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📘 Trade Type Explanation: Trade Thru Exempt

What is it?

A Trade Thru Exempt transaction is one that is allowed to be executed at a price outside the National Best Bid and Offer (NBBO) without violating Rule 611 of Regulation NMS (the Order Protection Rule).

When does it occur?

Trade Thru Exempt trades can occur:

  • During regular trading hours
  • In specific circumstances defined by regulation
  • When certain order types or trading strategies are employed

Key characteristics:

  • Executes at a price that may be worse than the NBBO
  • Must fall under specific exemptions to Rule 611
  • Often involves unique market situations or order types
  • Requires proper flagging and reporting

Impact on trading data:

  • Open: Can impact if it occurs at market open
  • High/Low: May set new highs or lows outside expected ranges
  • Close: Can affect closing price if executed late in the day
  • Volume: Contributes to trading volume
  • VWAP: Included in VWAP calculations, potentially affecting the average
  • Other: Can affect analyses of market efficiency and best execution

Why it matters:

Understanding Trade Thru Exempt trades is important for retail traders because:

  1. They represent exceptions to normal price protection rules
  2. Can explain seemingly unfair executions
  3. Important for understanding market structure and regulation
  4. May affect overall market quality and execution statistics

Accessibility and restrictions:

  • Retail investors: Generally not directly accessible, but may be affected
  • Institutional investors: May use in specific trading strategies
  • Restrictions: Limited to specific circumstances defined in Regulation NMS
  • Broker-specific considerations: May affect how certain orders are routed and executed

Example:

During a fast-moving market, an Intermarket Sweep Order (ISO) is executed at a price slightly worse than the current NBBO, but is marked as Trade Thru Exempt due to its ISO status.

Technical details:

  • SIP Mapping: Reported with specific flags indicating Trade Thru Exempt status
  • Reporting requirements: Must be properly identified and justified under Rule 611 exemptions

Related trade types:

  • Intermarket Sweep Order (ISO): A common type of Trade Thru Exempt order
  • Benchmark Trade: May qualify for Trade Thru Exempt status
  • Block Trade: Large trades that might qualify for exemption

Common misconceptions:

  1. Some traders assume all Trade Thru Exempt trades are unfair or manipulative
  2. There's a misconception that these trades always result in worse prices for investors

Historical context:

Trade Thru Exempt provisions were introduced with Regulation NMS in 2007 to allow for necessary flexibility in an interconnected market system while still protecting investors.

Regulatory considerations:

While these trades are exempt from Rule 611, they are still subject to best execution requirements and other regulations. Firms must carefully document and justify the use of Trade Thru Exempt flags.

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