Trade-through prohibitions and market quality

On September 4, 2002, the SEC implemented a de minimis exemption to the trade-through rule for three active ETFs, allowing markets to execute trades at prices up to three cents worse than those posted elsewhere. Relaxing the trade-through rule does not worsen ETF market quality. Effective and realized spreads are essentially unchanged or slightly smaller post-event, and prices become slightly more efficient. Part of the explanation is that, in these ETFs, trade-throughs are common, and their frequency changes little following the exemption. Thus, it is difficult to extrapolate from this regulatory experiment to draw broader policy conclusions about trade-through prohibitions.