Moody's says the SEC's proposed rescission of order protection rules would remove a key obstacle to on-chain trading, potentially shifting order flow to tokenized venues.
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The SEC's proposed market structure overhaul would do more than reshape equity trading. It could also remove a regulatory barrier that has kept tokenized stocks off on-chain venues, according to Moody's Ratings.
Last month, the agency proposed rescinding the order protection rule, which currently forces brokers to route trades to the venue displaying the best price. The change aims to lower costs and encourage innovation. Moody's, in a report released Tuesday, said the shift would have consequences for both retail investors and the industry.
"For retail investors, the key concern is the potential for weaker price protection, including a greater risk that orders are executed at less favourable prices than those available elsewhere," the report said.
Instead of a blanket ban on trading through protected quotes, the reforms would shift the burden to broker-dealers' best-execution obligations and market competition between venues. For the industry, the changes "could shift how exchanges, broker-dealers, wholesalers, electronic market makers and other trading venues currently operate," Moody's wrote.
At the same time, the proposals could make it easier to trade tokenized stocks on blockchains. The existing market structure was not designed for smart contracts or liquidity pools. By reducing mandatory price protections, the SEC would eliminate a key obstacle to on-chain trading, Moody's said.
"The SEC proposal could reduce the need for tokenized trading venues to replicate the existing protected-quotation-based intermarket model," the report noted. "That could make it easier for the SEC and market participants to consider a compliant framework for tokenized listed securities."
If that happens, some order flow could shift from traditional exchanges to on-chain venues. Moody's said the beneficiaries would include fintech trading platforms, digital-asset venues, and algorithmic principal trading firms that already participate in tokenized securities markets.
The SEC is accepting public comments on the proposals through early next month. A final rule, if adopted, would take effect later this year or in early 2026.
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