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, tradethroughs 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.