The U.S. Securities and Exchange Commission (SEC) has proposed the rescission of two key rules under Regulation NMS (National Market System), a move analysts suggest could significantly facilitate the trading of tokenized U.S. equities within decentralized finance (DeFi) ecosystems. This proposal aims to simplify market structure and reduce operational costs for market participants, fostering competition and innovation.
Key Takeaways
- The SEC proposes to eliminate Rules 611 and 610(e) of Regulation NMS, which were established to prevent trade-throughs and crossed/locked quotations.
- This action is viewed as a significant enabler for automated market makers (AMMs) in DeFi to engage in large-scale trading of tokenized U.S. equities.
- The SEC intends to rely on FINRA’s existing best execution duty to ensure investor protection, a framework more adaptable to DeFi structures.
- Analysts anticipate the SEC will finalize these rule changes by early 2027, with potential exemptive relief for tokenization pilots issued sooner.
- Despite this development, challenges related to exchange/ATS registration and clearance/settlement for tokenized assets remain.
The SEC’s proposed changes target Rule 611, which prohibits trading centers from executing trades at prices inferior to the best publicly displayed bid or offer (protected quotation) on another venue, and Rule 610(e), which forbids displaying quotations that would result in locked or crossed markets for NMS stocks. These rules, enacted in 2005, were designed to ensure fair and orderly markets. The SEC has initiated a 60-day public comment period for these proposed rescissions.
Potential Regulatory Precedent and DeFi Integration
The potential impact on DeFi, particularly for tokenized securities, is substantial. Alex Thorn, head of firmwide research at Galaxy Digital, noted that the existing trade-through prohibition has presented a significant structural impediment for on-chain trading of tokenized U.S. equities. Automated Market Makers (AMMs), by their nature, execute trades based on algorithmic pricing mechanisms and pool liquidity, often resulting in executions that would violate Rule 611. AMMs cannot inherently route intermarket sweep orders or ingest market data with the latency guarantees required by current regulations, meaning any pool trading tokenized NMS stocks would likely be in continuous violation.
Similarly, Rule 610(e)’s prohibition against locked or crossed quotations poses a challenge for AMMs, whose continuous, flow-driven price discovery mechanisms can regularly result in prices that align with or cross the National Best Bid and Offer (NBBO). The SEC’s proposal to rescind these rules suggests a shift towards a principles-based approach. If adopted, the regulatory oversight would likely transition to FINRA Rule 5310, which mandates a best execution duty for brokers. This framework is considered more amenable to the operational dynamics of AMMs and DeFi protocols.
Jaret Seiberg, managing director at TD Cowen’s Washington Research Group, expressed optimism that the SEC will adopt the proposed rescissions, aligning with Chairman Paul Atkins’ long-standing priority of simplifying market structure. Seiberg forecasts a finalization of these rules in the first quarter of 2027. He also anticipates that the SEC may grant exemptive relief for Rule 611 to facilitate initial tokenization pilot programs even before the rules are formally amended, potentially in the near future.
While this development addresses a critical market structure barrier, tokenized U.S. equities still face other regulatory hurdles. These include the requirement for trading venues to register as exchanges or Alternative Trading Systems (ATSs), and the complexities surrounding clearance and settlement processes that are not yet fully adapted for decentralized or peer-to-peer trading models. Galaxy Digital’s Thorn indicated that further clarity and potential solutions for these issues are anticipated with the SEC’s forthcoming “innovation exemption.”
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