to scale, they cannot just solve the problem of "mapping stocks onto the chain." The more difficult part is the trading structure: on-chain markets are inherently more inclined towards 24/7 operation, smart contract matching, AMMs or hybrid order books, and cross-venue liquidity.

Traditional U.S. stock markets, on the other hand, are built upon exchanges, brokers, quote protection, order routing, SRO rules, and clearing and settlement systems. The rhythms, quoting logic, and technical interfaces of the two systems are not naturally 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 may gain more room for experimentation in matching mechanisms, auction mechanisms, priority design, and block trading mechanisms.

But this remains just a possibility. The proposal does not change securities issuance registration requirements, nor does it resolve issues related to the custody, clearing, shareholder rights, cross-border sales, KYC/AML, and broker responsibilities for tokenized stocks. More critically, even if the SEC rescinds Rule 610(e), existing relevant rules from exchanges and FINRA will not automatically disappear; they will need to decide whether to amend their own rules.

Summary

In its economic analysis evaluating the potential rescission of Regulation NMS's Rule 611 and Rule 610(e), the SEC estimates that the quantifiable costs that could be saved annually by relevant market participants would be approximately $54.2 million to $77 million. These savings primarily come from 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 and Rule 610(e).

These numbers are not huge, but they illustrate a point: the SEC is not just discussing "principles." It views this reform as a structural deregulation for the market, 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 single most important word is "complexity." The advantages of on-chain assets are often summarized as 24/7 operation, composability, and transparent settlement. However, if the underlying security trading rules still require all innovations to fit back into the quote protection framework designed in 2005, then the "chain" merely adds an extra layer of packaging. After the rules loosen, the real test will be whether new trading venues can provide better execution quality within a compliant framework, rather than just turning stocks into Token form.

Reference sources:

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