Hyperliquid and Pyth contributors call on SEC to abolish trading penetration rules

The push to incorporate on-chain trading into the structure of the U.S. stock market is no longer a fringe topic

Douro Labs, a core contributor to the Hyperliquid Policy Center and Pyth Network, have filed a request with the U.S. Securities and Exchange Commission to repeal Rule 611 under the NMS regulations-the "transaction penetration rule"-that has dominated the routing of U.S. stock orders for decades. According to the joint comment letter, the rule is designed around a centralized quotation and national best bid and ask price framework, a structure that does not apply to automated market makers, on-chain order books or markets that never close.

This argument is more precise than a general complaint about traditional regulation. Section 611 generally requires brokers to route orders to a trading venue that displays the best price to prevent execution of trades with inferior quotes. The logic relies on integrating NBBO that demonstrates liquidity on regulated exchanges and a shared trading calendar. On-chain trading venues do not produce similar integrated quotes, and their continued operation means that the concept of the best price will constantly change between different pools and chains.

Market rules designed for another era

HPC's comment letter describes this situation as a mismatch between the SEC's existing tools and decentralized enforcement mechanisms. Trading penetration rules assume a world of open central limit order books, professional quotes, and synchronized trading periods. In an environment that operates 24/7 and includes automated market makers, there is no unified national best bid and ask price to enforce, and forcing it into the framework would distort the way liquidity is actually cleared.

On-chain trading venues rely on a continuous pool of liquidity, and the quality of execution will change with on-chain activities. Recent rankings of developer activity show that construction activity is still highly concentrated on a few networks, which means that reference prices and routing logic also vary depending on ecology. The cost of this mismatch does not only affect the trading venue itself. Brokers and market makers face compliance uncertainty when deciding whether on-chain execution meets best execution obligations. HPC's comment letter requires the SEC to address the issue directly after repealing Section 611, rather than leaving intermediaries to guess for themselves.

Best execution without integrated quotes

One of the more specific proposals in the comment letter is to allow the use of transparent and manipulation-resistant independent reference prices in scenarios where NBBO is not applicable, including on-chain price feeds such as Pyth. This would provide brokers with a viable alternative to centralized integration tapes while retaining the core policy goal of protecting orders from inferior prices.

This is not just a crypto-native appeal. The best enforcement obligation has always been the main pressure point in traditional stock litigation and enforcement. The question is whether an independently verifiable oracle price can provide the audit trajectory provided by exchange quotes that regulators have historically required. Douro Labs 'involvement in the Pyth project suggests that the answer may be built around on-chain pricing infrastructure, but the SEC has not yet accepted this alternative.

Tokenized shares remain within the old framework

It is worth noting that HPC does not require a comprehensive exemption for all tokenized securities. The comment letter states that tokenized U.S. stocks should continue to be subject to NMS regulations and existing best execution requirements. This distinction is important because the tokenization market is expanding rapidly. A recent summary of tokenized assets shows that the scale of the chain in this field has exceeded US$20 billion, and major institutions are settling tokenized treasury bonds. Therefore, the regulatory boundary between traditional securities and the on-chain market is becoming increasingly difficult to avoid.

This exclusion clause also signals a more cautious lobbying stance. HPC is not asking the SEC to abandon investor protection for tokenized stock products, but is seeking a different compliance path for native on-chain trading systems. That could make the proposal more acceptable to regulators still focusing on retail investors protection.

Issues that the SEC still needs to address

Even if the trade penetration rules are repealed, the more difficult task will be how to define how brokers can demonstrate optimal execution when routing orders to on-chain markets. The comment letter raised this question but did not provide an answer. The SEC needs to determine what constitutes a reliable reference price, what "anti-manipulation" means in practice, and who should be held accountable when on-chain execution deviates from subsequent reference feeds.

The comment letter was sent against the backdrop of growing tensions in Washington about digital asset market infrastructure. Before the Senate vote, banking interests were already working to reshape major cryptocurrency legislation, and the SEC's attitude to market structure was an independent but interconnected battle. For anyone building an on-chain trading system, the 611 issue is not so much about deregulation as about establishing a coherent framework before tokenized stocks and crypto-native order books further intrude into the same regulatory space.

The open question is whether the SEC will use this comment period to modernize enforcement rules or simply maintain the existing structure. This decision will determine whether brokers can use on-chain price feeds as a compliance tool or continue to view decentralized trading venues as too risky for institutional order flows.