Tokenized stocks keep rights but may lose trade-through rule

The SEC’s Sept. 17 order grants temporary, conditional relief to certain venues offering tokenized National Market System stocks. The relief covers permissioned automated market maker pools, where approved participants trade against assets committed to the pool, and some liquidity providers using their own capital.

Eligible tokens must represent an interest in the issuer and carry the same class of rights and privileges as conventional shares. Those rights include dividends, voting power and a share of residual assets if the company is liquidated. Synthetic products, tokenized linked securities, security-based swaps, rights and warrants are excluded.

Venues that meet the order’s conditions may operate outside parts of the exchange, alternative trading system and trading-center framework for relevant Regulation NMS rules. That includes Rule 611, which generally protects investors from trades executed at prices worse than protected quotations available elsewhere.

The order does not remove anti-fraud or anti-manipulation requirements. Brokers that belong to the Financial Industry Regulatory Authority must continue to meet applicable best-execution duties when handling covered customer transactions.

FINRA Rule 5310 requires firms to use reasonable diligence to find the best market and obtain the most favorable price available under prevailing conditions. The review can consider the order’s size and type, markets checked, quotation access, execution speed, costs and the likelihood of filling limit orders. The duty applies when a firm acts as an agent or trades as principal and cannot be transferred to another party.

Firms using automated routers or internalizers may conduct regular reviews instead of examining every order. Those reviews generally must occur at least quarterly by security and order type. Firms must compare their arrangements with competing markets and address material differences in execution quality.

The SEC order requires venues to disclose whether they use external market data or blockchain oracles, which bring information from outside sources into blockchain applications. Notices must identify providers and data sources, explain how the information is used, describe risks such as manipulation and disclose reference-price bands or other controls.

Venues must stop trading when the underlying stock is halted on its primary listing exchange. They must notify participants about relevant events, maintain accessible records, address operational problems, impose trading limits and restrict venue credit. The order does not set a required data provider, contributor count, aggregation method, confidence level or response to stale data.

Douro Labs, which contributes to Pyth Network and operates Pyth Pro, asked SEC staff on Oct. 9 to establish provider-neutral principles for evaluating external price feeds and using them in dollar-denominated reporting. Its proposed criteria include independent contributors, manipulation-resistant aggregation, public information about contributors and calculation methods, and comparisons with outside market benchmarks. It also proposed disclosures on data confidence, staleness and unavailable information.

Venues must publish free, machine-readable dollar-denominated transaction data for the previous 30 days and update it within 10 minutes of each transaction. Conversion methods must be consistent, impartial and reasonable. Transaction records and trading-interest records must include dollar prices.

An Oct. 4 notice from OKX Institutional Crypto Exchange said automated market maker prices are set by pool asset ratios. Data from Massive.com is used for stock values and trading-halt information, while an affiliate, OKX INC, provides stablecoin price indices to convert USDC transactions into dollars for reporting. The notice also described outside volume data used for trading-limit checks.

A Sept. 23 notice from TSV LLC said its operations had not started and that it had not selected a production market-data provider. It listed intended uses including halt detection and monitoring price differences.