SECURITIES AND EXCHANGE COMMISSION

Agency decision

Ask Donna

What actually matters in this document.

Text

17 CFR Parts 240 and 242

Release No. 34-84528; File No. S7-14-16

RIN 3235-AL67

Disclosure of Order Handling Information

AGENCY:

Securities and Exchange Commission.

ACTION:

Final Rule.

SUMMARY: The Securities and Exchange Commission (“Commission” or “SEC”) is adopting

amendments to Regulation National Market System (“Regulation NMS”) under the Securities

Exchange Act of 1934 (“Exchange Act”) to require additional disclosures by broker-dealers to

customers regarding the handling of their orders. The Commission is adding a new disclosure

requirement which requires a broker-dealer, upon request of its customer, to provide specific

disclosures related to the routing and execution of the customer’s NMS stock orders submitted

on a not held basis for the prior six months, subject to two de minimis exceptions. The

Commission also is amending the current order routing disclosures that broker-dealers must

make publicly available on a quarterly basis to pertain to NMS stock orders submitted on a held

basis, and the Commission is making targeted enhancements to these public disclosures. In

connection with these new requirements, the Commission is amending Regulation NMS to

include certain newly defined and redefined terms that are used in the amendments. The

Commission also is amending Regulation NMS to require that the public order execution report

be kept publicly available for a period of three years. Finally, the Commission is adopting

conforming amendments and updating cross-references as a result of the rule amendments being

adopted today.

DATES:

Effective Date: [INSERT DATE 60 DAYS AFTER DATE OF PUBLICATION

IN THE FEDERAL REGISTER]

Compliance Date: [INSERT DATE 180 DAYS AFTER DATE OF

PUBLICATION IN THE FEDERAL REGISTER]

FOR FURTHER INFORMATION CONTACT: Theodore S. Venuti, Assistant Director, at

(202) 551-5658, Steve Kuan, Special Counsel, at (202) 551-5624, Sarah Albertson, Special

Counsel, at (202) 551-5647, Michael Bradley, Special Counsel, at (202) 551-5594, Amir Katz,

Special Counsel, at (202) 551-7653, Emerald Greywoode, Special Counsel, at (202) 551-7965,

or Andrew Sherman, Special Counsel, at (202) 551-7255, Division of Trading and Markets,

Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting: (1) amendments to 17

CFR 242.600 and 242.606 (respectively, “Rule 600” and “Rule 606” of Regulation NMS) under

the Exchange Act to require additional disclosures by broker-dealers to customers about the

routing of their orders; (2) amendments to 17 CFR 242.605 (“Rule 605” of Regulation NMS) to

require that the public order execution reports be kept publicly available for a period of three

years; and (3) conforming changes and updated cross-references in 17 CFR 240.3a51-1(a) (“Rule

3a51-1(a) under the Exchange Act”), 17 CFR 240.13h-1(a)(5) (“Rule 13h-1(a)(5) of Regulation

13D-G”), 17 CFR 242.105(b)(1) (“Rule 105(b)(1) of Regulation M”), 17 CFR 242.201(a) and

242.204(g) (“Rules 201(a) and 204(g) of Regulation SHO”), 17 CFR 242.600(b), 242.602(a)(5)

and 242.611(c) ( “Rules 600(b), 602(a)(5), and 611(c) of Regulation NMS”), and 17 CFR

242.1000 (“Rule 1000 of Regulation SCI”).

TABLE OF CONTENTS

Introduction ......................................................................................................................... 6

II.

Overview of Adopted Rule Amendments ........................................................................... 8

III.

Amendments to Rule 600, Rule 605, and Rule 606.......................................................... 14

IV.

Customer-Specific Order Handling Reports ......................................................... 14

Applicability of Customer-Specific Disclosures in Rule 606(b) ................. 14

Definition of Actionable Indication of Interest ............................................ 56

Scope of Broker-Dealer’s Obligation Under Rule 606(b)(3) ...................... 65

Timing and Frequency Requirements for Customer-Specific Order

Handling Report ........................................................................................... 77

Format of Customer-Specific Order Handling Reports ............................... 87

Rule 606(b)(3) Report Content .................................................................... 99

Rule 606(c) Quarterly Aggregated Public Report of Rule 606(b)(3)

Information ................................................................................................ 117

Public Order Routing Report Under Rule 606(a) ............................................... 124

Orders Covered By Rule 606(a) Public Disclosures.................................. 126

Marketable Limit Orders and Non-Marketable Limit Orders.................... 131

Payment for Order Flow Disclosures – Rules 606(a)(1)(iii) and (iv) ........ 134

Format of Public Order Routing Report .................................................... 145

Division of Rule 606(a) Report’s Section on NMS Stocks by S&P

500 Index and Other NMS Stocks ............................................................. 150

Calendar Month Breakdown ...................................................................... 153

Execution Metrics ...................................................................................... 155

Amendment to Disclosure of Order Execution Information............................... 156

Paperwork Reduction Act ............................................................................................... 158

Summary of Collection of Information............................................................... 159

Customer-Specific Disclosures Under Rule 606(b)(3) .............................. 159

Amendment to Current Public and Customer-Specific Disclosures .......... 160

Amendment to Current Disclosures under Rule 605 ................................. 161

Use of Information .............................................................................................. 161

Customer-Specific Disclosures Under Rule 606(b)(3) .............................. 162

Amendment to Current Public and Customer-Specific Disclosures .......... 162

Amendment to Current Disclosures under Rule 605 ................................. 164

Respondents ........................................................................................................ 164

Initial Estimate ........................................................................................... 164

Estimate for Adopted Rule [Amendments to 605 and 606]....................... 165

Total Initial and Annual Reporting and Recordkeeping Burdens ....................... 165

Customer-Specific Disclosures Under Rule 606(b)(3) .............................. 166

Proposed Public Aggregated Report on Orders Subject to the

Customer-Specific Disclosures Under Rule 606(b) Not Adopted ............. 178

Proposed Requirement to Document Methodologies for Categorizing

Order Routing Strategies Not Adopted ...................................................... 178

Amendment to Current Public and Customer-Specific Disclosures .......... 178

Revisions to Compliance Manuals............................................................. 189

Amendment to Disclosures under Rule 605 .............................................. 190

Collection of Information is Mandatory ............................................................. 190

Confidentiality of Responses to Collection of Information ................................ 190

Retention Period for Recordkeeping Requirements ........................................... 191

Economic Analysis ......................................................................................................... 191

Introduction ......................................................................................................... 192

Baseline ............................................................................................................... 194

Current $200,000 Threshold ...................................................................... 195

Current Reporting for NMS Stock Orders of $200,000 and Above .......... 196

Publication Period for Reports Required by Rules 605 and 606 ............... 197

Available Information on Conflicts of Interest .......................................... 198

Available Information on Execution Quality............................................. 199

Format of Current Reports ......................................................................... 200

Quality of Broker-Dealer Routing Practices for Not Held NMS Stock

Orders......................................................................................................... 200

Use of Actionable IOIs .............................................................................. 200

Competition, Efficiency, and Capital Formation ....................................... 201

Costs and Benefits............................................................................................... 205

Customer-Specific Order Handling Disclosures ........................................ 206

Public Order Handling Report ................................................................... 246

Disclosure of Order Execution Information .............................................. 283

Structured Format of Reports..................................................................... 284

Other Definitions in Adopted Amendments to Rule 600........................... 287

Alternatives Considered ...................................................................................... 287

Alternative Scope for the Customer-Specific Reports ............................... 287

Scope of Broker-Dealer’s Obligation Under Rule 606(b)(3) .................... 291

Public Availability of Aggregated Rule 606(b)(3) Order Handling

Information ................................................................................................ 293

Automatic Provision of Customer-Specific Not Held Order Handling

Report (Adopted Rule 606(b)(3)) .............................................................. 299

Submission to the Commission of Not Held NMS Stock Order

Handling Reports (Adopted Rule 606(b)(3)) ............................................. 300

Categories of NMS Stocks for Rule 606(a) ............................................... 301

Disclosure of Additional Information about Not Held NMS Stock

Order Routing and Execution .................................................................... 302

Order Handling Reports at the Stock Level (Adopted Rule 606(b)(3))..... 306

Alternative to Three-Year Posting Period (Adopted Amendments to

Rules 605(a)(2) and 606(a)(1)) .................................................................. 306

Economic Effects and Effects on Efficiency, Competition, and Capital

Formation ................................................................................................... 308

Effects of Adopting Amendments on Efficiency and Competition ........... 308

Effects of Adopting Amendments on Capital Formation .......................... 319

VI.

Regulatory Flexibility Certification ................................................................................ 321

VII.

Statutory Authority and Text of the Proposed Rule Amendments ................................. 322

Introduction

In July 2016, the Commission proposed to amend Rules 600 and 606 under Regulation

NMS to require additional disclosures by broker-dealers to customers about the handling of their

orders, to amend Rules 605 and 607 for consistency with the proposed amendments to Rule 606,

and to amend other rules to update cross references as appropriate. 1 As discussed below, after

careful review and consideration of the comments received, the Commission is adopting these

amendments with certain modifications.

Transparency has long been a hallmark of the U.S. securities markets, and the

Commission continuously strives to ensure that investors are provided with timely and accurate

information needed to make informed investment decisions. In recent years, the Commission

and its staff have undertaken a number of reviews of market structure and market events, and

much of this effort has aimed to enhance transparency for investors. 2 The amendments being

See Securities Exchange Act Release No. 78309, 81 FR 49432 (July 27, 2016) (“Proposing Release” or

“Proposal”).

The Commission recently adopted amendments to Regulation ATS that enhance the operational

transparency of alternative trading systems (“ATSs”) that transact in National Market System (“NMS”)

stocks (“NMS Stock ATSs”).” See Securities Exchange Act Release No. 83663 (July 18, 2018), 83 FR

38768 (August 7, 2018) (“ATS-N Adopting Release”). In addition, the Commission has proposed a

Transaction Fee Pilot for NMS stocks to help inform the Commission, market participants and the public

about the effects, if any, that transaction-based fees and rebates may have on order routing behavior,

execution quality, and market quality. See Securities Exchange Act Release No. 82873 (March 14, 2018),

83 FR 13008 (March 26, 2018) (“Transaction Fee Pilot Proposing Release”).

adopted today to Rule 606 of Regulation NMS represent the Commission’s continued

commitment to enhance transparency for investors.

Rule 606 encourages competition by enhancing the transparency of broker-dealer order

handling and routing practices. 3 Rule 606(a) requires broker-dealers to provide a publicly

available quarterly report of information regarding routing of non-directed orders. 4 Rule 606(b)

requires broker-dealers to provide customers, upon request, certain information about the routing

of their orders. Prior to the amendments being adopted today, the Rule 606(a) requirements

applied to smaller dollar-value orders more typical of retail investors but did not apply to large

dollar-value orders more typical of institutional investors. 5 As discussed in detail in the

Proposing Release, equity market structure, as well as order handling and routing practices, have

changed significantly since Rule 606 was adopted in 2000, presenting a need to update the rule

such that it provides transparency into broker-dealer order handling and routing practices that

continues to be useful in today’s automated and vastly more complex national market system. 6

As the Commission noted when it originally adopted Rule 606, in a fragmented market

“the order routing decision is critically important” and “must be well-informed and fully subject

See Securities Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594, 3602 (January 21, 2010)

(“Concept Release on Equity Market Structure”).

A “non-directed order” means any customer order other than a directed order. See 17 CFR 242.600(b)(48).

A “directed order” means a customer order that the customer specifically instructed the broker-dealer to

route to a particular venue for execution. See 17 CFR 242.600(b)(19). As discussed below, these

definitions are being revised in connection with the amendments to Rule 606 so that they no longer only

apply to “customer orders,” but otherwise are remaining the same. See infra Section III.A.1.b.vii.

The Commission limited the scope of Rule 606(a) to smaller dollar-value orders by defining a “customer

order” to which the rule applied as an order to buy or sell an NMS security that is not for the account of a

broker-dealer, but not any order for a quantity of a security having a market value of at least $50,000 for an

NMS security that is an option contract and a market value of at least $200,000 for any other NMS security.

See 17 CFR 242.600(b)(18).

See Proposing Release, supra note 1, at 49433-44 for a detailed description of the history and the market

developments leading to the Proposal.

to competitive forces,” 7 and, further, the public disclosure of order routing practices “could

provide more vigorous competition on . . . order routing performance.” 8 By updating the Rule

606 disclosure regime, the rule as amended will provide disclosures more relevant to today’s

marketplace that encourage broker-dealers to provide effective and competitive order handling

and routing services, and that improve the ability of their customers to determine the quality of

such broker-dealer services. 9

II.

Overview of Adopted Rule Amendments

To facilitate enhanced transparency regarding broker-dealers’ handling and routing of

orders in NMS stock, the Commission proposed to amend Rules 600(b) and 606 such that all

orders of any dollar value in NMS stock 10 submitted by a customer to a broker-dealer would be

covered by order handling and routing disclosure rules. Under the proposed amendments, new

Rule 606(b)(3) would require broker-dealers to make detailed, customer-specific order handling

disclosures for NMS stock orders available to institutional customers in particular, who

previously were not entitled to disclosures under the rule for their order flow, or were entitled to

disclosures that have become inadequate in today’s highly automated and more complex

market. 11 The Commission also proposed to require a broker-dealer to make publicly available a

report that aggregates the information required for the detailed customer-specific order handling

See Securities Exchange Act Release No. 43590 (November 17, 2000), 65 FR 75414, 75415 (December 1,

2000) (“Rule 606 Predecessor Adopting Release”). For clarity, when this release references “Predecessor

Rule 606,” it is referring to the version of the rule adopted in the Rule 606 Predecessor Adopting Release.

See id. at 75417.

If any of the provisions of these rules, or the application thereof to any person or circumstance, is held to be

invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or

circumstances that can be given effect without the invalid provision or application.

“NMS stock” and “NMS security” are defined in Rule 600 of Regulation NMS. See 17 CFR

242.600(b)(46)-(47).

See proposed Rule 606(b)(3); see also Proposing Release, supra note 1, at 49447.

reports for all NMS stock orders that it receives across all of its customers. 12 Further, the

Commission proposed updating Rule 606(a) to provide retail customers in particular with certain

enhanced disclosures regarding a broker-dealer’s order routing practices. 13

The Commission received comments on the Proposal. 14 The commenters, many of which

also commented on Rule 606 in connection with the Concept Release on Equity Market

Structure, overwhelmingly supported updating the disclosures required by Rule 606. Most also

expressed support for, or offered constructive critiques of, specific components of the Proposal,

and several suggested alternatives to specific provisions of the Proposal, but all comments

received recognized a need for enhanced transparency and supported the goals of the Proposal. 15

In addition, the Equity Market Structure Advisory Committee (“EMSAC”) provided

recommendations with respect to Rules 605 and 606 on November 29, 2016, to provide

meaningful execution quality and order handling disclosures from a retail and an institutional

perspective. 16

After careful review and consideration of the comment letters and upon further

consideration by the Commission concerning how to further the goal of more useful and

effective disclosure of order handling information under Regulation NMS, the Commission is

See proposed Rule 606(c); see also Proposing Release, supra note 1, at 49447.

See proposed Rule 606(a); see also Proposing Release, supra note 1, at 49462.

Comments received on the Proposal are available on the Commission’s website, available at

https://www.sec.gov/comments/s7-14-16/s71416.htm.

See, e.g., Letter from John A. McCarthy, General Counsel, KCG Holdings, Inc., dated October 31, 2016

(“KCG Letter”) at 1; Letter from Joseph Kinahan, Managing Director, Client Advocacy and Market

Structure, TD Ameritrade, Inc., dated October 18, 2016 (“Ameritrade Letter”) at 1; Letter from Tyler

Gellasch, Executive Director, Healthy Markets Association, dated September 26, 2016 (“HMA Letter”) at

3-4; Letter from Micah Hauptman, Financial Services Council, Consumer Federation of America, dated

September 26, 2016 (“CFA Letter”); Letter from Stuart J. Kaswell, Executive Vice President and Managing

Director, General Counsel, Managed Funds Association, dated September 23, 2016 (“MFA Letter”) at 1.

See EMSAC Recommendations Regarding Modifying Rule 605 and Rule 606 (“EMSAC Rule 606

Recommendations”), November 29, 2016, available at https://www.sec.gov/spotlight/emsac/emsacrecommendations-rules-605-606.pdf.

adopting the proposed amendments to Rules 600 and 606 (and the other corresponding proposed

amendments) with certain modifications. 17

Specifically, the Commission is amending Rule 606(b) of Regulation NMS 18 to require a

broker-dealer, upon request of a customer that places, directly or indirectly, one or more orders

in NMS stock that are submitted on a “not held” basis with the broker-dealer, 19 to provide

customer-specific disclosures, for the prior six months, broken down by calendar month,

regarding: (1) its internal handling of such orders; (2) its routing of such orders to various

trading centers; 20 (3) the execution of such orders; and (4) the extent to which such orders

provided liquidity or removed liquidity, and the average transaction rebates received or fees paid

by the broker-dealer. 21 Generally, the information is available upon request by customers who

submitted “not held” NMS stock orders through the broker-dealer, and is required to be provided

for each venue and divided into separate sections for directed orders and non-directed orders. 22

This new disclosure requirement is subject to two de minimis exceptions.23 A “not held” NMS

stock order that is subject to either de minimis exception is covered by the existing customerspecific disclosures in Rule 606(b)(1), as is any “held” NMS stock order submitted by a

The amendments to Rule 606 would not limit any other obligations that broker-dealers may have under

applicable federal securities laws, rules, or regulations, including the anti-fraud provisions of the federal

securities laws.

17 CFR 242.606(b).

Typically, a “not held” order provides the broker-dealer with price and time discretion in handling the

order, whereas a broker-dealer must attempt to execute a “held” order immediately.

A “trading center” is defined in Rule 600 of Regulation NMS. See 17 CFR 242.600(b)(78).

See Rule 606(b)(3).

See id.

See Rules 606(b)(4) and (b)(5).

customer to any broker-dealer. 24 For the reasons explained below, the Commission is not

adopting the proposed requirement that the Rule 606(b)(3) disclosures be divided into passive,

neutral, and aggressive order routing strategies.

In connection with the new disclosure requirement, the Commission is amending Rule

600(b) of Regulation NMS 25 to include definitions of the terms “actionable indication of

interest,” “orders providing liquidity,” and “orders removing liquidity,” and to revise the

existing definitions of the terms “directed order” and “non-directed order.” 26 The Commission is

not adopting the proposed defined term “institutional order” in Rule 600(b) and therefore also is

not adopting the proposed $200,000 market value threshold for orders to qualify for the new

customer-specific disclosures in Rule 606(b)(3). 27

As discussed in Section III.A.7, infra, the Commission is not adopting the proposed

amendment to Rule 606 of Regulation NMS to require a broker-dealer to make publicly

available, on an aggregate basis, the order handling information required under Rule 606(b)(3). 28

The Commission is amending Rule 606(a) of Regulation NMS such that the aggregated

order routing disclosures that broker-dealers must make publicly available on a quarterly basis

See Rule 606(b)(1). As discussed below, while the amendments to Rule 606(b)(1) modify the orders that

are covered by Rule 606(b)(1), the required disclosures under Rule 606(b)(1) are not changing. See infra

Section III.A.1.b.vi.

17 CFR 242.600(b).

The newly defined terms are being incorporated into Rule 600(b) in alphabetical order, in keeping with

Rule 600(b)’s existing alphabetical organization of the terms defined therein, and the numbered provisions

for existing defined terms in Rule 600(b) are being adjusted accordingly. For ease of reference however,

throughout this release, citations to pre-existing defined terms in Rule 600(b) are to their pre-existing

numbered provisions, unless otherwise indicated.

See Rule 606(b)(3); see also infra Section III.A.1.b.ii. Relatedly, the Commission also is not amending

Rule 600(b) to rename the term “customer order” as “retail order,” as was proposed.

See proposed Rule 606(c). Because the Commission is not adopting proposed Rule 606(c), pre-existing

Rule 606(c), which addresses “Exemptions” from the rule and which the Commission proposed to

renumber as Rule 606(d) under the Proposal, is not being renumbered as such and remains unchanged as

Rule 606(c).

pertain to orders of any dollar value in NMS stock that are submitted on a “held” basis. Further,

the Commission is making targeted enhancements to these public disclosures to: (1) require

limit order information to be split into marketable and non-marketable categories (relatedly, the

Commission is adopting a definition of the term “non-marketable limit order” under Rule

600(b)); 29 (2) require more detailed disclosure of the net aggregate amount of any payments

received from or paid to certain trading centers; (3) require broker-dealers to describe any terms

of payment for order flow arrangements and profit-sharing relationships with certain venues that

may influence their order routing decisions; and (4) require that broker-dealers keep the order

routing reports posted on a website that is free and readily accessible to the public for a period of

three years from the initial date of posting on the website. 30 In addition to what was proposed,

the Commission is replacing the Rule 606(a) requirement to group order routing information for

NMS stocks by listing market with a requirement to group such information by stocks included

in the S&P 500 Index as of the first day of the quarter and other NMS stocks.

Finally, consistent with the amendments to Rule 606(a), the Commission is amending

Rule 605 to require market centers 31 to keep execution reports required by the rule posted on a

website that is free and readily accessible to the public for a period of three years from the initial

A “marketable limit order” is any buy order with a limit price equal to or greater than the national best offer

at the time of order receipt, or any sell order with a limit price equal to or less than the national best bid at

the time of order receipt. 17 CFR 242.600(b)(39). “National best bid and national best offer” is defined in

Rule 600 of Regulation NMS. 17 CFR 242.600(b)(42). The Commission is adopting new Rule 600(b)(54)

to define “non-marketable limit order” to mean “any limit order other than a marketable limit order,” as

discussed in more detail below. See infra Section III.B.2.

See Rule 606(a); see also Proposing Release, supra note 1, at 49462. “Payment for order flow” has the

meaning provided in 17 CFR 240.10b-10. See 17 CFR 242.600(b)(54). A “profit-sharing relationship” is

defined in Rule 600 of Regulation NMS. See 17 CFR 242.600(b)(56).

A “market center” means any exchange market maker, OTC market maker, alternative trading system,

national securities exchange, or national securities association. See 17 CFR 242.600(b)(38).

date of posting on the website. The Commission also is adopting amendments to other rules to

update cross-references in connection with the other rule amendments being adopted today. 32

Consistent with the Proposal, the Commission continues to believe that generally

requiring more detailed, standardized, baseline order handling information to be made available

to customers upon request for orders in NMS stocks should enable those customers — and

particularly institutional customers — to more effectively assess how their broker-dealers are

carrying out their best execution obligations and the impact of their broker-dealers’ order routing

decisions on the quality of their executions, including the risks of information leakage and

potential conflicts of interest. 33 In addition, the Commission believes that these more detailed

customer-specific disclosures will further encourage broker-dealers to minimize information

leakage, 34 as well as better enable customers to verify that their broker-dealers are following

their order handling instructions. Unlike the Proposal and in response to commenters’ feedback,

the Commission believes that the applicability of these new order routing disclosures should be

based on order type (“not held” orders in NMS stocks) rather than the dollar value of an order.

Similar to the Proposal, the Commission believes that simplifying and enhancing the

current publicly available disclosures, particularly with respect to financial inducements from

trading centers, should assist customers in evaluating better the order routing services of their

broker-dealers and how well they manage potential conflicts of interest. 35 Unlike the Proposal

The Commission is adopting amendments to: Rule 3a51-1(a) under the Exchange Act; Rule 13h-1(a)(5) of

Regulation 13D-G; Rule 105(b)(1) of Regulation M; Rules 201(a) and 204(g) of Regulation SHO; Rules

600(b), 602(a)(5), and 611(c) of Regulation NMS; and Rule 1000 of Regulation SCI.

See infra Section III.A; see also Proposing Release, supra note 1, at 49434.

See id.

See Proposing Release, supra note 1, at 49434.

and in response to commenters’ feedback, the Commission believes that this goal would be

targeted more effectively by having these disclosures apply to “held” orders in NMS stocks

rather than those under $200,000.

III.

Amendments to Rule 600, Rule 605, and Rule 606

Section III discusses in detail the adopted rule amendments. Subsection A addresses the

customer-specific order handling disclosures required by new Rule 606(b)(3) and amended Rule

606(b)(1). This section also discusses a part of the Proposal we are not adopting: proposed Rule

606(c)’s requirement that broker-dealers make publicly available an aggregated report of the

Rule 606(b)(3) customer-specific order handling information across all of their customers.

Subsection B addresses the enhanced public report required under amended Rule 606(a). The

newly defined and re-defined terms that the Commission is adopting in Rule 600 in connection

with the amendments to Rule 606 are discussed where relevant in subsections A and B. The

adopted amendment to Rule 605 is discussed in subsection C.

The staff will review these amendments, including in particular the de minimis exceptions

described in Section III.A.1.b.iv below, not later than one year after the compliance date of the

amendments, and report to the Commission.

Customer-Specific Order Handling Reports

Applicability of Customer-Specific Disclosures in Rule 606(b)

a. Proposal

The Commission proposed to delineate the types of orders that would trigger a brokerdealer’s obligation to provide a customer with the order handling disclosures required by new

Rule 606(b)(3) by amending Rule 600(b) to include a definition of “institutional order.” 36

See proposed Rule 600(b)(31).

Specifically, the Commission proposed to define an “institutional order” as an order to buy or

sell a quantity of an NMS stock having a market value of at least $200,000, provided that such

order is not for the account of a broker-dealer. 37 As proposed, Rule 606(b)(3) would apply only

to such “institutional orders.”

The Commission’s proposed definition of “institutional order” dovetailed with the current

definition of “customer order,” 38 such that all orders in NMS stocks routed by broker-dealers for

their customers, regardless of order dollar value, would be covered by order routing disclosure

rules. 39 The Commission’s proposed definition maintained a dollar-value threshold analysis to

identify the “institutional orders” for which the Rule 606(b)(3) disclosures would be available

and distinguish them from “retail orders” that were too small to meet the dollar-value threshold

in the definition and for which other disclosures would be available. 40

The Commission solicited comment on alternatives to a dollar-value threshold approach.

For example, the Commission asked commenters among other things: (1) whether dollar value

is the proper criterion for defining an institutional order, and (2) whether there are other order

characteristics the Commission should consider to distinguish between retail and institutional

orders, in addition to, or instead of, a dollar-value threshold. 41

The Commission also asked whether commenters believe a de minimis exemption from

customer-specific reporting under proposed Rule 606(b)(3) is appropriate. Specifically, the

See id. The proposed definition of institutional order applied only to orders for NMS stocks and, therefore,

did not include orders in NMS securities that are options contracts.

See supra note 5.

See Proposing Release, supra note 1, at 49445. Relatedly, the Commission proposed to rename term

“customer order” in Rule 600(b) as “retail order.” See infra Section III.B.1.

See id. The Commission preliminarily believed that this would be an effective method of focusing the Rule

606(b)(3) disclosures on orders from institutional customers. See Proposing Release, supra note 1, at

49444-45 for additional detail on the Proposal.

See id. at 49445.

Commission asked if commenters believe that the rule should include a de minimis exemption

for broker-dealers that receive, in the aggregate, less than a certain threshold number or dollar

value of institutional orders. 42 The Commission also asked if the rule should be applicable, with

respect to disclosures to any particular customer, only if a broker-dealer receives greater than a

certain threshold number or dollar value of institutional orders from that customer. 43

The Commission received comments on the proposed dollar-value threshold as well as

comments in response to its questions regarding a potential de minimis exemption from Rule

606(b)(3) and, after further consideration, is modifying its approach.

b. Final Rule and Response to Comments

i. Comments Regarding Dollar-Value Threshold

The Commission received significant comment on the proposed definition of

“institutional order” that criticized the proposed $200,000 threshold as an ineffective proxy for

institutional trading interest. 44 Many commenters expressed concern that defining institutional

order using the proposed $200,000 threshold would be both over-inclusive by including orders

from retail investors with a market value over $200,000 and under-inclusive by excluding orders

from institutional customers with a market value less than $200,000, and result in the

See id. at 49449.

See id.

See, e.g., Letter from Theodore R. Lazo, Managing Director and Associate General Counsel, The Securities

Industry and Financial Markets Association, dated October 17, 2016 (“SIFMA Letter”) at 2-3; Letter from

Mary Lou Von Kaenel, Managing Director, Financial Information Forum, dated September 26, 2016 (“FIF

Letter”) at 2-3; Letter from Mary Lou Von Kaenel, Managing Director, Financial Information Forum, dated

November 7, 2016 (“FIF Addendum”) at 2; Letter from David W. Blass, General Counsel, Investment

Company Institute, dated September 26, 2016 (“ICI Letter”) at 3-7; Letter from John Russell, Chairman of

the Board, and James Toes, President and Chief Executive Officer, Security Traders Association, dated

September 26, 2016 (“STA Letter”) at 4; HMA Letter at 5-6; Letter from Tyler Gellasch, Executive

Director, and Chris Nagy, Director, Healthy Markets Association dated January 6, 2017 (“HMA Letter II”)

at 2; CFA Letter at 6-7; Letter from Dennis M. Kelleher, President and Chief Executive Officer, Stephen

W. Hall, Legal Director and Securities Specialist, and Lev Bagramian, Senior Securities Policy Advisor,

Better Markets, Inc., dated September 26, 2016 (“Better Markets Letter”) at 5; MFA Letter at 3.

misclassification of a large number of orders. 45 Two commenters stated that they receive retail

investor orders that exceed $200,000 in market value. 46

Several commenters stated that, for reasons such as obtaining a better price, achieving

faster execution, avoiding potential information leakage, avoiding market effect, or the

advancement in the sophistication of institutional trading systems, many institutional customers,

before submitting their order flow to their broker-dealers, internally divide their order flow into

smaller “child” orders that may not meet the proposed $200,000 dollar-value threshold. 47

Multiple commenters offered their own analyses of internal and external data indicating that a

large percentage of orders from institutional customers would fall below the $200,000

threshold. 48 One of these commenters stated that the proposed definition of institutional order

could exclude disproportionately more orders of smaller funds, orders in less liquid stocks that

See, e.g., Letter from Robert J. McCarthy, Director of Regulatory Policy, Wells Fargo Advisors, LLC,

dated September 26, 2016 (“Wells Fargo Letter”); Letter from David M. Weisberger, Managing Director,

IHS Markit, dated September 26, 2016 (“Markit Letter”); Letter from Jeff Brown, Senior Vice President,

Legislative and Regulatory Affairs, Charles Schwab & Co. Inc., dated September 26, 2016 (“Schwab

Letter”).

See Schwab Letter at 3; Letter from Marc R. Bryant, Senior Vice President and Deputy General Counsel,

Fidelity Investments, dated September 26, 2016 (“Fidelity Letter”) at 2-3.

See Markit Letter at 6-7; Letter from Greg Babyak, Head, Global Regulatory and Policy Group, Bloomberg

LP, and Gary Stone, Market Structure Strategy, Bloomberg Tradebook and Bloomberg LP, dated

September 26, 2016 (“Bloomberg Letter”) at 11; Letter from Erin K. Preston, Chief Compliance Officer

and Associate General Counsel, Dash Financial LLC, dated September 26, 2016 (“Dash Letter”) at 3;

Letter from Richard Foster, Senior Vice President and Senior Counsel for Regulatory and Legal Affairs,

Financial Services Roundtable, dated September 26, 2016 (“FSR Letter”) at 3-4; MFA Letter at 3; FIF

Letter at 3; FIF Addendum at 2; Letter from Nathaniel N. Evarts, State Street Global Advisors, dated

September 26, 2016 (“SSGA Letter”) at 1.

See Markit Letter at 6-7; Letter from Matt D. Lyons, Global Trading Manager, The Capital Group of

Companies, Timothy J. Stark, Market and Transactional Research, The Capital Group of Companies, and

Michael J. Triessl, Senior Vice President and Senior Counsel, Capital Research and Management

Company, dated September 30, 2016 (“Capital Group Letter”) at 2; Bloomberg Letter at 11-12.

fall below the $200,000 threshold, and larger orders that are broken up into smaller child orders

by institutional customers. 49

One commenter expressed concern that the dollar-value threshold would exclude the

majority of orders from institutions from the enhanced institutional order handling disclosure

requirements, diminishing the value of the disclosure and forcing institutional investors to

continue individual negotiations to obtain order handling information. 50 Another commenter

stated that excluding an unknown portion of a large institution’s orders (and perhaps all of a

smaller institution’s orders) from heightened scrutiny may create opportunities for abuse and

evasion, and that investors may therefore seek to deliberately avoid identifying their orders as

institutional orders. 51 Another commenter stated that different securities trade differently based

on available liquidity and their capacity to move the market. 52 The commenter stated that the

proposed definition may force customers to choose between placing orders above the threshold

to receive disclosures but at the risk of higher market impact costs or staying below the threshold

to protect order information but sacrificing their right to disclosures. 53

As illustrated by these comments, there was broad opposition to the $200,000 dollarvalue threshold in the proposed definition of institutional order. The Commission is not adopting

the proposed definition. Rather than attempt to capture within a definition of “institutional

order” the orders that account for most institutional order dollar volume, the comments indicate

See Letter from Adam C. Cooper, Senior Managing Director and Chief Legal Officer, Citadel Securities,

dated October 13, 2016 (“Citadel Letter”) at 2.

See ICI Letter at 3.

See HMA Letter at 6.

See CFA Letter at 7.

See id.

that market participants would prefer a different approach to order handling disclosures. 54 In

light of these comments, the Commission believes that a modified approach to delineating the

orders covered by new Rule 606(b)(3) would be more consistent with the expectations of market

participants.

ii. Commenter Recommendations Regarding a Modified

Approach

Many commenters urged the Commission to replace the proposed dollar-value threshold

with a different approach for identifying the orders covered by the new customer-specific order

routing disclosures. 55 They generally supported two different approaches: a number of

commenters suggested that the applicability of the new order routing disclosures be based on

order type (“held” versus “not held” orders); 56 and a number of other commenters suggested that

their applicability be based on the characteristics (e.g., type or regulatory status) of the entity

placing the order. 57

Commenters who supported an order type-based approach suggested that the not held

order type classification would be an effective proxy for identifying orders typical of institutional

investors for which the existing customer-specific disclosures are inapplicable or inadequate

See, e.g., ICI Letter at 3, 6-7 (noting that adopting a definition of institutional order that would apply to all

orders, regardless of size, that an institutional customer submits to its broker-dealer would best enable the

Commission to accomplish the objective of providing information necessary for institutional investors to

understand broker-dealers’ order routing decisions); Letter from Amy B.R. Lancellotta, Managing Director,

Independent Directors Council, dated September 26, 2016 (“IDC Letter”) at 2 (supporting ICI’s

recommendation); Capital Group Letter at 2-3; HMA Letter II (agreeing with Capital Group, and noting

that covering all institutional orders is one of the most important aspects of the rule).

See, e.g., MFA Letter at 3-4; CFA Letter at 6-8; FIF Letter at 2-3, 14-15; ICI Letter at 3, 6-7; STA Letter at

3-4; SIFMA Letter at 1-3; FIF Addendum at 2; Healthy Markets Letter at 2; Jon Schneider, Chairman of

the Board, and James Toes, President and Chief Executive Officer, Security Traders Association, dated

April 11, 2017 (“STA Letter II”) at 2.

See, e.g., SIFMA Letter at 3; Bloomberg Letter at 12; Citadel Letter at 2-3; FIF Letter at 2-3, 14-15; FIF

Addendum at 2; STA Letter II at 2. See also EMSAC Rule 606 Recommendations, supra note 16.

See SSGA Letter at 1; ICI Letter at 3, 6-7; IDC Letter at 2; MFA Letter at 3; Fidelity Letter at 3; CFA

Letter at 8; Better Markets Letter at 5.

because institutional investor orders are generally not held to the market. 58 Commenters

attributed this to the fact that a broker-dealer has time and price discretion in executing a not held

order, and institutional investors in particular rely on such discretion for reasons such as

minimizing price impact, whereas a broker-dealer must attempt to execute a held order

immediately, which typically better suits retail investors who seek immediate executions and rely

less on broker-dealer order handling discretion. 59 As one commenter put it, the Rule 606(b)

disclosure requirements should be based on whether the broker-dealer has discretion when

handling the client’s order and, as a general matter, broker-dealers have no discretion in handling

retail investor held orders but do have discretion in handling institutional investor not held

orders. 60 One commenter also stated that the held/not held approach would provide a targeted,

deterministic solution to the issues presented by the proposed order dollar-value-based

distinction between retail and institutional orders, and would alleviate the need to identify certain

orders as institutional and others as retail for purposes of order routing disclosure. 61

Several commenters also stated that basing the Rule 606(b) disclosure requirements on

whether an order is held or not held would be straightforward and minimally burdensome

because: broker-dealers and other market participants are very familiar with these order type

See Ameritrade Letter at 2; Letter from Richie Prager, Senior Managing Director, Head of Trading,

Liquidity and Investments Platform, Hubert De Jesus, Managing Director, Co-Head of Market Structure

and Electronic Trading, Supurna VedBrat, Managing Director, Co-Head of Market Structure and Electronic

Trading, and Joanne Medero, Managing Director, Government Relations and Public Policy, BlackRock,

Inc., dated September 26, 2016 (“BlackRock Letter”) at 2; Citadel Letter at 2-3; Markit Letter at 4; Schwab

Letter at 3; Capital Group Letter at 2-3; KCG Letter at 4; FIF Letter at 2-3; FIF Addendum at 2; STA Letter

II at 2. One commenter noted its belief that the vast majority of orders entered by institutional customers

are with not-held instructions and the vast majority of orders entered by retail investors are with held

instructions. See STA Letter at 4.

See Wells Fargo Letter at 5; Markit Letter at 3 n.7; Capital Group Letter at 3; Schwab Letter at 3;

Ameritrade Letter at 2 n.2; KCG Letter at 4; FIF Addendum at 2.

See SIFMA Letter at 3; see also Capital Group Letter at 2; KCG Letter at 4.

See FIF Letter at 2-3, 14-15.

classifications; classifying orders as held or not held would be consistent with current industry

practice; and the terms held and not held are common terms of usage in the securities markets. 62

One of these commenters stated that broker-dealers already must mark orders that they execute

as held or not held, 63 and another commenter stated that the held/not held order classifications

are commonly recognized in the FIX Protocol. 64 Two commenters pointed out that the held and

not held order classifications are already utilized in the Commission’s definition of “covered

order” in Rule 600(b)(15). 65 One of these commenters stated that not held orders are generally

distinguished from held orders in regulations and firms’ monitoring processes, and specifically

noted that broker-dealers already characterize orders on a held or not held basis to comply with

Rule 605’s covered order requirement, OATS technical specifications, and other rules such as

FINRA Rule 5320. 66

Two commenters objected to the held or not held analysis and stated that the applicability

of the new customer-specific disclosures should not be based on order type because the held/not

held classification is within the control of the order sender. 67 One commenter stated that the

held/not held order type-based distinction is an imprecise proxy for the status of the underlying

customer, would not cover all institutional orders, and that the distinction may leave out many

smaller investment advisers that currently trade through or have some portion of assets under

See Citadel Letter at 3; Markit Letter at 3, 7-8; KCG Letter at 4; Capital Group Letter at 2-3; SIFMA Letter

at 3.

See Capital Group Letter at 3.

See Citadel Letter at 3.

See SIFMA Letter at 3 and n. 4; Market Letter at 3 and n. 8.

See Markit Letter at 3-4, 7.

See HMA Letter at 7; Dash Letter at 4.

management through “retail” channels. 68 This commenter also stated that the distinction would

allow for potential gaming, and that amidst rising concerns with broker-dealers’ conflicts of

interests, some institutional investors have increasingly come to use held orders. 69 Another

commenter, however, understood that some not held orders may come from retail customers, and

that institutional clients may send broker-dealers a small amount of held orders, but nevertheless

supported scoping the disclosures by the held and not held order classifications. 70

Some commenters suggested that the applicability of the customer-specific disclosures

should be based on the type of the entity placing the order. 71 One commenter argued that this

approach would be preferable to an approach based on order type classification because brokerdealers already must know whether their customers are institutional investors. 72 Another

commenter stated that orders should not be classified according to the unique order handling

typical of an entity, as that characteristic may change over time, whereas the entity type itself

remains constant. 73

Most of the commenters that supported an entity-centric approach suggested that the

Commission rely on FINRA Rule 4512(c), which defines the term “institutional account” for

purposes of that rule, as a source for such an approach. 74 Two commenters also suggested as a

source FINRA Rule 2210(a)(4), which defines the term “institutional investor” for purposes of

See HMA Letter II at 2-3.

See id.

See SIFMA Letter at 3; see also Markit Letter at 7-8; Schwab Letter at 3; Letter from Manisha Kimmel,

Chief Regulatory Officer, Wealth Management, Thomson Reuters, dated September 26, 2016 (“Thomson

Reuters Letter”) at 1; Citadel Letter at 3.

See, e.g., ICI Letter at 6-7; MFA Letter at 3; Fidelity Letter at 3; STA Letter at 4; CFA Letter at 8.

See HMA Letter II at 2.

See Better Markets Letter at 5.

See ICI Letter at 6-7 n.19; MFA Letter at 3-4; Fidelity Letter at 3; STA Letter at 4; CFA Letter at 8;

Bloomberg Letter at 13; see also FIF Letter at 3.

that rule, and also incorporates the definition of “institutional account” from FINRA Rule

4512(c). 75 One commenter stated that, because all broker-dealers that handle customer orders for

equity securities are FINRA members, they should be accustomed to using the standards

supplied in FINRA’s rules. 76

Some commenters offered additional considerations or recommendations regarding how

an entity-based approach should be crafted. For example, one commenter suggested that the new

customer-specific disclosures should apply to any order attributed to any entity that is a “large

trader” under Section 13(h) of the Exchange Act. 77 Another commenter stated that institutional

and retail investors should be defined according to whether the investor is an entity or

individual. 78

In addition to the foregoing commenter recommendations, a few commenters suggested

that there should be no distinction between retail and institutional customers for purposes of the

new Rule 606(b)(3) order handling reports and that all orders should be covered by the Rule

606(b)(3) reports, 79 or that retail and institutional customers should receive the same

See MFA Letter at 3-4; ICI Letter at 6-7 n.19.

See ICI Letter at 6-7 and n.19; see also CFA Letter at 8.

See SSGA Letter at 1; see also 15 U.S.C. 78m(h). Another commenter expressed concern that a large

trader-based definition of institutional order would result in considerable overlap among retail customers

that also are large traders under Rule 13h-1. See STA Letter at 4. This is one of several examples of

commenters critiquing or supporting the views expressed by other commenters regarding the definition of

institutional order. See, e.g., IDC Letter at 2 (supporting ICI Letter’s recommendations on how to expand

the definition of “institutional” order); STA Letter at 4 (supporting remarks made in FIF Letter); Citadel

Letter at 3 (noting support for similar proposal from Blackrock Letter and ICI Letter); Ameritrade Letter at

2 (noting commenter support for defining institutional orders by the type of order submitted); HMA Letter

II at 2-3 (noting broad commenter support for not defining institutional orders by dollar size).

See Better Markets Letter at 5.

See HMA Letter at 5; Dash Letter at 3; HMA Letter II at 1-2; Letter from Abraham Kohen, President, AK

Financial Engineering Consultants, LLC, dated September 28, 2016 (“Kohen Letter”).

disclosures. 80 One commenter stated that the goal with respect to both retail investor and large

institutional orders should be best execution. 81

iii. The Commission’s Adopted Approach

The Commission is not adopting a definition of “institutional order” or an order dollar

value-based approach to delineate the applicability of new Rule 606(b)(3). 82 Generally, the

amendments to Rule 606(b) are designed to apply required order handling disclosures to any

NMS stock order regardless of its dollar value and to require more detailed disclosures regarding

how broker-dealers exercise discretion when handling and routing customers’ NMS stock orders

in today’s electronic markets. These disclosures are designed to provide transparency to

customers for whom the existing customer-specific disclosures under Rule 606(b) are

inapplicable or have become inadequate. Upon further consideration and in light of the views

expressed by commenters, the Commission believes that these goals can best be accomplished if

the detailed, customer-specific, order handling disclosures set forth in Rule 606(b)(3) generally

apply to orders of any dollar value for NMS stock that customers submit to their broker-dealers

on a “not held” basis. Accordingly, under Rule 606(b)(3), a broker-dealer must provide the

disclosures set forth therein, upon customer request, to any customer that places, directly or

indirectly, one or more orders in NMS stock that are submitted on a not held basis with the

broker-dealer, subject to two de minimis exceptions discussed below. 83

See, e.g., Better Markets Letter at 5-7.

See HMA Letter at 5.

Relatedly, as discussed below, the Commission is not renaming the term “customer order” as “retail order”

in Rule 600(b). See infra Section III.B.1.

See infra Section III.A.1.b.iv; see also Rule 606(b)(3). Consistent with what was proposed, Rule 606(b)(3)

applies only to orders for NMS stocks and does not include orders in NMS securities that are options

contracts. Some commenters supported this approach. See STA Letter II at 2-3; FIF Letter at 12. Other

commenters recommended that options be included in the amended order handling disclosures being

adopted today. See Dash Letter at 1-2; HMA Letter at 12; Markit Letter at 14. The Commission continues

We believe that basing the applicability of this requirement on whether orders are held or

not held serves the purposes of the disclosures. A broker-dealer must attempt to execute a held

order immediately; a not held order instead provides the broker-dealer with price and time

discretion in handling the order. As a result, the Rule 606(b)(3) disclosures apply to NMS stock

orders for which customers have provided their broker-dealers with price and time order

handling discretion, and do not apply to orders that the broker-dealer must attempt to execute

immediately. The Commission believes that since the disclosures are designed to provide greater

transparency into a broker-dealer’s exercise of order handling discretion, they should be

provided for orders for which broker-dealers actually exercise such discretion. Focusing the

customer-specific report in this way will better enable customers to understand their brokerdealers’ order routing decisions and the extent to which those decisions may be affected by

conflicts of interest or create information leakage. Customers also will be better able to assess

their broker-dealers’ skill and effectiveness in handling their orders and achieving satisfactory

executions.

Importantly, as noted by multiple commenters, broker-dealers and other market

participants are familiar with the held and not held order type classifications, classifying orders

as held or not held would be consistent with current industry practice, and the terms “held” and

“not held” are common terms of usage in the securities markets. 84 Indeed, broker-dealers

already utilize the “held” and “not held” order classifications to comply with FINRA OATS

to believe that, as noted in the Proposing Release, due to differences in the current market structure for

NMS securities that are options contracts – in particular the lack of an over-the-counter market in listed

options – the same market structure complexities that exist for NMS stocks do not exist at this time for

NMS securities that are options contracts to a degree that warrants the more detailed order handling

disclosures proposed herein. See Proposing Release, supra note 1, at 49444 n.101.

See Citadel Letter at 3; Markit Letter at 3, 7-8; KCG Letter at 4; Capital Group Letter at 2-3; SIFMA Letter

at 3.

technical specifications, 85 and existing Commission rules, such as the definition of “covered

order” in Rule 600(b), rely on market participants’ ability to distinguish between “held” and “not

held” orders. As such, the Commission is not adding definitions of these terms to Rule 600(b).

The Commission intends for broker-dealers to rely on their current methods for classifying

orders as “held” or “not held” for purposes of complying with Rule 606. By leveraging the

established not held order classification, Rule 606(b)(3)’s applicability should be easily

understood by market participants and the implementation burdens broker-dealers encounter in

order to comply with Rule 606(b)(3) should be lessened to the extent that their order handling

and routing systems are already configured for not held order classifications.

Further, under the Commission’s adopted approach, any customer is entitled to receive

the Rule 606(b)(3) disclosures for their not held NMS stock orders, subject to two de minimis

exceptions. The Commission is not adopting definitions of “institutional order” or “retail order,”

and the adopted amendments make no such distinction, based on dollar value of the order or

otherwise. In this regard, the Commission’s adopted approach is consistent with comments that

stated that no such distinction is necessary. Under final Rule 606(b)(3), customers may request

the disclosures for any not held NMS stock orders that they submit (subject to the de minimis

exceptions, discussed below), including not held NMS stock orders for less than $200,000 in

market value, which would have been defined as “retail orders” and not subject to the Rule

606(b)(3) disclosures under the Proposal. The Commission believes it is appropriate to make the

Rule 606(b)(3) disclosures available for all not held NMS stock orders (subject to the de minimis

See FINRA OATS Reporting Technical Specifications, September 12, 2016, at pp. 4-2 to 4-3, available at

http://www.finra.org/sites/default/files/TechSpec_9122016.pdf.

exceptions) so customers have information sufficient to evaluate the broker-dealers that are

exercising order handling and routing discretion.

The Commission believes that it is appropriate for broker-dealers to provide the Rule

606(b)(3) disclosures to those customers for whom the existing customer-specific order routing

disclosures in Rule 606(b) are inapplicable or inadequate. Specifically, the Rule 606(b)(3)

disclosures are particularly suited to customers that submit not held NMS stock orders because

the disclosures set forth detailed order handling information that is useful in evaluating how

broker-dealers exercise the discretion attendant to not held orders and, in the process, carry out

their best execution obligations and manage the potential for information leakage and conflicts of

interest. Moreover, many of the commenters that criticized the Commission’s proposed

definition of institutional order suggested that all or nearly all of an institutional customer’s

orders should be covered by the Rule 606(b)(3) disclosures regardless of order dollar value.

Some of these commenters supported accomplishing this via an entity-based approach to Rule

606(b)(3)’s applicability, 86 which the Commission has not chosen to adopt for reasons set forth

below, and some of these commenters supported the adopted approach. 87 By using the not held

order distinction rather than the proposed $200,000 threshold, Rule 606(b)(3) as adopted will

cover more order flow than would have been covered under the Proposal. 88 In addition, by using

the not held order distinction, Rule 606(b)(3) as adopted will likely result in more Rule 606(b)(3)

disclosures for order flow that is typically characteristic of institutional customers — not retail

customers — and will likely cover all or nearly all of the institutional order flow.

While some commenters suggested that the new customer-specific disclosures in Rule

See supra note 58.

See supra note 56.

See infra Section V.C.1.a.i.3.

606(b)(3) should be available to all orders without any limitation based on entity type or order

classification or otherwise, the Commission believes that it is appropriate to differentiate

between not held orders and held orders for purposes of order handling information disclosure

because broker-dealers generally handle not held orders differently from held orders due to the

discretion they are afforded with not held orders but not with held orders. 89 As a result, the

information pertinent to understanding broker-dealers’ order handling practices for not held

orders is not the same as for held orders.

Indeed, in recent years, routing and execution practices for not held orders have become

more automated, dispersed, and complex. 90 In today’s electronic markets, broker-dealers’

commonly handle such orders by using sophisticated institutional order execution algorithms and

smart order routing systems that decide the timing, pricing, and quantity of orders routed to a

number of various trading centers, and that may divide a large “parent” order into many smaller

“child” orders, and route the child orders over time to different trading centers in accordance

with a particular strategy. 91 The order handling disclosures required by Rule 606(b)(3) are

designed to take this into account and provide relevant disclosures that, in the Commission’s

view, will enable customers to better assess their broker-dealers’ order execution quality and

order handling ability overall and methods for complying with best execution obligations, as well

as, more specifically, the degree to which their broker-dealers’ order routing practices may

involve information leakage or the potential for conflicts of interest.

By contrast, the Commission’s concern regarding how broker-dealers handle held orders

is less about the difficulties posed by more automated, dispersed and complex order routing and

See, e.g., Schwab Letter at 3.

See supra Section I; see also Proposing Release, supra note 1, at 49436.

See id.

execution practices. Rather, the Commission believes that enhanced disclosures for held orders

should provide customers with more detailed information including with respect to the financial

inducements that trading centers may provide to broker-dealers to attract immediately executable

trading interest, as opposed to the different information geared towards not held NMS stock

orders that is set forth in Rule 606(b)(3). As noted above and discussed below, the quarterly

public disclosures required under Rule 606(a) are indeed being enhanced to provide more detail

regarding financial inducements to broker-dealers, and the Commission believes that these

disclosures are more appropriately tailored to the characteristics of held order flow and the needs

of customers that use held orders. 92

Also, the Commission does not disagree with one commenter’s statement that best

execution should be the goal for orders from both institutional customers and retail investors, and

that both types of investors deserve to know how their orders are routed and executed. 93 Best

execution is the broker-dealer’s legal obligation for all orders, whether from retail or institutional

customers. 94 While meeting their best execution obligations, broker-dealers frequently may

choose to handle orders in a variety of different ways and choose among a host of available order

routing destinations. Because the choices broker-dealers make in this regard are informed by the

type of order at hand, for the reasons stated above, the Commission believes that separate

disclosures for not held orders and held orders are the better way to help customers understand

how their broker-dealers are handling and routing their orders and how well their broker-dealers

As noted supra and infra, the Commission is also is amending Rule 606(a) such that it applies to held

orders of any size in NMS stock.

See HMA Letter at 5.

See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37538 (June 29, 2005)

(“Regulation NMS Adopting Release”). FINRA has codified a duty of best execution into its rules. See

FINRA Rule 5310.

are performing these functions. While this commenter also stated that the Proposal’s reforms for

retail customers are inadequate, for the reasons stated above, as well as in Section III.B infra, the

Commission disagrees.

As noted above, other commenters suggested basing Rule 606(b)(3)’s applicability on the

characteristics of the customer that submits the order to the broker-dealer. This entity-centric

approach suggested by commenters would require the Commission to set forth the types of

customers that may request the Rule 606(b)(3) disclosures for their NMS stock orders, but would

not entail any differentiation in the types of orders covered by Rule 606(b)(3). As a result, NMS

stock orders from qualifying customers that are submitted on a held basis would be covered by

the Rule 606(b)(3) disclosures. This is a sub-optimal outcome. Broker-dealers must attempt to

execute held orders immediately and are afforded no discretion in handling them; therefore,

applying the Rule 606(b)(3) disclosures to held orders would not provide insight into how a

broker-dealer exercises order handling and routing discretion. Moreover, including a customer’s

held orders in the Rule 606(b)(3) report could obfuscate the reports’ depiction of the discretion

actually exercised by the broker-dealer with respect to not held orders and undermine the very

purpose of these disclosures.

An entity-based approach also would require the Commission to prescribe institutional

status criteria that customers must fit in order to be entitled to receive the disclosures. A risk

with such an approach is that the criteria could be over-inclusive or under-inclusive. The

Commission is particularly concerned about potential under-inclusiveness because customers

that do not fit the criteria would not be entitled to receive the disclosures. To mitigate this risk,

the Commission, as suggested by commenters, could leverage certain existing rules that already

set forth institutional status criteria. For example, several commenters suggested as sources the

definitions of “institutional account” and “institutional investor” in FINRA Rules 2210(a)(4) and

4512(c), respectively. 95 But these definitions serve a purpose for the noted FINRA rules that is

different from the purpose similar prescribed criteria would serve for the purpose of Rule

606(b)(3). Under FINRA Rule 4512, a broker-dealer is not required to obtain for “institutional

accounts” certain additional information that it is required to obtain for accounts that are not

“institutional accounts.” 96 Likewise, under FINRA Rule 2210(a)(4), a broker-dealer is subject to

less prescriptive review requirements for “institutional communications” that are solely to

“institutional investors” than it is subject to for other, “retail communications.” 97 Under both of

these FINRA rules, exclusion from the defined “institutional” criteria triggers a more stringent

due diligence or review obligation for the broker-dealer. The opposite would be true under an

entity-centric approach to Rule 606(b) — if the institutional status criteria adopted by the

Commission were not met, the market participant would be excluded from the more detailed

disclosure regime. 98

See supra notes 74 and 75 and accompanying text.

See FINRA Rule 4512(a)(2).

See FINRA Rule 2210.

One commenter suggested that the “large trader” designation under Section 13(h) of the Exchange Act

serve as the source for the Commission’s institutional status criteria (see SSGA Letter at 1, supra note 77).

This approach would, however, include held orders from large traders within the required disclosures.

Moreover, to qualify as a large trader under Rule 13h-1, a person must meet daily or monthly aggregate

share volume or market value thresholds for transactions in NMS securities. See 17 CFR 242013h-1.

Therefore, such an approach would exclude orders from an institutional customer that does not meet the

designated thresholds. In addition, because the large trader definition is based on transactions in NMS

securities, it takes into account transactions in option contracts that are NMS securities whereas the

Commission’s amendments to Rule 606(b) apply only to orders for NMS stock. Another commenter stated

that institutional and retail investors should be defined according to whether the investor is an entity or

individual (see Better Markets Letter at 5, supra note 78). This approach similarly would include held

orders within the Rule 606(b)(3) disclosures. Further, certain natural persons may take on the

characteristics of institutions in their trading behavior and utilize not held orders to a significant degree, but

they would be categorically excluded from receiving the Rule 606(b)(3) disclosures for such orders under

an approach based on an individual versus entity distinction.

This categorical exclusion of some customer types from Rule 606(b)(3)’s purview is

avoided under the Commission’s adopted approach. By basing the application of Rule 606(b)(3)

on the held and not held order classifications, no customer is categorically excluded from

receiving the Rule 606(b)(3) disclosures. The Commission acknowledges that some commenters

stated that an entity-centric approach to Rule 606(b)(3)’s coverage based on the noted FINRA

rules would coincide with familiar industry standards regarding the types of market participants

that are considered to be “institutional.” 99 But adapting the FINRA rules for the Commission’s

purposes in Rule 606(b) would present challenges. For example, private funds such as hedge

funds may not be covered by the “institutional” definitions in FINRA Rules 2210 or 4512, 100 yet

in the Proposing Release the Commission noted, by way of example, that “[a]n institutional

customer includes … hedge funds,” among others. 101 If the Commission relied solely on the

FINRA rules, contrary to the Commission’s contemplation in the Proposing Release, hedge

funds may not be defined as “institutional” for Rule 606(b) purposes and would not be entitled to

the more detailed Rule 606(b)(3) disclosures. Of course, the Commission could modify the

criteria used in the FINRA rules to better suit its purposes here, but even then there would still be

a risk of under-inclusiveness in the adapted criteria. There also could be new types of market

participants that evolve and that trade in an institutional manner, but if they were not covered by

See HMA Letter II at 2; CFA Letter at 8; STA Letter at 4.

100

FINRA Rule 4512(c)(3) contains a catch-all provision that includes within the definition of “institutional

account” the account of any person with at least $50 million in total assets. An entity that is not otherwise

expressly covered by FINRA Rule 4512(c)(1) or (2), such as a hedge fund for example, is not covered by

the definition if it has total assets of less than $50 million. As such, if the Commission were to rely on the

FINRA rules as suggested by some commenters, smaller entities with less than $50 million in total assets

may be excluded from Rule 606(b)(3) even though they may have less bargaining power than their larger

competitors and therefore may benefit most from required, standardized order routing disclosures. There

also could be disparate results – for example, a registered investment company with less than $50 million in

assets would be covered because it is expressly identified in the rule, while a hedge fund with less than $50

million in assets would not be covered.

101

See Proposing Release, supra note 1, at 49433, n.1.

the Commission’s prescribed institutional status criteria, they would not be entitled to receive the

Rule 606(b)(3) disclosures under the rule.

Moreover, as noted above, commenters also highlighted the industry familiarity with the

not held order classification. 102 And, unlike the “institutional” definitions in the referenced

FINRA rules, which apply in contexts completely different from broker-dealer order handling,

the not held order classification is already used by broker-dealers specifically for order handling

purposes, among other things. For example, FINRA Rule 7440 requires broker-dealers to record

certain information, including any “special handling requests,” when an order is received,

originated, or transmitted. 103 FINRA’s OATS Reporting Technical Specifications state that,

when a FINRA member originates or receives an order and then subsequently transmits that

order to another desk or department within the firm, the member is required to record and report

to OATS, among other things, “special handling instructions that are communicated by the

receiving department to a desk or other department, such as ‘Not Held.’” 104

Basing the applicability of Rule 606(b)(3) on customers’ not held NMS stock orders is, in

the Commission’s view, the most tailored approach to aligning the orders covered by Rule

606(b)(3) with the Commission’s intent for the rule to provide more detailed disclosure and

enhanced transparency regarding how broker-dealers handle NMS stock orders, and to provide

such transparency to customers for whose NMS stock orders the current disclosure regime is

inapplicable or inadequate. This approach also is likely to avoid the problems inherent in an

entity-centric approach. Further, many commenters, as well as EMSAC, supported basing Rule

102

See Citadel Letter at 3; Markit Letter at 3, 7-8; KCG Letter at 4; Capital Group Letter at 2-3; SIFMA Letter

at 3.

103

See FINRA Rule 7440(b)(15) and (c)(1)(G).

104

See FINRA OATS Reporting Technical Specifications, September 12, 2016, at pp. 4-2 to 4-3, available at

http://www.finra.org/sites/default/files/TechSpec_9122016.pdf.

606(b)(3)’s application on the not held order classification. Accordingly, under Rule 606(b)(3),

a broker-dealer must provide the disclosures set forth therein, upon customer request, to any

customer that places, directly or indirectly, one or more orders in NMS stock that are submitted

on a not held basis with the broker-dealer, subject to the de minimis exceptions discussed below.

iv. De Minimis Exceptions

The Commission is adopting in new Rules 606(b)(4) and (b)(5) two de minimis

exceptions from Rule 606(b)(3)’s requirements, either of which excepts a broker-dealer from the

Rule 606(b)(3) requirements. One of the exceptions focuses on the broker-dealer firm and the

other focuses on the individual customer. Specifically, a broker-dealer is not obligated to

provide the Rule 606(b)(3) report: (i) to any customer if not held NMS stock orders constitute

less than 5% of the total shares of NMS stock orders that the broker-dealer receives from its

customers over the prior six months, 105 or (ii) to a particular customer if that customer trades

through the broker-dealer, on average each month for the prior six months, less than $1,000,000

of notional value of not held orders in NMS stock. 106 These de minimis exceptions are designed

such that the Rule 606(b)(3) requirements apply when a broker-dealer’s order flow consists

primarily of not held orders for NMS stock and when a customer’s trading profile is such that it

relies heavily on the discretion of the broker-dealer and so would sufficiently benefit from the

Rule 606(b)(3) disclosures.

The Commission received several comments in response to its questions regarding a

potential de minimis exception from customer-specific reporting under proposed Rule 606(b)(3).

105

See Rule 606(b)(4). Under the rule, the first time a broker-dealer meets or exceeds the 5% threshold, it has

a grace period of up to three calendar months to provide the Rule 606(b)(3) report. There is no such grace

period for compliance after the first time the threshold is met or exceeded. See id.

106

See Rule 606(b)(5). As discussed below, however, when either de minimis exception applies, the brokerdealer still must provide, if requested, the Rule 606(b)(1) customer-specific disclosures for not held NMS

stock orders that it receives from customers. See infra Section III.A.1.b.vi.

Multiple commenters supported an exception from Rule 606(b)(3) reporting for broker-dealers

that have either a de minimis level of institutional customers or a de minimis amount of

institutional trading activity as measured by executed shares as a percentage of all executed

shares. 107 These commenters also supported disclosure based on whether an order is held or not

held and generally discussed the reasoning for a de minimis exception in that context. 108

Commenters also suggested that firms that receive less than 5% of orders from institutions

should be exempt from requirements to provide disclosures for institutional orders, both at the

individual investor level and in the aggregate. 109 One commenter stated that the de minimis

threshold should be set at 5% of not held orders received. 110 Two commenters noted that there

currently is a 5% threshold in Rule 606(a) in connection with the rule’s requirement that brokerdealers disclose the identity of any venue to which 5% or more of non-directed orders were

routed for execution. 111 One of these commenters stated that the purpose of a de minimis

exception is to provide relief so that reporting obligations for a given entity more closely match

its actual core business and targeted customer profile. 112

107

See, e.g., FIF Letter at 5, 10; STA Letter at 6; Citadel Letter at 3.

108

See, e.g., FIF Letter at 5, 10; STA Letter II at 2; Citadel Letter at 3; Thomson Reuters Letter at 1;

Ameritrade Letter at 2.

109

See STA Letter II at 2; Ameritrade Letter at 2; Wells Fargo Letter at 5. See also Letter from Jeff Brown,

Senior Vice President, Legislative and Regulatory Affairs, Charles Schwab & Co. Inc., dated October 30,

2018 (“Schwab Letter II”).

110

See Schwab Letter II at 2.

111

See Ameritrade Letter at 2; Wells Fargo Letter at 5.

112

See Wells Fargo Letter at 5. See also Letter from Stephen John Berger, Managing Director, Government

and Regulatory Policy, Citadel Securities, dated October 23, 2018 (“Citadel Letter II”) at 1-2 (noting that

the 5% threshold suggested by other commenters should ensure that smaller broker dealers are not

adversely affected by the new disclosure requirement, and noting that a threshold based on a percentage of

orders or shares received could potentially be set lower than a threshold based on a percentage of executed

shares).

Some commenters stated that the costs incurred by retail broker-dealers to create systems

to generate the Rule 606(b)(3) reports would exceed any benefits. 113 One of these commenters

stated that the Rule 606(b)(3) statistics are not relevant to retail-oriented brokers’ customer base

and would provide them no added benefit, and that requiring retail broker-dealers to generate the

statistics would be an onerous task with significant added expense. 114 Two commenters

recommended an exemption from Rule 606(b)(3) reporting for firms with a de minimis amount

of not held order flow in light of the fact that retail customers occasionally submit not held

orders. 115 One commenter believed that, if broker-dealers with a de minimis amount of not held

orders are exempted, the majority of the exemptions would be for retail brokers. 116

Other commenters did not support a de minimis exception even if a broker-dealer has

limited institutional customer order flow, so that institutional customers can compare order

routing among all broker-dealers. 117 One commenter stated that, if a small broker-dealer is able

to effectively manage orders from institutional customers in the current complex market

environment, it should be able to provide customers with information on their order routing

practices. 118

The Commission believes that a de minimis exception from Rule 606(b)(3) reporting, as

set forth in Rule 606(b)(4), presents advantages for certain broker-dealers. Broker-dealers

handle different types of order flow, and not all broker-dealers handle a significant amount of not

held NMS stock order flow. Indeed, some broker-dealers focus mainly on servicing customers

113

See Ameritrade Letter at 2; Citadel Letter at 3; FIF Letter at 5, 10.

114

See FIF Letter at 5. See also Markit Letter at 17.

115

See Thomson Reuters Letter at 1; Schwab Letter at 3.

116

See STA Letter at 8-9.

117

See, e.g., Bloomberg Letter at 15; MFA Letter at 4-5. See also Markit Letter at 28.

118

See Capital Group Letter at 4.

that use held orders in NMS stock, and as such, typically do not handle not held order flow in

NMS stock. The Commission believes that it is appropriate to relieve broker-dealers with

minimal or zero not held order flow from the obligation to incur the costs associated with having

the capability to provide the new Rule 606(b)(3) disclosures for not held NMS stock orders. The

Commission does not believe that it would be appropriate to require every broker-dealer,

regardless of its customer base and core business, to be compelled to incur the costs required to

create the systems and processes necessary to generate the Rule 606(b)(3) reports. The

Commission does not intend to introduce a wholesale change in order handling and routing

disclosure requirements such that broker-dealers whose order flow consists almost entirely of

held orders must also become prepared to provide disclosures that focus on trading activity

characteristics of not held orders.

In the Commission’s view, the potential benefits of the Rule 606(b)(3) disclosures for

customers of such broker-dealers do not justify the costs to such broker-dealers of developing the

necessary systems and mechanisms for providing the disclosures. There would be no expected

benefits of Rule 606(b)(3) in circumstances where a broker-dealer does not currently handle any

not held NMS stock order flow. Nevertheless, absent a de minimis exception, such a brokerdealer could feel compelled to incur the costs and burdens associated with being able to provide

the Rule 606(b)(3) disclosures in order to ensure compliance with the rule should it receive not

held orders in the future. The Commission believes that it is appropriate to relieve any such

broker-dealers of these potential costs and unnecessary burdens.

Likewise, there would be only limited benefits of Rule 606(b)(3) in circumstances where

broker-dealers handle a minimal amount of not held orders, and the Commission does not

believe that such benefits would justify the costs to broker-dealers in these circumstances. While

some commenters opposed a de minimis exemption on grounds that institutional customers

should be able to compare orders across all broker-dealers and that broker-dealers capable of

handling institutional customer orders should be able to provide the Rule 606(b)(3)

information, 119 the Commission believes that these comments rest on an unlikely premise that it

is broker-dealers that handle primarily institutional customer orders that would be excepted

under Rule 606(b)(4). To the contrary, consistent with other commenters’ views, 120 the

Commission expects the de minimis exceptions to be relevant mainly in the context of brokerdealers that handle almost entirely held orders from customers but may occasionally handle not

held orders from customers. Indeed, commenters noted that a small percentage of retail

customers may submit not held orders, whether for purposes of working an order in illiquid

securities or for other purposes. In these circumstances, the Commission believes that brokerdealers that focus on servicing such customers should not be required to incur the costs or

burdens associated with building the systems and other capabilities necessary to provide the Rule

606(b)(3) disclosures when they are likely to handle not held orders only occasionally and

separate from their core business of handling held orders. 121

Accordingly, the firm-level de minimis exception to Rule 606(b)(3), as expressed in Rule

606(b)(4), focuses on the broker-dealer’s overall order flow across all of its customers. The

Commission believes that the scope of this exception will appropriately cover most brokerdealers that handle almost entirely held order flow. A broker-dealer that handles not held NMS

stock order flow that is less than 5% of the total shares of NMS stock orders in a six calendar

month period that it receives from its customers most likely does not make, as a matter of course,

119

See MFA Letter at 4-5; Capital Group Letter at 4.

120

See, e.g., Ameritrade Letter at 2; Citadel Letter at 3.

121

See Wells Fargo Letter at 5.

the routing decisions for which Rule 606(b)(3) is designed to provide enhanced transparency.

95% or more of such a broker-dealer’s NMS stock order flow would be held orders. The

Commission does not believe that it is appropriate to require such a broker-dealer to expend the

effort and incur the expense necessary to be able to provide disclosures that are primarily aimed

at order handling that is rarely, if ever, employed by the broker-dealer.

The Commission is adopting a firm-level de minimis exception that is based on the

“percentage of shares of not held orders in NMS stocks the broker or dealer received from its

customers” (emphasis added) rather than the percentage of not held orders in NMS stocks or

other measures suggested by commenters. 122 The purpose of the firm-level de minimis

exception is to except from the Rule 606(b)(3) disclosure requirements those broker-dealers that

receive zero or minimal not held NMS stock order flow from their customers and whose core

business does not involve handling or routing such order flow. The Commission believes that

the percentage of shares of not held orders is an appropriate measure for the calculation of the

firm-level de minimis exception because it more accurately reflects the nature of a brokerdealer’s business activities than other suggested approaches.

The other methods that commenters suggested for calculating a firm-level de minimis

threshold — e.g., based on the percentage of not held orders (not shares) in NMS stocks — are in

the Commission’s view less accurate indicia of the broker-dealers to whom this aspect of Rule

606 is intended to apply and therefore would result in a less tailored exception. For example, the

use of a “per order” threshold for the firm-wide de minimis exception would result in the equal

treatment for purposes of a firm’s de minimis calculation of, on the one hand, a single order for

10 shares of Corporation X, and on the other hand, a single order for 100,000 shares of

122

See, e.g., Schwab Letter II at 2.

Corporation X. The Commission believes that in this example, the two orders should not be

afforded equal treatment and that the order for 100,000 shares is more indicative of the brokerdealer’s business and thus should be given greater weight than the order for 10 shares.

Indeed, in the aforementioned example, the broker-dealer would likely need to apply

more discretion when executing the order for 100,000 shares (to minimize potential information

leakage and price impact) than for an order for 10 shares. As discussed above, the new Rule

606(b)(3) disclosures are intended to provide customers with detailed information concerning

how broker-dealers exercise discretion, particularly for larger orders (including those broken up

into several smaller child orders). Thus, if the firm-level de minimis threshold were calculated in

a manner that did not account for shares received, there would be greater risk that a broker-dealer

exercising discretion in handling larger orders, potentially as a meaningful portion of its

business, would not be subject to the new Rule 606(b)(3) disclosure requirement.

As noted below, Commission supplemental staff analysis found that among 342 brokerdealers that receive not held orders from customers, about 8% (28 broker-dealers) would receive

a de minimis exception from Rule 606(b)(3) requirements pursuant to Rule 606(b)(4). 123 23 of

the 28 broker-dealers that would be eligible for the de minimis exception receive not held orders

less than 2.5% of the total shares of their orders in the sample and five of the 28 broker-dealers

receive not held orders greater or equal to 2.5% and less than 5% of the total shares of their

orders in the sample. 124 Thus, the 5% threshold in Rule 606(b)(4) creates a narrow exception

from Rule 606(b)(3) among broker-dealers that receive not held orders from customers and

would allow for a reasonably small increase in not held order flow as a percentage of total order

123

See infra Section V.C.1.a.ii.

124

See id.

flow before one of these broker-dealers would be subject to the requirements of Rule 606(b)(3).

Those broker-dealers covered by the exception likely handle not held NMS stock order flow only

occasionally and separate from their core business, and therefore, in the Commission’s view,

should not be subject to the requirements of Rule 606(b)(3). In addition, some commenters that

supported a firm-level de minimis exception specifically suggested that the threshold be set at the

5% level. 125 Accordingly, the Commission believes that the 5% threshold for the firm-level de

minimis exception is reasonable given the goals of the rule.

A broker-dealer is covered by the firm-level de minimis exception as long as its customer

not held NMS stock order flow continues to be less than the 5% firm-level threshold. A brokerdealer is no longer excepted from the purview of Rule 606(b)(3) once and as long as it meets or

surpasses the firm-level threshold of the de minimis exception. Specifically, when a brokerdealer has equaled or exceeded the firm-level threshold, it must comply with Rule 606(b)(3) for

at least six calendar months (“Compliance Period”) regardless of the volume of not held NMS

stock orders the broker-dealer receives from its customers during the Compliance Period. 126

Therefore, during the Compliance Period, the broker-dealer must provide the Rule 606(b)(3)

report to a customer for any of the customer’s not held NMS stock orders submitted to the

broker-dealer during the Compliance Period (subject to the customer-level de minimis exception

set forth in Rule 606(b)(5)). The Compliance Period begins the first calendar day of the next

calendar month immediately following the end of the six calendar month period for which the

broker-dealer equaled or exceeded the firm-level threshold, unless it is the first time the broker-

125

See supra note 109.

126

See Rule 606(b)(4).

dealer has equaled or exceeded the threshold. 127 The first time a broker-dealer equals or exceeds

the firm-level threshold, there is a grace period of three calendar months before the Compliance

Period begins and the broker-dealer must comply with Rule 606(b)(3) requirements. 128 The

customer is not entitled to receive Rule 606(b)(3) reports for orders handled during the grace

period, as the grace period is not part of the Compliance Period. After the three calendar month

grace period, beginning the first calendar day of the fourth calendar month after the end of the

six calendar month period for which the broker-dealer equaled or exceeded the firm-level

threshold, the broker-dealer must provide the Rule 606(b)(3) report prospectively for not held

NMS stock orders submitted by customers from that date through the next six calendar months.

The Commission believes that the limited three-month grace period is appropriate

because it will allow a firm time to come into compliance with the Rule 606(b)(3) requirements

when its not held NMS stock order flow crosses the Rule 606(b)(4) firm-level de minimis

threshold for the first time. The grace period affords a broker-dealer time to develop the systems

and processes and organize the resources necessary to generate the Rule 606(b)(3) reports. At

the same time, should such a broker-dealer subsequently fall below the de minimis threshold, the

Commission believes that no such grace period for Rule 606(b)(3) is necessary if and when that

broker-dealer’s not held NMS stock order flow again meets or crosses the firm-level de minimis

threshold such that the broker-dealer is again subject to the Rule 606(b)(3) requirements. The

broker-dealer should already have developed the necessary systems and processes for providing

the Rule 606(b)(3) report in connection with its subjection to Rule 606(b)(3). 129

127

See id.

128

See id.

129

A broker-dealer whose not held NMS stock order flow from its customers equals or exceeds the five

percent threshold must be able to provide the Rule 606(b)(3) reports to its customers beginning on the

Rule 606(b)(4) requires compliance with Rule 606(b)(3) for “at least” six calendar

months for a broker-dealer that equals or exceeds the firm-level de minimis threshold. The

Commission believes that it is appropriate to require a minimum Compliance Period of six

calendar months in order to coincide with the six-month timeframe of Rule 606(b)(3).

Customers of a broker-dealer that is or becomes subject to Rule 606(b)(3) therefore will be able

to request a Rule 606(b)(3) report that contains at least one full time period of disclosures

contemplated by Rule 606(b)(3). 130 There is no maximum period of time that a broker-dealer

may be subject to Rule 606(b)(3) – a broker-dealer that consistently receives not held NMS stock

orders from its customers at a rate that equals or exceeds the 5% threshold will be required to

comply with Rule 606(b)(3) month after month. Rule 606(b)(4) is designed to require brokerdealer compliance with Rule 606(b)(3) for as long as the broker-dealer’s not held NMS stock

order flow from its customers equals or exceeds the 5% threshold, subject to the minimum

Compliance Period of six calendar months.

Rule 606(b)(4) also is designed to enable a broker-dealer that is subject to Rule 606(b)(3)

for six calendar months (or longer) subsequently to avail itself of the firm-level de minimis

compliance date for these rule amendments. As such, broker-dealers will need to determine whether their

customer not held NMS stock order flow equaled or exceeded the 5% threshold for the six calendar month

period that ends in the calendar month that includes the effective date of these rule amendments. Since the

compliance date for these rule amendments is 180 days after publication in the Federal Register, and since

the effective date is 60 days after Federal Register publication, broker-dealers that equaled or exceeded the

5% threshold during the six calendar month period ending in the calendar month that includes the effective

date will have nearly four months between the effective date and compliance date to prepare to provide the

Rule 606(b)(3) reports.

130

As noted above, a broker-dealer is not required to provide the Rule 606(b)(3) report for orders received

when the broker-dealer was not subject to Rule 606(b)(3). So, for example, a broker-dealer that is subject

to Rule 606(b)(3) as of June 1 would be required to provide the Rule 606(b)(3) information for not held

NMS stock orders received from a customer on June 1 through at least November 30 of that calendar year

(subject to the customer-level de minimis exception and a three-month grace period if first time the firm is

required to provide a report pursuant to Rule 606(b)(3)). A customer could request a Rule 606(b)(3) report

prior to the end of that period, but the report would only be required to include disclosures as of June 1 (if

there is no three-month grace period).

exception if its not held NMS stock order flow no longer equals or exceeds the 5% threshold.

Specifically, under Rule 606(b)(4), if, at any time after the end of the Compliance Period, the

broker-dealer’s not held NMS stock order flow falls below the 5% threshold for the prior six

calendar months, the broker-dealer is not required to comply with Rule 606(b)(3), except with

respect to orders received during the Compliance Period. 131 Thus, after the broker-dealer’s

initial Compliance Period, Rule 606(b)(4) provides for a rolling month-to-month assessment of

whether the broker-dealer must continue to comply with Rule 606(b)(3) or may avail itself of the

Rule 606(b)(4) de minimis exception.

For example, suppose a broker-dealer has equaled or exceeded the firm-level threshold

and therefore must comply with Rule 606(b)(3) for a six calendar month period that begins on

January 1 and ends on June 30 (assuming this Compliance Period started after a three-month

grace period, if this was the first time the broker-dealer has had to comply with Rule 606(b)(3)).

If, in the beginning of July, the broker-dealer determines that its not held NMS stock order flow

equaled or exceeded the threshold for January 1 through June 30, the broker-dealer must

continue to comply with Rule 606(b)(3) for July. If, on the other hand, the broker-dealer

determines that its not held NMS stock order flow was below the 5% threshold for January 1

through June, the broker-dealer would not be required to comply with Rule 606(b)(3) for July 1

through July 31. In the beginning of August, the broker-dealer would determine if it is subject to

Rule 606(b)(3) based on its order flow for the prior six calendar month period, which this time

would be the period from February 1 through July 31. If the broker-dealer met the threshold for

that six calendar month period, and had also met it for the period January 1 through June 30 such

that it was required to comply with Rule 606(b)(3) for July, the broker-dealer would be required

131

See Rule 606(b)(4). An example is set forth in the paragraph below.

to continue complying with Rule 606(b)(3) through August. If the broker-dealer met the

threshold for the February 1 through July 31 period but had not met it for the January 1 through

June 30 period and was not required to comply with Rule 606(b)(3) for July, the broker-dealer

would start a new Compliance Period that would run from August 1 through January 31 of the

following calendar year. In this scenario, the broker-dealer would be required to provide Rule

606(b)(3) disclosures for not held NMS stock orders received from a customer during the prior

six calendar months, except for any such orders that the broker-dealer received during July when

the broker-dealer was not required to provide reports pursuant to Rule 606(b)(3).

Table A below contains an example of a broker-dealer firm that meets or exceeds the 5%

de minimis threshold for the first time and enters a six-month Compliance Period after a threemonth grace period. Table A below also reflects that, after the initial six-month Compliance

Period, the broker-dealer’s required compliance with Rule 606(b)(3) continues on a rolling

month-to-month basis. Table B below contains an example where there is no grace period and a

previously compliant broker-dealer firm begins a new Compliance Period after an intervening

period of not meeting the 5% threshold.

Table A: Firm equals or exceeds 5% threshold for the first time

Event

Firm determines in Jan. 2020

that it equaled/exceeded

threshold for first time; grace

period begins

Period examined for

qualifying threshold

July 1 - Dec. 31, 2019

Prepare to collect and report

required data for

Compliance Period

beginning Apr. 1, 2020

Begin collection of required

data for orders received

during Compliance Period

On Apr. 1, 2020, grace period

ends and six-month Compliance

Period begins

Provide reports for

Apr. 1 to Apr. 30, 2020

May 2020

June 2020

Obligation

Reporting is mandatory during

Compliance Period regardless

of whether threshold is

equaled or exceeded in prior

six calendar months

Provide reports for

Apr. 1 to May 31, 2020

(continue adding prior

month’s data to report each

successive month of the

Compliance Period)

Provide reports for full

Compliance Period,

Apr. 1 to Sept. 30, 2020

(Sept. data not required to

be provided before 7th

business day of Oct.)

Initial Compliance Period ends

on Sept. 30, 2020

On Oct. 1, firm determines that

it equaled/exceed threshold;

Compliance Period extends

through Oct. 31, 2020

Apr. 1 to Sept. 30, 2020

Provide reports for

May 1 to Oct. 31, 2020

On Nov. 1, firm determines that

it equaled/exceed threshold;

Compliance Period extends

through Nov. 30, 2020

May 1 to Oct. 31, 2020

Provide reports for

June 1 to Nov. 30, 2020

Continue assessing, on a rolling

basis, whether equal/exceed

threshold for prior six month

period

Prior six calendar months, on a

rolling basis

Provide reports for prior six

month period as long as

threshold continues to be

met

Table B: Previously compliant firm equals or exceeds 5% threshold after intervening

period of not meeting threshold

Event

Period examined for

qualifying threshold

Obligation

Firm determines in Jan. 2020

that it equaled/exceeded 5%

threshold (not for the first

time); six-month Compliance

Period begins Jan. 1, 2020

July 1 to Dec. 31, 2019

Begin collection of required

data for orders received during

Compliance Period

Six-month Compliance

Period ends on June 30, 2020

Reporting is mandatory

during Compliance Period

regardless of whether

threshold is equaled or

exceeded in prior six calendar

months

Provide reports for full

Compliance Period,

Jan. 1 to June 30, 2020

(June data not required to be

provided before 7th business

day of July)

Jan. 1 to June 30, 2020

Firm not required to collect or

report data for July 2020 but

must continue to provide

reports for prior Compliance

Period, Jan. 1 to June 30, 2020

Feb. 1 to July 31, 2020

Begin collection of required

data for orders received during

new Compliance Period, Aug.

- Jan. 31, 2021; provide reports

for portion of prior six months

that is covered by a

Compliance Period, i.e., Feb. 1

to June 30, 2020 (July 2020 not

within Compliance Period)

Firm determines in July 2020

that it did not equal/exceed

threshold; Compliance Period

not extended

Firm determines in Aug. 2020

that it equaled/exceeded

threshold; new Compliance

Period begins

Oct. 2020

Six-month Compliance

Period ends on Jan. 31, 2021

Reporting is mandatory

during Compliance Period

regardless of whether

threshold is equaled or

exceeded in prior six calendar

months

Provide reports for Apr. 1 to

June 30, 2020; Aug. 1 to Sept.

30, 2020

Provide reports for

Aug. 1, 2020 to Jan. 31, 2021

(Jan. 2021 data not required to

be provided before 7th

business day of Feb. 2021)

The other de minimis exception to Rule 606(b)(3) focuses on each customer’s order

flow. 132 Whereas the firm-level de minimis exception is designed to relieve mainly brokerdealers that do not regularly handle not held orders of the Rule 606(b)(3) obligations, the

customer-level exception is designed to relieve broker-dealers from the obligation to provide the

Rule 606(b)(3) disclosures to particular customers that do not trade NMS stocks in a manner that

generally relies on a broker-dealer’s use of discretion over order routing and handling.

The Commission expects that the benefits of the Rule 606(b)(3) disclosures will accrue

mainly for customers that trade regularly with significant levels of not held NMS stock order

flow. The new customer-specific order handling disclosures are intended to provide such

customers with insight into how their brokers exercise order handling discretion over a period of

time. In order to accurately reflect a broker’s order handling behavior, the customer-specific

disclosures must contain ample order data. The Commission believes that $1,000,000 of

notional value traded on average each month for the prior six months is a level of order flow that

would allow for meaningful order handling disclosures. A Rule 606(b)(3) report covering a

customer’s prior six months of trading activity would include at least $6 million worth of the

customer’s trades. The Commission believes that such a sample of trading activity would be

large enough to not be misleadingly colored by one-off or infrequent routing choices by the

broker-dealer or order handling requests by the customer. Therefore, such a sample size would

provide the customer with an accurate and reliable depiction of how its broker-dealer generally

handles its not held NMS stock order flow.

132

See Rule 606(b)(5).

The Commission also believes that the customer-level de minimis threshold is set at a

sufficiently low level such that the exception captures customers that do not trade regularly or in

significant quantity and who would not therefore realize the benefits of the rule. Based on the

Commission’s experience and understanding of the frequency and quantities in which various

market participants tend to trade, the Commission believes that this threshold is a relatively low

one for more active traders, including customers that have an interest in evaluating their brokerdealers’ order handling services, but high enough such that the exception will capture customers

that trade infrequently or in small quantities and for whom the detailed Rule 606(b)(3) report

would not be warranted or meaningful. Indeed, customers that trade on average each month for

the prior six months less than $1,000,000 of notional value of not held orders through the brokerdealer are not likely to require the more complex order handling tools offered by the brokerdealer that would warrant or make meaningful a detailed review of the broker-dealer’s order

handling decisions. Even if a customer is sufficiently sophisticated to utilize not held orders and

analyze the Rule 606(b)(3) information, unless the customer submits not held orders to a degree

that generates a meaningful sample of order handling and routing data, the Rule 606(b)(3) report

will not provide a reliable basis for assessing the broker-dealer’s activity.

In addition, as discussed below, 133 part of the reason why the Rule 606(b)(3) information

is provided in the aggregate for all orders sent to each venue, and not on an order-by-order basis,

is to protect broker-dealers from potentially disclosing sensitive or proprietary information

regarding their order handling techniques. If the rule allowed customers to request the

disclosures for discrete not held orders or a de minimis level of not held order flow, there would

be heightened risk that customers could gain insight into the broker-dealer’s order handling

133

See infra Section III.A.6.

techniques by perhaps reverse engineering how the broker-dealer handled a particular order. A

broker-dealer’s internal process for determining how to handle and route individual orders – such

as, for example, the specific routing destinations chosen and the timing for sending child orders –

is typically highly sensitive and proprietary information that broker-dealers guard closely. By

requiring the Rule 606(b)(3) disclosures only for non-de minimis levels of not held trading

activity, the customer-level de minimis exception helps ensure that the aggregated information

provided under Rule 606(b)(3) reflects a robust amount of trading activity from which a

customer is unable to glean this sensitive or proprietary information.

While broker-dealers may, by rule, be excepted from Rule 606(b)(3) due to the firm-level

de minimis exception, or excepted from providing the Rule 606(b)(3) disclosures to certain

customers due to the customer-level de minimis exception, the Commission notes that some

broker-dealers, for business reasons, may choose to provide the new customer-specific order

handling disclosures to their customers regardless of the de minimis exceptions and that

customers below the customer-level de minimis threshold could move their order flow to such

firms.

v. Orders for the Account of a Broker-Dealer

As noted above, the Commission’s proposed definition of institutional order explicitly

excluded orders for the account of a broker-dealer, and such orders were not covered by

proposed Rule 606(b)(3). Consistent with what was proposed, Rule 606(b)(3), as adopted, does

not apply to orders from broker-dealers. Some commenters argued that orders for the account of

a broker-dealer should be included in the order handling reports required under Rule 606 and,

therefore, such orders should not be excluded from the proposed definition of institutional order

in Rule 600(b). 134 The Commission understands these comments to pertain to the proper scope

of a broker-dealer’s reporting obligations under Rule 606(b)(3), and as such they are discussed in

detail in Section III.A.3, infra. As discussed in Section III.A.3, infra, the Commission continues

to believe that the scope of a broker-dealer’s obligation under Rule 606(b)(3) properly does not

extend to orders placed by a broker-dealer.

vi. Rule 606(b)(1)

To incorporate new Rule 606(b)(3) into the existing regulatory structure, the Commission

must make corresponding revisions to Rule 606(b)(1), which is the pre-existing customerspecific order routing disclosure rule. Prior to today, Rule 606(b)(1) did not differentiate

between NMS stock orders from customers submitted on a held or not held basis. As a result,

absent amendment to Rule 606(b)(1), not held orders in NMS stock that are covered by Rule

606(b)(3) also would be covered by Rule 606(b)(1). This is not the Commission’s intent. As

discussed above, the Commission is requiring Rule 606(b)(3) disclosures to be available for not

held NMS stock orders, subject to two de minimis exceptions. For held NMS stock orders, or for

instances when a de minimis exception would except a broker-dealer from providing Rule

606(b)(3) disclosures, the existing disclosure requirements of Rule 606(b)(1) would apply.

The Commission is amending Rule 606(b)(1) to require a broker-dealer, upon customer

request, to provide the disclosures set forth in Rule 606(b)(1) for orders in NMS stock that are

submitted on a held basis, and for orders in NMS stock that are submitted on a not held basis and

for which the broker-dealer is not required to provide the customer a report under Rule

606(b)(3). 135 As a result, any NMS stock order from a customer triggers Rule 606(b) order

134

See Markit Letter at 3 n.6, 18; Dash Letter at 1, 4-5; FIF Letter at 2, 8, 16-17; SIFMA Letter at 1, 3.

135

See Rule 606(b)(1). Rule 606(b)(1) also requires a broker-dealer to provide the disclosures for orders

(whether held or not held) in NMS securities that are option contracts. As explained above (see supra note

handling disclosure requirements. This is consistent with the Commission’s stated intent in the

Proposal for all orders in NMS stock routed by broker-dealers for their customers to be

encompassed by order routing disclosure rules regardless of order size. 136

Because there is no dollar-value threshold in Rule 606(b) as adopted, there are two

categories of NMS stock orders that would have been covered by Rule 606(b)(3) under the

Proposal but instead are covered by Rule 606(b)(1) under the adopted approach. First, a

customer’s held NMS stock order that has a market value of at least $200,000 will be covered by

the Rule 606(b)(1) disclosures (and, as discussed below, the Rule 606(a) public disclosures)

whereas, under the Proposal, such an order would have been covered by the Rule 606(b)(3)

disclosures. 137 As discussed above, 138 because broker-dealers must attempt to execute held NMS

stock orders immediately and have no price or time routing discretion with such orders, the

Commission does not believe that the Rule 606(b)(3) disclosures are appropriate for such orders,

even if they are for $200,000 or more. Indeed, as explained supra and infra, 139 the Commission’s

concerns with respect to broker-dealer handling of held NMS stock orders relate mainly to

financial inducements to attract held order flow from broker-dealers, and those concerns persist

regardless of the size of the held order. Held NMS stock orders of any dollar value should

therefore be covered by disclosures designed to provide more transparency into such financial

83), the Commission is not altering Rule 606(b)’s application to orders for NMS securities that are option

contracts, and so the adopted amendments to Rule 606(b)(1) continue the rule’s prior application to option

contract orders.

136

See Proposing Release, supra note 1, at 49445.

137

Conversely, a customer’s not held order in NMS stock that has a market value less than $200,000 will be

covered by the Rule 606(b)(3) disclosures whereas, under the Proposal, such an order would have been

covered by the Rule 606(b)(1) disclosures (and the Rule 606(a) public disclosures). The Commission

believes this is the proper result for the reasons set forth supra in Section III.A.1.b.

138

See supra Section III.A.1.b.iii.

139

See id.; see also infra Section III.B.1.b.

inducements and the potential conflicts of interest faced by broker-dealers which, as discussed

infra, is what the enhancements to Rule 606(a) in particular are designed to achieve. 140

Second, compared to the Proposal, a not held NMS stock order for at least $200,000 that

is from a customer that does not meet the customer-level de minimis threshold or that the

customer submits to a broker-dealer that qualifies for the firm-level de minimis exception will be

covered by Rule 606(b)(1) whereas, under the Proposal, any not held NMS stock order for at

least $200,000 would have been covered by Rule 606(b)(3). The Commission believes that it is

the appropriate result for Rule 606(b)(3) not to apply to such an order and for Rule 606(b)(1) to

apply instead. As discussed above, 141 the firm-level de minimis exception in Rule 606(b)(4)

targets broker-dealers that mainly handle customer held orders but may occasionally handle a not

held order from one of their customers. The Commission believes that such a broker-dealer

should be entitled to the relief from Rule 606(b)(3) provided by the firm-level de minimis

exception if it receives a large not held NMS stock order, including one that is for $200,000 or

more, yet still does not receive aggregate not held NMS stock order flow that exceeds the firmlevel de minimis threshold.

The Commission believes that, in most cases, a customer that trades in NMS stock order

dollar values of $200,000 or more and is sufficiently sophisticated to utilize not held orders, will

also be sufficiently sophisticated to submit such orders to broker-dealers that are not excepted

from Rule 606(b)(3) by the firm-level de minimis exception, should the customer desire the Rule

606(b)(3) information (and meet or surpass the customer-level de minimis threshold). In

addition, as discussed above, the customer-level de minimis exception targets customers whose

140

See infra Section III.B.1.b.

141

See infra Section III.A.1.b.iv.

trading activity is not substantial enough to provide a sample of data that would accurately and

reliably reflect a broker-dealer’s order handling behavior and make the Rule 606(b)(3)

disclosures meaningful. Thus, should a customer that submits a not held NMS stock order for

$200,000 or more not meet the customer-level de minimis threshold (a scenario that the

Commission believes is unlikely to occur in most cases), the Commission believes that Rule

606(b)(1) is the appropriate recourse for the customer regardless of the dollar value of any of the

customer’s individual orders. If requested, the Rule 606(b)(1) disclosures provide the customer

with information as to the venues to which its orders were routed, whether the orders were

directed or non-directed, and the time of any transactions that resulted from the orders. The

Commission believes that these disclosures provide information that is more meaningful in light

of the overall extent to which the customer trades, and are sufficient to provide a basis for the

customer to engage in further discussions with its broker-dealer regarding the broker-dealer’s

order handling practices.

vii. Definitions of “Directed Order” and “Non-Directed Order”

The Commission is adopting revised definitions of the terms “directed order” 142 and

“non-directed order” 143 under Rule 600(b). These terms are used throughout Rule 606. They are

referenced in Rule 606(a) and Rule 606(b)(1) and, as discussed infra, 144 are referenced in new

Rule 606(b)(3). Therefore, these terms are being defined compatibly with Rule 606 as amended,

which as adopted does not distinguish between NMS stock orders based on order dollar value.

142

A directed order is a customer order that the customer specifically instructed the broker-dealer to route to a

particular venue for execution. See 17 CFR 242.600(b)(19).

143

A non-directed order is any customer order other than a directed order. See 17 CFR 242.600(b)(48).

144

See Section III.A.5.b.

Specifically, Rule 600(b) prior to these amendments defines the terms directed order and

non-directed order in reference to a “customer order,” and the term “customer order” includes a

$200,000 dollar value threshold for NMS stock orders that the Commission is not incorporating

into Rule 606 as amended. Thus, the Commission is removing the reference to “customer order”

from the definitions of “directed order” and “non-directed order” to eliminate the $200,000

dollar-value threshold for NMS stock orders incorporated into those terms. Accordingly, as

amended, the term “directed order” means an order from a customer that the customer

specifically instructed the broker-dealer to route to a particular venue for execution, and the term

“non-directed order” means any order from a customer other than a directed order. 145 By

eliminating the term “customer order” and instead referring to “an order from a customer,” these

amended definitions do not incorporate the dollar value limitations in the definition of the term

“customer order.”

Otherwise, however, the amended definitions of “directed order” and “non-directed

order” are consistent with the pre-existing definitions. While the amended definitions eliminate

the previously existing order dollar value limitation in the cross-referenced term “customer

order,” they maintain the pre-existing definitions’ exclusion of orders from a broker-dealer. In

this regard, the Commission notes that the amended definitions of “directed order” and “nondirected order” continue to incorporate the term “customer,” which is defined in Rule 600(b) as

any person that is not a broker-dealer. 146 Thus, the defined terms “directed order” and “nondirected order,” as amended, apply only to orders that are from a person that is not a brokerdealer.

145

See Rules 600(b)(20) and 600(b)(49).

146

See 17 CFR 242.600(b)(16).

Definition of Actionable Indication of Interest

a. Proposal

To further facilitate the updated order handling disclosure regime, the Commission

proposed to amend Rule 600 to include a definition of “actionable indication of interest.” 147

Specifically, the Commission proposed that, under proposed Rule 600(b)(1) of Regulation NMS,

an actionable IOI be defined as “any indication of interest that explicitly or implicitly conveys all

of the following information with respect to any order available at the venue sending the

indication of interest: (1) symbol; (2) side (buy or sell); (3) a price that is equal to or better than

the national best bid for buy orders and the national best offer for sell orders; and (4) a size that

is at least equal to one round lot.” 148

Final Rule and Response to Comments

The Commission is adopting as proposed the definition of actionable indication of

interest under Rule 600(b)(1) of Regulation NMS. 149 Accordingly, under final Rule 600(b)(1),

actionable IOI means any indication of interest that explicitly or implicitly conveys all of the

following information with respect to any order available at the venue sending the indication of

interest: (1) symbol; (2) side (buy or sell); (3) a price that is equal to or better than the national

147

See proposed Rule 600(b)(1). As the Commission indicated in 2009, an actionable IOI is a privately

transmitted message by certain trading centers, such as an ATS or an internalizing broker-dealer, to

selected market participants to attract immediately executable order flow to such trading centers, and

functions in some respects similarly to a displayed order or a quotation. See Securities Exchange Act

Release No. 60997 (November 13, 2009), 74 FR 61208, 61210 (November 23, 2009) (“Regulation of NonPublic Trading Interest Proposing Release”).

148

See proposed Rule 600(b)(1). See also Proposing Release, supra note 1, at 49445-49447 for additional

detail on the Commission’s proposal. As noted in the Proposing Release, this definition is based on and

substantively similar to the Commission’s description of actionable IOIs in the Regulation of Non-Public

Trading Proposing Release in 2009. See Regulation of Non-Public Trading Interest Proposing Release,

supra note 147.

149

See Rule 600(b)(1).

best bid for buy orders and the national best offer for sell orders; and (4) a size that is at least

equal to one round lot.

By defining actionable IOIs in this manner, the Rule 606(b)(3) order handling reporting

requirements mandate that a broker-dealer disclose its activity communicating to external

liquidity providers for them to send an order to the broker-dealer in response to a not held NMS

stock order of a customer of the broker-dealer. The Commission continues to believe that

including these disclosures relating to actionable IOI activity in the Rule 606(b)(3) order

handling reports would better enable customers to understand and evaluate how broker-dealers

handle their orders, in particular with respect to the potential for information leakage stemming

from broker-dealers’ use of actionable IOIs. The Commission also continues to believe that the

definition of actionable IOI is appropriately designed to capture trading interest that is the

functional equivalent to an order or quotation.

Commenters generally supported the creation of a definition of actionable IOI in Rule

600(b), but some commenters expressed concerns about and suggested revisions to the

Commission’s proposed definition. 150 One of the main concerns was that it was not sufficiently

clear from the Proposal what it means for an IOI to be “actionable.” 151 In this regard, some

commenters suggested that the proposed definition could be read to capture conditional orders or

150

See, e.g., Fidelity Letter at 3-4; FIF Letter at 7; Bloomberg Letter at 13-15; SIFMA Letter at 6.

151

See, e.g., FSR Letter at 2, 6-7; Bloomberg Letter at 13-14; FIF Letter at 7; HMA Letter at 10. One of these

commenters stated that broker-dealer order routers respond to IOIs but do not send them, and that the

inclusion of IOIs in the Proposal appeared out of context with order routing transparency. See Bloomberg

Letter at 13. This is not consistent with the Commission’s understanding, which, as noted in the Proposing

Release, is that broker-dealers may send an actionable IOI to select external liquidity providers to

communicate to send orders to the broker-dealer to trade with the order that is represented by the actionable

IOI at the broker-dealer. See Proposing Release, supra note 1, at 49453; see also Section III.A.6.a, infra.

IOIs that require additional negotiation or “firming up” to be executable by the broker-dealer, 152

and several commenters asserted that such conditional trading interest is distinguishable from an

actionable IOI and therefore should be excluded from the definition of actionable IOI and the

disclosures required by Rule 606. 153

As stated above and in the Proposing Release, for an IOI to be actionable it must convey

(explicitly or implicitly) information sufficient to attract immediately executable orders to the

venue sending the indication of interest. 154 In addition, Rule 3b-16 defines an order as any firm

indication of a willingness to buy or sell a security, as either principal or agent, including any bid

or offer quotation, market order, limit order, or other priced order. 155 When the Commission

adopted Rule 3b-16 in connection with the adoption of Regulation ATS, the Commission stated:

Whether or not an indication of interest is ‘firm’ will depend on what actually

takes place between the buyer and seller…. At a minimum, an indication of

interest will be considered firm if it can be executed without further agreement of

the person entering the indication. Even if the person must give its subsequent

assent to an execution, however, the indication will still be considered firm if this

subsequent agreement is always, or almost always, granted so that the agreement

is largely a formality. For instance, indications of interest where there is a clear

prevailing presumption that a trade will take place at the indicated price, based on

understandings or past dealings, will be viewed as orders. 156

152

See FSR Letter at 2, 6-7; Fidelity Letter at 4; Letter from Timothy J. Mahoney, Chief Executive Officer,

BIDS Trading L.P., dated October 7, 2016 (“BIDS Letter”).

153

See Markit Letter at 4, 12-13; Bloomberg Letter at 14; BIDS Letter; SIFMA Letter at 6; EMSAC Rule 606

Recommendations, supra note 16, at 3. One commenter stated that, absent clarification, the Proposing

Release’s definition of actionable IOIs would be inconsistent with the Commission’s published

understanding of conditional orders in the ATS-N Proposing Release. See BIDS Letter at 4. The

clarification, set forth below, of the difference between actionable IOIs versus IOIs or conditional orders

that require additional agreement of the broker-dealer responsible for the IOI or conditional order before an

execution can take place is consistent with what is stated in the ATS-N Adopting Release. See ATS-N

Adopting Release, supra note 2, at 38847-38848.

154

See Proposing Release, supra note 1, at 49446.

155

See 17 CFR 240.3b-16.

156

See Securities Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844, 70850 (December 22,

1998).

The Commission believes that this language is instructive here in light of the

Commission’s intention for the definition of actionable IOIs to apply to IOIs that are the

functional equivalent of orders or quotations, i.e., firm representations of trading interest.

Specifically, the Commission intends that the actionable IOI definition would include, at a

minimum, an IOI that represents an order that can be executed against by the IOI recipient

without further agreement of the broker-dealer that communicated the IOI. Moreover,

indications of interest where the agreement of the parties to the terms of a trade is presumed from

the facts or circumstances, such as past dealings or a course of conduct between the parties, may

also be considered actionable IOIs. Indeed, in the context of dark pools, the Commission has

previously noted that IOIs may communicate information explicitly or implicitly, such as

through a course of conduct, based on which the recipient of the IOI can reasonably conclude

that sending a contra-side marketable order responding to the IOI will result in an execution if

the trading interest has not already been executed against or cancelled. 157 The Commission

believes that, generally, it would consider an IOI from a broker-dealer to be actionable if it fits

this description, i.e., if the IOI recipient can reasonably conclude that sending a contra-side

marketable order to the broker-dealer will result in an execution against trading interest

represented by the IOI that has not already been executed against or cancelled.

So-called “conditional” orders referenced by several commenters would not, therefore,

constitute actionable IOIs if they require additional agreement by the broker-dealer responsible

for the conditional order before an execution can occur, unless facts or circumstances suggest

that the broker-dealer’s agreement can be presumed. The Commission believes that IOIs that do

not enable the IOI recipient to send a marketable order to the IOI sender that is executable

157

See Regulation of Non-Public Trading Interest Proposing Release, supra note 147, at 61211.

against the interest represented by the IOI without further agreement by the IOI sender may not

function equivalently to orders or quotations and therefore do not represent the sort of order

handling activity that the Rule 606(b)(3) order handling reports are meant to capture.

Moreover, as noted in the Proposal, actionable IOIs have the capacity to communicate

information about the existence of a large parent order, and as such their usage, like other

components of broker-dealers’ order handling and routing practices, creates the potential for

information leakage. 158 The Commission believes that disclosing in the Rule 606(b)(3) order

handling reports information regarding a broker-dealer’s use of actionable IOIs could help enable

its customers to assess the degree to which the trading interest they route to the broker-dealer is

subject to potential information leakage. By contrast, the Commission does not believe that this

same utility would exist if non-actionable IOIs (those that are not executable without further

agreement) were to be included in the customer-specific order handling reports, as the

Commission does not understand such non-actionable IOIs to present the same risk of

information leakage as actionable IOIs.

In addition, the Commission continues to believe that the four elements contained in the

definition of actionable IOI (symbol, side, price, and size) are all necessary pieces of information

for an external liquidity provider to respond with an order that is immediately executable against

trading interest of a customer of the broker-dealer responsible for the IOI. The Commission

emphasizes that these pieces of information may be implicitly conveyed, such as via a course of

dealing between the IOI sender and the recipient. For example, given that Rule 611 of

Regulation NMS generally prevents trading centers from executing orders at prices inferior to

the NBBO, if a broker-dealer sends an IOI communicating an interest to buy a specific NMS

158

See Proposing Release, supra note 1, at 49446.

stock, the IOI recipient reasonably can assume that the associated price is the NBBO or better. 159

Moreover, the IOI recipient may have responded previously with orders to the IOI sender and

repeatedly received executions at the NBBO or better with a size of at least one round lot. 160 In

this example, the IOI communicated by the broker-dealer would be actionable, with explicit

conveyance of the symbol and side elements and implicit conveyance of the price and size

elements. Indeed, the Commission understands that IOIs are frequently conveyed with explicit

side and symbol terms and implicit price and size terms, and can be executed against by the IOI

recipient without further agreement of the IOI sender.

One commenter stated that, for the purpose of routing brokers determining whether to

send an order to a non-displayed venue, an IOI should have, at a minimum, a symbol. 161

Another commenter stated that, at a minimum, symbol and side (buy or sell) must be included

with an IOI in order for it to be an actionable IOI, and that size or price do not need to be

explicitly included. 162 While these comments may suggest that an IOI could still be actionable

with less than the four noted elements in the definition, the Commission believes that, without

the inclusion of all four elements (symbol, side, price, and size) explicitly or implicitly with the

IOI, the IOI recipient could require additional information before executing against the IOI and

the IOI therefore may not be actionable. To the extent these comments suggest that one or more

of the four noted elements of an actionable IOI may be implicitly conveyed, as noted above, the

Commission agrees. One commenter stated that the Commission has captured all the necessary

elements for the actionable IOI definition, but that the definitions of two of the elements —

159

See Regulation of Non-Public Trading Interest Proposing Release, supra note 147, at 61211.

160

See id.

161

See Markit Letter at 15.

162

See Letter from Elizabeth K. King, General Counsel and Corporate Secretary, NYSE Group, dated October

31, 2016 (“NYSE Letter”) at 2.

quantity and price — should be expanded to include relative measures in addition to absolute

measures. 163 The Commission notes in response that if each of the four elements is

communicated — explicitly or implicitly — such that the IOI recipient can respond to the IOI

with an order that is executable against trading interest represented by the IOI without further

agreement by the IOI sender (taking into account the relevant facts and circumstances, including

any course of dealing between the parties), that communication would constitute an actionable

IOI under the definition in Rule 600(b)(1).

The Commission does not believe that it is necessary for purposes of the definition of

actionable IOI to draw a distinction between IOIs that are communicated manually (such as via

the telephone, for example) versus IOIs that are communicated electronically. Some

commenters drew such a distinction, and suggested that only IOIs that are communicated and

accessible electronically should constitute actionable IOIs under Rule 600(b)(1). 164 The

Commission believes that whether an IOI is actionable should not turn on the level of automation

involved in the communication of the IOI. Once an IOI is communicated by a broker-dealer to

the IOI recipient, regardless of whether the communication is manual (such as via telephone) or

electronic, if that IOI recipient can respond to the IOI with an order that is executable against the

trading interest represented by the IOI without further agreement by the broker-dealer

responsible for the IOI, then the IOI should be considered an actionable IOI under Rule

600(b)(1). An actionable IOI has the potential to leak information as to the existence of an order

regardless of whether the actionable IOI is transmitted electronically or manually. Thus, order

handling statistics regarding both electronic and manual actionable IOIs could be valuable to

163

See Capital Group Letter at 3-4.

164

See Bloomberg Letter at 13-15; FIF Letter at 7; FIF Addendum at 4 n.7; Fidelity Letter at 4; SIFMA Letter

at 6.

customers in evaluating the order routing practices of their broker-dealers and the degree to

which those practices may leak information regarding their not held NMS stock orders.

One commenter urged the Commission to follow the commenter’s characterization of

how IOIs were described in the Regulation of Non-Public Trading Interest Proposing Release by

targeting IOIs sent by venues such as ATSs, and to consider whether other market participants

that send IOIs, such as exchanges, should be included within the scope of the rule. 165 The

purpose of the Regulation of Non-Public Trading Interest Proposing Release, however, was

different from the Commission’s purposes here in adopting the definition of actionable IOI for

the new customer-specific order handling reports. There, due to the Commission’s concern

about potentially deleterious effects of dark pools’ transmission to selected market participants,

and not the public broadly via the consolidated quotation data, of valuable pricing information in

the form of actionable IOIs that function similarly to quotations, the Commission proposed to

amend the Exchange Act quoting requirements in Rule 602 of Regulation NMS and Rule

301(b)(3) of Regulation ATS to apply expressly to actionable IOIs. 166 Here, by contrast, the

Commission’s purpose is to require broker-dealers to provide order handling and routing

information that is sufficient for their customers to understand the methods their broker-dealers

use to carry out their best execution obligations and assess the potential impact of information

leakage and conflicts of interest, not to provide public access to comprehensive pricing

information or encourage the public display of quotations. The Commission believes that the

definition of actionable IOI being adopted today is appropriately tailored to serve the purpose of

165

See Bloomberg Letter at 13-15; see also Regulation of Non-Public Trading Interest Proposing Release,

supra note 147.

166

See Regulation of Non-Public Trading Proposing Release, supra note 147, at 61211-12.

this rulemaking, and that the concerns it expressed in the Regulation of Non-Public Trading

Proposing Release are outside the scope of this rulemaking.

For similar reasons, the Commission is not excluding from the definition of actionable

IOI in Rule 600(b)(1) an IOI for a quantity of NMS stock having a market value of at least

$200,000 that is communicated only to those who are reasonably believed to represent current

contra-side trading interest of at least $200,000, as suggested by one commenter. 167 The

Commission likewise is not requiring broker-dealers to disclose in the publicly available reports

the percentage of orders that were exposed through so-called “size-discovery IOIs,” as suggested

by another commenter. 168 These commenters noted that the Regulation of Non-Public Trading

Proposing Release proposed to exclude such “size-discovery IOIs” from the rule amendments

proposed therein, 169 but the Commission again notes that the purpose of the Commission’s

actions here is different from what it was in the Regulation of Non-Public Trading Proposing

Release. There, the Commission recognized that the benefits of certain size-discovery

mechanisms could be undermined if their narrowly tailored IOIs for large size were required to

be included in the public quotation data. 170 Here, by contrast, the Commission is not requiring

that actionable IOIs be included in public quotation data, and thus the Commission does not

believe that the same concern is implicated.

Finally, in response to commenters who requested clarification as to whether rules,

regulations, and guidance applicable to quotes or orders would be applicable to actionable IOIs

167

See Bloomberg Letter at 14-15.

168

See NYSE Letter at 1-2.

169

See Bloomberg Letter at 14; NYSE Letter at 2.

170

See id. at 61213.

under the final rule, 171 the Commission is defining actionable IOIs at this time for purposes of

the Rule 606 amendments also being adopted today. The Commission is not expanding the

scope of existing rules, regulations, or guidance related to orders or quotations, other than Rule

606 and guidance related thereto, with regard to actionable IOIs.

Scope of Broker-Dealer’s Obligation Under Rule 606(b)(3)

a. Broker-Dealer Required to Provide Report on its Order Handling

to Customer Placing Order with the Broker-Dealer

i. Proposal

The Commission proposed in Rule 606(b)(3) that every broker-dealer shall, on request of

a customer that places, directly or indirectly, an institutional order with the broker-dealer,

disclose to such customer a report on its handling of institutional orders for that customer. 172

The Commission noted in the Proposal that, pursuant to this rule language, a broker-dealer would

be required to provide the order handling report to the customer placing the institutional order

with the broker-dealer, even if the customer is acting on behalf of others and is not the ultimate

beneficiary of any resulting transactions. 173 Thus, the broker-dealer would not be required to

provide the order handling report to the underlying clients of that customer.

The Commission also noted that the proposed report would cover instances where an

institutional order is handled either directly by the broker-dealer or indirectly through systems

provided by the broker-dealer. 174 By way of example, the Commission stated that an

institutional order would have been placed with a broker-dealer if a broker-dealer receives an

institutional order directly from a customer and works to execute the order itself, as well as if a

171

See Fidelity Letter at 4; SIFMA Letter at 6.

172

See proposed Rule 606(b)(3).

173

See Proposing Release, supra note 1, at 49448.

174

See id. at 49447.

broker-dealer receives an institutional order indirectly from a customer, where the customer selfdirects its institutional order by entering it into a routing system or execution algorithm provided

by the broker-dealer. 175

Further, the Commission did not propose to change the existing definition of customer in

Rule 600(b), which states that “customer” means any person that is not a broker-dealer. 176 In

utilizing this defined term, proposed Rule 606(b)(3) therefore required a broker-dealer to provide

the customer-specific institutional order handling report only to a non-broker-dealer. 177

ii. Final Rule and Response to Comments

Notwithstanding that Rule 606(b)(3) is modified from what was proposed such that the

adopted rule covers not held NMS stock orders of any dollar value (subject to the two de

minimis exceptions), the person or entity to which the broker-dealer must provide the Rule

606(b)(3) report is the same as under the Proposal. Specifically, under Rule 606(b)(3), every

broker-dealer must, on request of a customer that places, directly or indirectly, one or more

orders in NMS stock that are submitted on a not held basis with the broker-dealer, disclose to

such customer a report on its handling of such orders for that customer. In other words, the

broker-dealer must provide the Rule 606(b)(3) report to the customer that places with the brokerdealer the orders covered by Rule 606(b)(3), even if the customer is acting on behalf of others

and is not the ultimate beneficiary of any resulting transactions. In addition, broker-dealers

remain excluded from the definition of “customer” in Rule 600(b), and that exclusion is

maintained for purposes of Rule 606(b)(3), which cross-references the defined term “customer.”

175

See id.

176

See 17 CFR 242.600(b)(16).

177

See Proposing Release, supra note 1, at 49447-48 for additional detail on the Commission’s proposal.

As a result, under Rule 606(b)(3) as adopted, a broker-dealer is required to provide the report

only to non-broker-dealers.

For the same reasons as stated in the Proposal, the Commission continues to believe that

a broker-dealer should be required to provide the customer-specific order handling report to the

customer that places the order with the broker-dealer, even if that customer may be acting on

behalf of others and is not the ultimate beneficiary of any resulting transactions, such as when an

investment adviser, as the customer of a broker-dealer, places an order with the broker-dealer

that represents the trading interest of clients of the investment adviser. 178 Multiple commenters

supported this delineation of Rule 606(b)(3)’s scope. 179 In addition, the Rule 606(b)(3) report

requirement covers instances where an order is handled either directly by the broker-dealer or

indirectly through systems provided by the broker-dealer. The Commission continues to believe

that requiring the reports to be provided to the customer that places the order with the brokerdealer – whether the customer is the account holder or an investment adviser or other fiduciary –

is appropriate because it would require the broker-dealer to provide detailed information to the

person that is responsible for making the routing and execution decisions for such order and for

assuring the effectiveness of those functions. Despite one commenter’s assertion that an

investment adviser’s underlying client also should be entitled to receive the Rule 606(b)(3)

report from the adviser’s broker-dealer, 180 the Commission does not believe it is appropriate to

require a broker-dealer to create individualized order handling reports for and make its execution

data available to an end user with whom the broker-dealer may have no direct relationship.

178

As discussed infra in this section, a broker-dealer is required to report to the customer that places the order

with the broker-dealer so long as the customer is not itself a broker-dealer.

179

See Markit Letter at 16, 18; Bloomberg Letter at 16; Capital Group Letter at 4; FIF Letter at 7-8, 16;

EMSAC Rule 606 Recommendations, supra note 16, at 3.

180

See Better Markets Letter at 7-8.

One commenter stated that an account-level report should not be required because

accounts often are assigned after the order is entered via an allocation process that is different

from the system that handles routing, and thus it would be costly. 181 This commenter also stated

it would require brokers, when using a third party to generate the reports, to transmit client

account numbers, which are more sensitive and confidential than the name of the institutional

manager. 182 This commenter also stated, however, that reporting information in the aggregate

should prevent any secret routing strategies from being divulged. 183 In addition, another

commenter stated it did not believe that customers will able to reverse engineer the way a smart

order router works or discern any other proprietary information about the broker’s technology or

order handling techniques from the proposed disclosure information. 184

Consistent with these comments, the Commission continues to believe that, because the

Rule 606(b)(3) customer-specific order handling disclosures will aggregate information to be

disclosed to a specific customer across all of the customer’s not held NMS stock orders, the risk

that such disclosures would reveal sensitive, proprietary information about broker-dealers’ order

handling techniques should be minimal. The customer-level de minimis exception from Rule

606(b)(3) also is relevant in this regard, as it should help ensure that there is a significant level of

trading activity reflected in the aggregated information provided to the customer under Rule

606(b)(3), and not information regarding just one or a few orders from which the customer may

be able to discern aspects of the broker-dealer’s sensitive or proprietary order handling

techniques. A broker-dealer’s sensitivity lies with its methods for determining how, where, and

181

See Markit Letter at 16, 19-20.

182

See id.

183

See id. at 19.

184

See Capital Group Letter at 5.

when to route a specific, individual order. By providing information for all of the customer’s

orders in the aggregate, the report conceals a broker-dealer’s proprietary determinations with

respect to any specific, individual order. Even if the report reflected that the broker-dealer sent a

small number of orders to a particular venue, the report would not reveal why the broker-dealer

chose that particular venue, when the broker-dealer routed the orders to that venue, what market

signals informed the broker-dealer’s choices as to venue and timing, or what type of routing

strategy the broker-dealer utilized. As to one commenter’s assertion that account-level

disclosure would require broker-dealers that use third-parties to generate the Rule 606(b)(3)

report to disclose sensitive client account numbers to such third-parties, the Commission is not

adopting any requirement that the Rule 606(b)(3) disclosures be provided at the client account

level, and thus nothing in Rule 606(b)(3) compels a broker-dealer to disclose client account

numbers to third-parties.

The Commission further notes that, because it is not altering the broker-dealer exclusion

from the definition of customer, and because Rule 606(b)(3) utilizes this defined term, the rule

does not require a broker-dealer to report to another broker-dealer. This is consistent with what

was proposed and with the order routing disclosure regime that has existed under Rules 606(a)

and 606(b)(1). 185

Some commenters argued that the broker-dealer exclusion should be eliminated because

a broker-dealer should be required, under Rule 606(b)(3), to report to the customer that places

the order with the broker-dealer even if that customer is itself a broker-dealer. 186 Two

commenters stated that, absent a modification to the Proposal, the Rule 606 report received by

185

The Commission did not propose to modify the definition of “customer” in Rule 600(b)(16), which defines

“customer to mean any person that is not a broker or dealer.” See Rule 600(b)(16).

186

See Markit Letter at 3 n.6, 18; Dash Letter at 1, 4-5; FIF Letter at 2, 8, 16-17; SIFMA Letter at 1, 3.

the end-customer of a broker-dealer that utilizes another broker-dealer’s technology for

execution would reflect only that the customer’s orders were sent by its broker-dealer to the

other executing broker-dealer, and lack the level of detail that is necessary for the customer to

assess execution quality. 187 Another commenter suggested that the Rule 606 reports exclude

only those orders received from other broker-dealers and foreign banks acting as broker-dealers

and routing to U.S. execution venues that were directed by such broker-dealers and foreign banks

acting as broker-dealers to a particular execution venue. 188

On the other hand, one commenter asserted that, in a “white-labeling” or leveraged

outsourced technology arrangement, where a broker that receives an order from an institutional

customer outsources another broker’s smart order routing or algorithmic trading technology, the

broker that received the order should be evaluating the effectiveness of the outsourced

technology and should fulfill the obligation of being able to provide clients’ reports on

request. 189 Another commenter asserted that the Proposal is unclear as to whether a brokerdealer that provides algorithmic trading services would be required to provide an order handling

report to a broker-dealer that utilizes those algorithmic trading services in the course of executing

orders on behalf of institutional customers. 190

In response to these comments, as an initial matter, it is worth highlighting that Rule

606(b)(3) requires a broker-dealer, upon request of a customer that places not held NMS stocks

order with the broker-dealer, to disclose to such customer a report with respect to its — i.e., the

broker-dealer’s — handling of such orders for that customer. As such, Rule 606(b)(3) is

187

See Dash Letter at 5; FIF Letter at 8 n. 9, 16-17.

188

See Markit Letter at 3 n.6.

189

See Bloomberg Letter at 16.

190

See STA Letter at 4-5; STA Letter II at 1.

designed to require a broker-dealer to disclose the information required by Rule 606(b)(3) to the

extent of its involvement in routing and executing its customers’ orders. If the broker-dealer

exercises discretion with regard to how an order is routed and ultimately executed, such as (but

not limited to) by determining particular venue destinations for an order, choosing among

different trading algorithms, adjusting or customizing algorithm parameters, or performing other

similar tasks involving its own judgment as to how and where to route and execute orders, the

broker-dealer is required to provide the information required by Rule 606(b)(3) with regard to

the customer’s order flow with the broker-dealer as well as the order routing and execution

information set forth in subparagraphs (b)(3)(i) through (iv) of the rule. If, by contrast, the

broker-dealer simply forwards its customers’ orders on to another broker-dealer and that second

broker-dealer exercises all discretion in determining where and how to route and execute the

orders, then the first broker-dealer is not required to provide disclosures under Rule 606(b)(3)

beyond those relevant to its activity in forwarding orders to the executing broker. In either case,

the broker-dealer reports the required information under Rule 606(b)(3) with respect to its order

handling for a customer.

This language from the rule informs the scope of a broker-dealer’s obligation in the types

of scenarios that commenters raised. As noted by some commenters, broker-dealers sometimes

license or outsource technology offerings, such as trading algorithms, from third-parties,

including other broker-dealers, to use for routing and executing orders. In these so-called

“white-labeling” scenarios, the broker-dealer typically exercises discretion in determining what

trading algorithm or other technology offering to utilize on behalf of its customer, as well as how

to handle the customer’s orders using that technology. For example, the broker-dealer may be

able to adjust discretionary parameters that determine the aggressiveness of a particular

algorithm, 191 otherwise determine where or how an order is routed and executed using the

algorithm or other technology, or determine when the algorithm is turned “on” or “off.” In this

type of scenario, it is the broker-dealer utilizing the trading algorithm or other technology

offering — and not the third-party provider of such algorithm or other technology — that

handles the customer’s order and that is obligated to provide the information required by Rule

606(b)(3). The broker-dealer’s obligation in this scenario extends to the routing and execution of

child orders that, for example, the trading algorithm may have placed after being “turned on” by

the broker-dealer. 192

The Commission understands that broker-dealers typically have access or rights to the

execution data for trades made using algorithms or other technology that they license or

outsource. As such, the Commission believes that most broker-dealers should be well-positioned

to provide the Rule 606(b)(3) information to their customers for orders (or child orders thereof)

that they routed or executed using a trading algorithm or other type of technology offering.

Ultimately, however, when relying on third-party technology in this manner, broker-dealers will

need to ensure that they can provide the information required by Rule 606(b)(3), should it be

requested by a customer. Further, consistent with the exclusion of broker-dealers from the

definition of customer, broker-dealers are required to report the Rule 606(b)(3) information only

to non-broker-dealers.

In another type of arrangement raised by commenters, one broker-dealer, sometimes

referred to as an introducing broker-dealer, will route an order on behalf of its customer to

another broker-dealer, sometimes referred to as an executing broker-dealer, and the executing

191

See, e.g., Markit Letter at 20; FIF Letter at 6.

192

See infra Section III.A.3.b.

broker-dealer will carry out the further routing and ultimate execution of the order, perhaps

utilizing trading algorithms or other technology. In this type of scenario, the executing brokerdealer’s customer is the introducing broker-dealer because it is the introducing broker-dealer that

places the order with the executing broker-dealer. Since, as discussed above, a broker-dealer is

required to report only to the customer that places the order with the broker-dealer, in the

introducing-broker-dealer/executing-broker-dealer arrangement, the executing broker-dealer is

not required to report the Rule 606(b)(3) information to the introducing broker-dealer’s

customer. Moreover, Rule 606(b)(3) does not require the executing broker-dealer to report to the

introducing broker-dealer in light of the broker-dealer exclusion from the definition of customer.

As noted above, some commenters argued that a different result would be appropriate

under the rule; specifically, they argued that broker-dealers should be required to provide the

Rule 606(b)(3) reports for broker-dealer orders. 193 The Commission intends, however, for Rule

606(b)(3) to be focused on the relationship between a customer (that is not a broker-dealer) and

its broker-dealer, and the information that the customer receives from its broker-dealer with

respect to how the broker-dealer handles the customer’s not held NMS stock orders. Rule

606(b)(3) is designed to provide a customer with access to baseline information that would

enable the customer to assess the nature and quality of services provided by its broker-dealer

with respect to such orders, as many customers may not have the sophistication or leverage

necessary to receive adequate information in the absence of a rule. The Commission does not

believe that broker-dealer to broker-dealer relationships carry the same level of risk of an

imbalance of information or sophistication on one side of the relationship as compared to

customer to broker-dealer relationships. Therefore, the Commission has determined not to

193

See supra note 186.

depart from the current practice under Rule 606 by including broker-dealer orders in Rule

606(b)(3).

For similar reasons, the Commission believes it is appropriate for the Rule 606(b)(3)

requirements not to extend to orders handled by exchange-affiliated routing brokers, which are

also excluded from Rule 606(b)(3)’s coverage by virtue of the broker-dealer exclusion from the

definition of customer. Three commenters suggested that requiring the Rule 606(b)(3)

disclosures for orders handled by exchange-affiliated routing brokers would provide market

participants with a more complete picture as to how their orders are handled. 194 But since only

broker-dealers can be members of an exchange, by the time an order reaches an exchangeaffiliated routing broker, it first has traveled from the end customer to a broker-dealer, from a

broker-dealer to the exchange (or perhaps from an end customer through a broker-dealer’s

systems via a market access arrangement and onto an exchange), and then from the exchange to

the exchange’s affiliated routing broker. Like an executing broker-dealer, an exchange-affiliated

routing broker has no direct relationship with the customer that sent the order in the first place.

Thus, the Commission does not believe that it would be appropriate to require an exchangeaffiliated routing broker to provide the Rule 606(b)(3) information to the customer from whom

the order originated. As noted above, the Commission’s goal is for Rule 606(b)(3) to provide

non-broker-dealer customers with access to baseline information that would enable them to

assess the d

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.