What the Rule Requires
The Order Protection Rule prohibits 'trade-throughs' — executions at prices inferior to the NBBO. If the best displayed bid for a stock on any exchange is $50.00, a sell order cannot be executed at $49.99 without checking whether $50.00 is available. The rule requires routing systems to respect the best displayed prices across all exchanges.
How Market Makers Satisfy the Rule
Wholesale market makers like Citadel Securities satisfy the Order Protection Rule by executing retail orders at prices equal to or better than the NBBO. They claim to provide 'price improvement' — execution at prices slightly better than the NBBO. This price improvement is measured against the NBBO at the moment of execution, which critics argue may itself be artificially wide due to off-exchange trading.
The SIP and NBBO Calculation
The NBBO is calculated by the Securities Information Processor (SIP), which consolidates quotes from all exchanges. Some market participants — particularly HFT firms — use proprietary data feeds that show market prices before the SIP. The gap between proprietary feeds and SIP data is a source of controversy in debates about market fairness.
Policy Debates Around the Rule
Some market structure analysts argue that the Order Protection Rule, by requiring routing to the best displayed price on slow exchanges, has created incentives for market participants to use faster off-exchange venues that circumvent the rule's spirit. The rule's effectiveness in the modern fragmented market is a subject of ongoing academic and policy debate.