The SEC Let Stocks Trade On-Chain. For S&P 500 Names, the Cap Is a Quarter of One Percent of Volume.

On 17 September 2026, the Securities and Exchange Commission issued Release No. 34-106402, which it calls the “Innovation Exemption.” The order allows US-listed stocks to trade on-chain through automated market makers for five years, until 17 September 2031. Markets took it as the arrival of tokenized equities. Securitize, the tokenization company that trades publicly as SECZ, rallied to a record on 23 September, and several analysts pointed to the order.

The size of what the SEC permitted matters as much as the permission. For the most heavily traded US stocks, a venue can handle no more than a quarter of one percent of the prior month’s average daily volume, in no more than 75 symbols. The SEC has built a pilot that is intentionally too small to move the national market system. The order’s structure shows why the Commission thinks that is the right size for now.

What the order actually grants

The order grants two exemptions. Law-firm analyses from Dechert, Skadden and Sidley Austin describe the structure consistently:

• A qualifying tokenized securities venue (TSV) is exempt from the definition of “exchange” in Section 3(a)(1) of the Exchange Act.
• A qualifying liquidity provider that deposits assets into a TSV’s AMM liquidity pool is exempt from the definition of “dealer” in Section 3(a)(5).

Trading has to run through permissioned AMM pools, deployed as auditable smart contracts on a public, permissionless blockchain. Only approved participants and wallets can trade, but the code and the ledger are public. Each token must carry the same rights and privileges as the underlying share. Trades must be reported publicly in US dollars within 10 minutes. Trading must pause when the primary listing exchange halts the stock. A venue must publish a public notice at least 30 days before it starts operating. The Federal Register published the order on 22 September with a request for comment.

Why an AMM needed two exemptions, not one

US equity market structure assumes orders are matched. Under Regulation NMS, an exchange brings together buyers’ and sellers’ orders, displays quotes, routes to the best price elsewhere, and falls under the order-protection and access rules built around that model. An AMM does not match orders at all. A pool holds two assets, and the price comes from a formula applied to the ratio between them. A trader swaps against the pool, and the ratio moves.

That creates two regulatory problems. First, a system that lets many parties trade a security against a shared pool looks enough like an exchange to fall within the definition. But the rules that come with exchange status assume an order book and displayed quotes, which an AMM does not have. Second, whoever funds the pool is always on one side of every trade, buying and selling for its own account at prices the pool sets. That is close to the core description of a dealer. If only the venue were exempted, every liquidity provider would still face dealer registration, and the pools would have no liquidity. So the SEC had to exempt both.

Most market coverage has skipped this point. The order is not a general green light for tokenized stocks. It is a narrow fix for one trading mechanism that does not fit existing definitions, and every other condition is there to contain that mechanism.

The size of the door

The caps are the most important design choice. Based on the law-firm summaries:

• Tier 1 covers S&P 500 and Russell 1000 constituents and certain exchange-traded products. A TSV may trade up to 0.25% of the prior month’s average daily share volume, across at most 75 symbols.
• Tier 2 covers all other eligible NMS stocks, excluding rights and warrants. The cap is 2.5% of prior-month average daily volume, across at most 250 symbols.
• Volume is measured against the consolidated figures recorded by an effective transaction reporting plan, and affiliated TSVs are counted together.
• According to Skadden’s summary, each later breach of the volume threshold requires the TSV and its affiliates to pause trading in that stock for three months, notify participants and update their public notice.

The comparison the market reaction missed is that the SEC gave smaller companies ten times the proportional allowance it gave the index names. To give a sense of scale, take a hypothetical Tier 1 stock averaging 50 million shares a day. A TSV could trade about 125,000 shares a day in it. A Tier 2 stock averaging 2 million shares a day would allow 50,000. The large-cap allowance is bigger in shares but small relative to that stock’s market. The small-cap allowance is a real share of its market. This follows from a simple principle. The more an order could affect price discovery for the whole market, the smaller the experiment the SEC allows.

That also makes the three-month pause important. A popular token that keeps hitting its cap does not scale up. It stops trading. At 0.25%, a Tier 1 token that attracts real retail demand will reach the ceiling quickly, and the order treats that as a reason to halt, not to expand.

What stays closed

• Synthetic tokens. Third-party tokens that give price exposure without the underlying rights, such as tokenized linked securities and tokenized security-based swaps, are excluded, according to Dechert. Most of the tokenized-stock products sold on offshore crypto platforms work this way, so the order does not bring them onshore.
• Primary issuance. A TSV cannot be used to issue new shares. The exemption covers secondary trading only.
• Leverage and exotic pairs. Dechert says tokens can be paired only with another tokenized NMS stock, a non-security crypto asset such as a payment stablecoin, or tokenized money-market fund shares, and no leverage is allowed.
• Issuer consent, in practice. A venue listing a token of another company’s stock must give that issuer written notice and 30 days to object.
• Everything else in securities law. The relief covers two definitions only. Anti-fraud and anti-manipulation rules still apply in full. Dechert notes that the order does not provide Investment Company Act relief, which leaves it unclear whether tokenized ETF shares can trade in these pools at all.

The case for a narrow door

Reading the caps as timidity misses the SEC’s argument. Chairman Paul Atkins has described the order as a bridge to durable rulemaking rather than a final regime. On that view, the small size is deliberate. A five-year pilot with public trade data, published smart contracts and hard volume limits produces evidence that a full rulemaking would need, including how AMM pricing tracks the primary market, how stablecoin settlement behaves under stress, and whether issuers object. It does this without risking price discovery in the stocks that anchor retirement portfolios.

The 10-to-1 tier ratio can also be read as a deliberate on-ramp for smaller companies. They have the most to gain from new liquidity channels and pose the least systemic risk if something breaks. If the experiment works, the Tier 2 data will likely be what justifies raising the Tier 1 caps.

The weaker part of that argument is the pause mechanism. A pilot meant to generate evidence stops trading exactly when demand is highest, which is also when the data would be most useful. Commenters will likely push on that point during the comment period.

What to watch

• The first TSV public notices, which start the 30-day clock and show who is actually building venues.
• Whether any issuer objects to a third-party token of its stock. That would be the first real test of the objection mechanism.
• Comment letters on the pause trigger and the Tier 1 cap.
• Any SEC statement on tokenized ETF shares and the Investment Company Act.

If you bought the Securitize rally, the practical point is that the SEC has approved the structure, not the scale. For five years, the order controls how big on-chain trading of US stocks can get, and for the largest companies it has set that limit very low.