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SEC Extends Trade-Through Rule

Against the wishes of the Nasdaq, the Securities and Exchange Commission voted to extend the so-called "trade-through" rule to electronic exchanges Wednesday, subjecting the vast majority of stock transactions to guidelines designed to ensure investors get the best price.

The commission voted 3-2 to adopt the rule, which requires that an order to buy stock be matched with the lowest offer to sell it (and vice versa), regardless of whether the orders match in size. Critics, which include the Nasdaq and many mutual funds, say the rule unfairly forces buyers into slower, piecemeal executions that can occur at worse prices than if the whole trade were carried out at once.

"The trade through rule, is in the most fundamental sense, a rule that protects investors," said SEC Chairman William Donaldson. Donaldson joined with commissioners Roel Campos and Harvey Goldschmid in voting for the rule. Cynthia Glassman and Paul Atkins voted against it.

The trade-through rule currently prevails on the Big Board and other exchanges where the existence of human floor brokers can slow down executions. Under the regulation passed Wednesday, all stock orders that are subject to automatic execution must be carried out at the best available price.

Since that price is often available on the NYSE, critics say the rule will drive trades that would have occurred elsewhere back to the Big Board. Still, the NYSE itself will be handicapped by its lack of a purely electronic infrastructure, and the exchange will have to beef up its technology to add more automatic execution if it hopes to compete with electronic exchanges in the long run.

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