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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 242

[Release No. 34-99679; File No. S7-29-22]

RIN 3235-AN22

Disclosure of Order Execution Information

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

amendments to a rule under the Securities Exchange Act of 1934 (“Exchange Act”) that requires

disclosures for order executions in national market system (“NMS”) stocks. First, the

amendments expand the scope of reporting entities subject to the preexisting rule that requires

market centers to make available to the public monthly execution quality reports to encompass

broker-dealers with a larger number of customers. Next, the amendments modify the definition

of “covered order” to include certain orders submitted outside of regular trading hours and

certain orders submitted with stop prices. In addition, the amendments modify the information

required to be reported under the rule, including changing how orders are categorized by order

size as well as how they are categorized by order type. The amendments, as part of the changes

to the order size categories, modify the rule to capture execution quality information for

fractional share orders, odd-lot orders, and larger-sized orders. Additionally, the amendments

modify reporting requirements for non-marketable limit orders (“NMLOs”) in order to capture

more relevant execution quality information for these orders by requiring statistics to be reported

from the time such orders become executable. The amendments modify time-to-execution

categories and require average time to execution to be measured in increments of a millisecond

or finer and calculated on a share-weighted basis for all orders. The amendments require that the

time of order receipt and time of order execution be measured in increments of a millisecond or

finer, and that realized spread be calculated at multiple time intervals. Finally, the amendments

enhance the accessibility of the reported execution quality statistics by requiring all reporting

entities to make a summary report available.

DATES: Effective date: The final rules are effective June 14, 2024.

Compliance date: See section VII, titled “Transition Matters,” for further information on

transitioning to the final rules.

FOR FURTHER INFORMATION CONTACT: Kathleen Gross, Senior Special Counsel,

Lauren Yates, Senior Special Counsel, Susie Cho, Special Counsel, Christopher Chow, Special

Counsel, David Michehl, Special Counsel, or Laura Harper Powell, Special Counsel at (202)

551-5500, Division of Trading and Markets, Commission, 100 F Street NE, Washington, DC

20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to 17 CFR

242.600 (“Rule 600”) to add new defined terms to and modify certain existing defined terms in

Rule 600 that are used in 17 CFR 242.605 (“Rule 605”) as amended, as well as amendments to

Rule 605; and to make conforming amendments to defined terms in 17 CFR 242.602, 242.611,

and 242.614; and conforming amendments to defined terms in 17 CFR 240.3a51-1, 240.13h-1,

242.105, 242.201, 242.204, and 242.1000.

Table of Contents

II.

Introduction and Background .......................................................................................... 4

Overview of Need for Rule Modernization ..................................................................... 7

Overview of the Proposal and Comments Received...................................................... 15

Overview of Final Rule 605 ........................................................................................... 21

Modifications to Reporting Entities ............................................................................... 24

Larger Broker-Dealers ................................................................................................... 24

1. Proposed Approach ........................................................................................................ 24

2. Final Rule and Discussion .............................................................................................. 28

Qualified Auction Mechanisms ..................................................................................... 51

1. Proposed Approach ........................................................................................................ 51

2. Final Rule and Discussion .............................................................................................. 52

NMS Stock ATSs and SDPs .......................................................................................... 53

1. Proposed Approach ........................................................................................................ 53

2. Final Rule and Discussion .............................................................................................. 54

III.

Modifications to Scope of Orders Covered and Required Information ......................... 62

Covered Order ................................................................................................................ 62

Orders Submitted Pre-Opening/Post-Closing ................................................................ 63

Stop Orders..................................................................................................................... 71

Non-Exempt Short Sale Orders ...................................................................................... 81

Required Information ..................................................................................................... 83

Categorization by Order Size ......................................................................................... 83

Categorization by Order Type ...................................................................................... 104

Timestamp Conventions and Time-to-Execution Statistics ......................................... 116

Execution Quality Statistics ......................................................................................... 128

IV.

Summary Execution Quality Report ............................................................................ 180

Proposed Approach ...................................................................................................... 181

Final Rule and Discussion ........................................................................................... 182

1. Required Information ................................................................................................... 188

2. Required Format ........................................................................................................... 205

3. Investor Testing and Education .................................................................................... 207

Requirements for Making Rule 605 Reports Available to the Public ......................... 210

Proposed Approach ...................................................................................................... 210

Final Rule and Discussion ........................................................................................... 211

1. Accessibility of Rule 605 Reports ................................................................................ 211

2. Alternatives to Rule 605 Proposal ................................................................................ 215

VI.

Existing Commission Exemptive Relief and Staff Statements .................................... 221

VII.

Transition Matters ........................................................................................................ 223

VIII.

Paperwork Reduction Act ............................................................................................ 229

Summary of Collection of Information........................................................................ 230

Proposed Use of Information ....................................................................................... 231

Respondents ................................................................................................................. 231

Total PRA Burdens ...................................................................................................... 232

IX.

Economic Analysis ...................................................................................................... 241

Introduction .................................................................................................................. 241

Market Failure .............................................................................................................. 242

Baseline ........................................................................................................................ 248

Regulatory Baseline ..................................................................................................... 249

Use of Reports under Rule 605 Prior to Rule Amendments ........................................ 264

Disclosure Requirements under Preexisting Rule 605 ................................................. 276

Markets for Brokerage and Trading Services for NMS Stocks under Preexisting Rule

605 Disclosure Requirements ...................................................................................... 338

Economic Effects ......................................................................................................... 349

Benefits......................................................................................................................... 350

Costs ............................................................................................................................. 440

Economic Effects on Efficiency, Competition, and Capital Formation ....................... 471

Reasonable Alternatives............................................................................................... 475

Reasonable Alternative Modifications to Reporting Entities ....................................... 475

Reasonable Alternative Modifications to Scope of Covered Orders ........................... 484

Reasonable Alternative Modifications to Required Information ................................. 493

Reasonable Alternative Modifications to Accessibility ............................................... 514

Other Reasonable Alternatives ..................................................................................... 522

Regulatory Flexibility Act Certification ...................................................................... 524

XI.

Other Matters ............................................................................................................... 526

Statutory Authority ..................................................................................................................... 526

Introduction and Background

On December 14, 2022, the Commission proposed amendments to Rule 605 under

Regulation National Market System (17 CFR 242.600 through 242.614) (“Regulation NMS”) to

update the disclosure of order execution quality statistics in national market system (“NMS”)

stocks.1 Rule 605, formerly known as Rule 11Ac1-5, was adopted in 20002 and requires market

See Securities Exchange Act Release No. 96493 (Dec. 14, 2022), 88 FR 3786 (Jan. 20, 2023) (“Proposing

Release”).

See Securities Exchange Act Release No. 43590 (Nov. 17, 2000), 65 FR 75414 at 75416 (Dec. 1, 2000)

(Disclosure of Order Execution and Routing Practices) (“Rule 11Ac1-5 Adopting Release”). Along with

Rule 11Ac1-5, the Commission also adopted Rule 11Ac1-6 as part of the Rule 11Ac1-5 Adopting Release.

See 17 CFR 242.606 (“Rule 606”). When the Commission later adopted Regulation NMS in 2005, Rule

11Ac1-5 was re-designated as Rule 605, and Rule 11Ac1-6 was re-designated as Rule 606. See Securities

Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005) (“Regulation NMS

Adopting Release”). Rule 606 requires the public disclosure of order routing practices and was amended in

2018. See Securities Exchange Act Release No. 84528 (Nov. 2, 2018), 83 FR 58338 (Nov. 19, 2018)

(“2018 Rule 606 Amendments Release”).

centers3 to make available standardized monthly reports of statistical information concerning

covered orders4 in NMS stocks5 that they received for execution.6 Prior to these amendments, the

Rule 605 report contained a number of execution quality metrics for covered orders.7 The

Regulation NMS defines the term “market center” to mean any exchange market maker, over-the-counter

(“OTC”) market maker, alternative trading system (“ATS”), national securities exchange, or national

securities association. See final 17 CFR 242.600(b)(55). “Exchange market maker” means any member of a

national securities exchange that is registered as a specialist or market maker pursuant to the rules of such

exchange. See final 17 CFR 242.600(b)(37). “OTC market maker” means any dealer that holds itself out as

being willing to buy from and sell to its customers, or others, in the United States, an NMS stock for its

own account on a regular or continuous basis otherwise than on a national securities exchange in amounts

of less than a block size. See final 17 CFR 242.600(b)(75). “Alternative trading system” or “ATS” means

any organization, association, person, group of persons, or system: (1) That constitutes, maintains, or

provides a market place or facilities for bringing together purchasers and sellers of securities or for

otherwise performing with respect to securities the functions commonly performed by a stock exchange

within the meaning of 17 CFR 240.3b-16; and (2) That does not: (i) Set rules governing the conduct of

subscribers other than the conduct of such subscribers’ trading on such organization, association, person,

group of persons, or system; or (ii) Discipline subscribers other than by exclusion from trading. See 17

CFR 242.300(a). See also final 17 CFR 242.600(b)(4) (stating that “alternative trading system” has the

meaning provided in 17 CFR 242.300(a)). “National securities exchange” means any exchange registered

pursuant to section 6 of the Exchange Act. See final 17 CFR 242.600(b)(63). “National securities

association” means any association of brokers and dealers registered pursuant to section 15A of the

Exchange Act. See final 17 CFR 242.600(b)(62).

Prior to these amendments, a “covered order” was defined to include any market order or any limit order

(including immediate-or-cancel orders) received by a market center during regular trading hours at a time

when a national best bid and national best offer (“NBBO”) is being disseminated, and, if executed, is

executed during regular trading hours, and did not include any orders for which the customer requests

special handling, including, but not limited to, market on open and market on close orders, stop orders, all

or none orders, and “not held” orders. See prior 17 CFR 242.600(b)(22). Generally, 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. See 2018 Rule 606 Amendments Release, 83 FR

58338 at 58340, n.19 (Nov. 19, 2018).

“NMS stock” is defined under Regulation NMS as any NMS security other than an option. See final 17

CFR 242.600(b)(65). An “NMS security” is defined as any security or class of securities for which

transaction reports are collected, processed, and made available pursuant to an effective transaction

reporting plan, or an effective national market system plan for reporting transactions in listed options. See

final 17 CFR 242.600(b)(64).

See prior 17 CFR 242.605. The procedures for market centers to make their execution quality data

available to the public are set forth in the National Market System Plan Establishing Procedures Under

Rule 605 of Regulation NMS (“Rule 605 NMS Plan”). See prior 17 CFR 242.605(a)(2) and Securities and

Exchange Commission File No. 4-518 (Rule 605 NMS Plan). See also Securities Exchange Act Release

No. 44177 (Apr. 12, 2001), 66 FR 19814 (Apr. 17, 2001) (order approving the Rule 605 NMS Plan) (“Rule

605 NMS Plan Release”).

See prior 17 CFR 242.605(a)(1); Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75423-25 (Dec. 1,

2000).

information was categorized: by (1) individual security, (2) one of five order types,8 and (3) one

of four order sizes.9 Within each of the three categories, the Rule 605 report that was required

prior to these amendments included statistics about the total number of orders submitted, and the

total number of shares submitted, shares cancelled prior to execution, shares executed at the

receiving market center, shares executed at another venue, shares executed within different timeto-execution buckets, and average realized spread.10 For market and marketable limit orders

specifically, the report required by Rule 605 prior to these amendments also included statistics

about the (1) average effective spread; (2) number of shares executed better than the quote, at the

quote, or outside the quote; (3) average time to execution when executed better than the quote, at

the quote, or outside the quote; and (4) average dollar amount per share that orders were

executed better than the quote or outside the quote.11 To calculate the required statistics, the time

of order execution and time of order receipt were measured to the nearest second.12

At the time the Commission adopted Rule 11Ac1-5, there was little publicly available

information to enable investors to compare and evaluate execution quality among different

See prior 17 CFR 242.605(a)(1). Prior to these amendments, “Categorized by order type” referred to

categorization by whether an order is: (1) a market order, (2) a marketable limit order, (3) an inside-thequote limit order, (4) an at-the-quote limit order, or (5) a near-the-quote limit order. See prior 17 CFR

242.600(b)(14).

See prior 17 CFR 242.605(a)(1). Prior to these amendments, the size categories were: 100 to 499 shares;

500 to 1,999 shares; 2000 to 4,999 shares; and 5,000 or greater shares. See prior 17 CFR 242.600(b)(13).

On June 22, 2001, the Commission granted exemptive relief to any order with a size of 10,000 shares or

greater (“Large Order Exemptive Relief”), reasoning that the exclusion of very large orders would help

assure greater comparability of statistics in the largest size category of 5,000 or greater shares. See letter

from Annette L. Nazareth, Director, Division of Market Regulation to Darla C. Stuckey, Assistant

Secretary, NYSE Group, Inc., dated June 22, 2001 (“Large Order Exemptive Letter”).

See prior 17 CFR 242.605(a)(1)(i).

See prior 17 CFR 242.605(a)(1)(ii).

See prior 17 CFR 242.600(b)(91), (92).

market centers.13 Rule 605, along with Rule 606 of Regulation NMS, was adopted in 2000, and

together these rules required the public disclosure of execution quality and order routing

practices.14 The Commission intended Rule 11Ac1-5 to provide awareness about how brokerdealers responded to trade-offs between price and other factors, such as speed or reliability, and

establish a baseline level of disclosure in order to facilitate cross-market comparisons of

execution quality.15 The Commission reasoned that once investors could evaluate execution

performance provided by various broker-dealers, competitive forces could then be brought to

bear on broker-dealers both with respect to the explicit trading costs associated with brokerage

commissions and the implicit trading costs associated with execution quality.16

The information disclosed under Rule 605 has provided significant insight into execution

quality at different market centers.17 However, Rule 605 has not been substantively updated

since it was adopted in 2000. In the interim, equity market conditions have changed due in part

to many technological advancements that have altered the speed and nature of trading. In

See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75416 (Dec. 1, 2000). For clarity, when this release

discusses the adoption of Rule 605, it is referring to the Rule 11Ac1-5 Adopting Release, supra note 2.

See Rule 11Ac1–5 Adopting Release, 65 FR 75414 at 75416 (Dec. 1, 2000).

See id. at 75418. Data obtained from Rule 605 reports are used by the third parties including academics and

the financial press to study a variety of topics related to execution quality, including liquidity measurement,

exchange competition, zero commission trading, and broker-dealer execution quality. See Proposing

Release, 88 FR 3786 at 3833, n.545-547 (Jan. 20, 2023) and accompanying text.

See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75419 (Dec. 1, 2000). Although it is difficult to

isolate the effects of Rule 605 given the evolution of the equity markets over time, one academic study

examining the introduction of Rule 605 found that the routing of marketable order flow by broker-dealers

became more sensitive to changes in execution quality across market centers after Rule 605 reports became

available. See Ekkehart Boehmer et al., Public Disclosure and Private Decisions: Equity Market Execution

Quality and Order Routing, 20 REV. FIN. STUD. 315 (2007) (“Boehmer et al.”). Another study attributed a

significant decline in effective and quoted spreads following the implementation of Rule 605 to an increase

in competition between market centers, who improved the execution quality that they offered in order to

attract more order flow. See Xin Zhao & Kee H. Chung, Information Disclosure and Market Quality: The

Effect of SEC Rule 605 on Trading Costs, 42 J. FIN. QUANTITATIVE ANALYSIS, 657 (Sept. 2007) (“Zhao &

Chung”).

See Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594 at 3604, n.55 (Jan. 21, 2010)

(“Concept Release on Equity Market Structure”).

addition, the participation of individual investors in the equity markets has increased.18

Accordingly, the Commission is adopting amendments to Rule 605 to update and improve the

disclosure of execution quality information by expanding the scope of entities subject to Rule

605, modifying the information required, and making key execution quality metrics more

accessible to investors.

Overview of Need for Rule Modernization

The U.S. equity markets have evolved significantly in the last couple of decades. For

instance, the equities markets have become increasingly fragmented, as both the market shares of

individual national securities exchanges have decreased and an increased percentage of order

flow has moved off-exchange. In 2000, there were nine registered national securities exchanges

and one registered national securities association.19 A large proportion of the order flow in listed

equity securities was routed to a few, mostly manual, trading centers,20 and the primary listing

exchanges maintained a high percentage of the order flow for exchange-listed equities.21

See Proposing Release, 88 FR 3786 at 3787-88 (Jan. 20, 2023). As used in this release, “individual

investor” refers to natural persons that trade relatively infrequently for their own or closely related

accounts.

See Securities and Exchange Commission, Annual Report for fiscal year 2000, at 38 available at

https://www.sec.gov/pdf/annrep00/ar00full.pdf.

See Securities Exchange Act Release Nos. 78309 (July 13, 2016), 81 FR 49432 at 49436 (July 27, 2016)

(“Rule 606 Amendments Proposing Release”); 42450 (Feb. 23, 2000), 65 FR 10577 at 10579-80 (Feb. 28,

2000) (“Fragmentation Release”).

See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75415 (Dec. 1, 2000) (stating that in Sep. 2000, for

example, the New York Stock Exchange Inc. (“NYSE”) accounted for 83.3% of the share volume in NYSE

equities and that the American Stock Exchange, LLC (“Amex”) accounted for 69.9% of share volume in

Amex equities). See also Concept Release on Equity Market Structure, 75 FR 3594 at 3595 (Jan. 21, 2010)

(stating that in Jan. 2005, NYSE executed approximately 79.1% of the consolidated share volume in its

listed stocks, as compared to 25.1% in Oct. 2009). In addition, NYSE-listed stocks were traded primarily

on the floor of the NYSE in a manual fashion until Oct. 2006, at which time NYSE began to offer fully

automated access to its displayed quotations. See id. at 3594-95. However, stocks traded on the NASDAQ

Stock Market LLC (“NASDAQ”), which in 2000 was owned and operated by a national securities

association, were already trading in a highly automated fashion at many different trading centers. See id. at

3595; Fragmentation Release, 65 FR 10577 at 10580 (Feb. 28, 2000). See also Proposing Release, 88 FR

3786 at 3791, n.76 (Jan. 20, 2023).

In contrast, trading in the U.S. equity markets today is highly automated and spread even

more among different types of trading centers, allowing even more choices about where orders

may be routed. The types of trading centers that currently trade NMS stocks are: (1) national

securities exchanges operating self-regulatory organization (“SRO”) trading facilities;22 (2)

ATSs that trade NMS stocks (“NMS Stock ATSs”);23 (3) exchange market makers; (4)

wholesalers;24 and (5) any other broker-dealer that executes orders internally by trading as

principal or crossing orders as agent.25 Some OTC market makers, such as wholesalers, operate

single-dealer platforms (“SDPs”) through which they execute institutional orders in NMS stocks

against their own inventory.26 In the first quarter of 2023, NMS stocks were traded on 16

national securities exchanges, and off-exchange at 33 NMS Stock ATSs and at over 220 other

Financial Industry Regulatory Authority (“FINRA”) members.27 Approximately 56% of NMS

See final 17 CFR 242.600(b)(100) (defining “SRO trading facility” as, among other things, a facility

operated by a national securities exchange that executes orders in a security).

An “NMS Stock ATS” as used in this release is an ATS that has filed an effective Form ATS-N with the

Commission.

The term “wholesaler” is not defined in Regulation NMS, but is commonly used to refer to an OTC market

maker that seeks to attract orders from broker-dealers that service the accounts of a large number of

individual investors. The primary business model of wholesalers is to trade internally as principal with

individual investor orders. They do not publicly display or otherwise reveal the prices at which they are

willing to trade internally as a means to attract individual investor orders from broker-dealers.

See 15 U.S.C. 78c(a)(4)(A) (defining “broker” generally as any person engaged in the business of effecting

transactions in securities for the account of others); 15 U.S.C. 78c(a)(5)(A) (defining “dealer” generally as

any person engaged in the business of buying and selling securities for such person’s own account through

a broker or otherwise). The term “broker-dealer” is used in this release to encompass all brokers, all

dealers, and firms that are both brokers and dealers. See also final 17 CFR 242.600(b)(106) (defining

“trading center”). Broker-dealers that primarily service the accounts of individual investors (referred to in

this release as “retail brokers”) often route the marketable orders of individual investors in NMS stocks to

wholesalers.

See Proposing Release, 88 FR 3786 at 3860, n.768 (Jan. 20, 2023) and accompanying text.

See infra Table 6. See also Proposing Release, 88 FR 3786 at 3860, n.766 (Jan. 20, 2023) and

accompanying text; and 3861 (Table 7).

share volume was executed on national securities exchanges.28 The majority of off-exchange

share volume was executed by wholesalers, who executed over one quarter of total share volume

(26.9%) and about 61% of off-exchange share volume.29

In addition, developments in trading further point toward the utility of amending Rule

605. Average stock prices have continued to increase over time,30 and odd-lots31 and fractional

shares32 continue to trade with increasing frequency. In addition, odd-lot quotes in higher-priced

stocks continue to offer prices that are frequently better than the round lot NBBO for these

See infra Table 6. See also Proposing Release, 88 FR 3786 at 3860, n.767 (Jan. 20, 2023) and

accompanying text; and 3861 (Table 7).

See infra Table 6. See also Proposing Release, 88 FR 3786 at 3861 (Table 7) (Jan. 20, 2023).

See Securities Exchange Act Release No. 90610 (Dec. 9, 2020), 86 FR 18596 at 18606-07 (Apr. 9, 2021)

(“Market Data Infrastructure (“MDI”) Adopting Release”) (citing Securities Exchange Act Release No.

88216 (Feb. 14, 2020), 85 FR 16726 at 16739 (Mar. 24, 2020) (“MDI Proposing Release”)) (stating that

“between 2004 and 2019, the average price of a stock in the Dow Jones Industrial Average nearly

quadrupled”). See also Proposing Release, 88 FR 3786 at 3787, n.16 (Jan. 20, 2023).

See MDI Adopting Release, 86 FR 18596 at 18616 (Apr. 9, 2021) (describing analyses included in the

MDI Adopting Release confirming observations made in the MDI Proposing Release that a significant

proportion of quotation and trading activity occurs in odd-lots, particularly for frequently traded, highpriced stocks); and Proposing Release, 88 FR 3786 at 3792, n.91 (Jan. 20, 2023) (describing analysis using

the NYSE Trade and Quote database (obtained via Wharton Research Data Services (“WRDS”)) (“TAQ

data” or “NYSE TAQ data”) that found that odd-lots increased from around 15% of trades in Jan. 2014 to

more than 55% of trades in Mar. 2022). An analysis of data from the SEC’s Market Information Data

Analytics System (“MIDAS”) analytics tool available at

https://www.sec.gov/marketstructure/datavis.html#.YoPskqjMKUk shows that, in Q1 2023, odd-lots made

up 80.5% of on-exchange trades (37.3% of volume) for stocks in the highest price decile and 18.8% of onexchange trades (1.2% of volume) for stocks in the lowest price decile. See dataset “Summary Metrics by

Decile and Quartile” available at https://www.sec.gov/marketstructure/downloads.html. See also Proposing

Release, 88 FR 3786 at 3792, n.91 (Jan. 20, 2023).

Analysis using Consolidated Audit Trail (“CAT”) data for executed orders in Aug. 2023 found that an

estimated 67.4 million originating orders with a fractional share component were eventually executed onor off-exchange. Orders with a fractional share component represented approximately 4% of all executed

orders and 22% of executed orders from “individual” accounts. Generally, accounts classified as

“individual” in CAT are attributed to natural persons. See also Proposing Release, 88 FR 3786 at 3792,

n.92 (Jan. 20, 2023).

stocks,33 and this better-priced odd-lot liquidity is distributed across multiple price levels.34 In

addition, odd-lot rates35 have increased among lower priced stocks.36 Because Rule 605 size

categories prior to these amendments excluded orders smaller than 100 shares, a significant

proportion of market activity was excluded.37 An analysis of Rule 605 data shows that Rule 605

coverage has declined in the decades since the initial adoption of Rule 605.38 Further, because

order size categories were tied to the number of shares, the categories may have grouped orders

See MDI Adopting Release, 86 FR 18596 at 18729 (Apr. 9, 2021) (describing analysis using data from

May 2020 and finding that approximately 45% of all trades executed on exchange and approximately 10%

of all volume executed on exchange in corporate stocks and exchange-traded funds (“ETFs”) (6,926 unique

symbols) occurred in odd-lot sizes (i.e., less than 100 shares) and 40% of those odd-lot transactions

(representing approximately 35% of all odd-lot volume) occurred at a price better than the NBBO). In

addition, a recent academic working paper shows that odd-lots offer better prices than the NBBO 18% of

the time for bids and 16% of the time for offers. This percentage increases monotonically in the stock price,

for example, for bid prices, increasing from 5% for the group of lowest-price stocks in their sample, to 42%

for the group of highest-priced stocks. See Robert P. Bartlett, Justin McCrary, and Maureen O’Hara, The

Market Inside the Market: Odd-Lot Quotes (working paper Feb. 1, 2022), available at

SSRN: https://ssrn.com/abstract=4027099 (retrieved from SSRN Elsevier database) (“Bartlett, et al.”). See

also Elliot Banks, BMLL Technologies, Inside the SIP and the Microstructure of Odd-Lot Quotes

(observing an upward trend in odd-lot trading inside the NBBO from Jan. 2019 to Jan. 2022). See also

Proposing Release, 88 FR 3786 at 3792, n.93 (Jan. 20, 2023).

See MDI Adopting Release, 86 FR 18596 at 18613 n.202 (Apr. 9, 2021) (describing analysis included in

the MDI Adopting Release that examined quotation data for the week of May 22-29, 2020 for stocks priced

from $250.01 to $1000.00 and found that there is odd-lot interest priced better than the new round lot

NBBO 28.49% of the time, and, in 48.49% of those cases, there are better priced odd-lots at multiple price

levels). See also Proposing Release, 88 FR 3786 at 3792, n.94 (Jan. 20, 2023).

The odd-lot rate is the total number of odd-lot trades divided by the total number of all trades.

For example, odd-lot rates for corporate stock price deciles 1-3 (the lowest priced corporate stocks

comprising 30% of all corporate stocks) have been higher on average in 2021, 2022, and Sep. 2023 (34%,

34%, 34%) as compared to 2019 and 2020 (23%, 27%). Similarly, exchange-traded products (“ETPs”) also

exhibit higher average odd-lot rates in price quartiles 1 and 2 (the lowest priced ETPs comprising 50% of

all ETPs) on average in 2021, 2022, and Sep. 2023 (26%, 28%, 28%) compared to 2019 and 2020 (19%,

22%). Analysis has been updated based on MIDAS, available at https://www.sec.gov/opa/data/marketstructure/marketstructuredownloadshtml-by_decile_and_quartile. See also Proposing Release, 88 FR 3786

at 3792, n.95 (Jan. 20, 2023).

See Proposing Release, 88 FR 3786 at 3792, n.91-92 (Jan. 20, 2023). See also id. at 3840, n.619-622 and

accompanying text (estimating, based on analysis of Tick Size Pilot data, coverage of current Rule 605

reporting requirements).

See id. at 3841 (Figure 3) (describing analysis comparing one market center’s volume (NYSE) to TAQ data

that showed that an estimated 50% of shares executed during regular market hours were included in Rule

605 reports as of Feb. 2021, and showed that this number has been on a slightly downward trend since

around mid-2012).

of very different notional values, which might have complicated comparisons of aggregate

execution quality. Finally, the speed of trading in the market has increased exponentially since

2000,39 rendering the 1 second timestamp conventions of preexisting Rule 605 less informative.

Moreover, since the adoption of Rule 605, the Commission and its staff have continually

assessed market events and their impact on market structure, with much of this effort aimed at

achieving enhanced transparency for investors.40 In 2010, the Commission issued a Concept

Release on Equity Market Structure seeking public comment on, among other things, the metrics

for assessing the performance of the current market structure and the effectiveness of tools such

as Rule 605 reports to protect investor interests.41 In 2015, the Commission formed the Equity

Market Structure Advisory Committee (“EMSAC”), which considered issues related to

Regulation NMS and equity market structure.42 The EMSAC recommended that the Commission

Analysis of data from the SEC’s MIDAS analytics tool shows that the percent of on-exchange NMLOs that

are fully executed within 1 millisecond (as a percentage of all fully executed on-exchange NMLOs) has

increased from 2.1% in Q1 2012 to 11.7% in Q1 2023 for small cap stocks, and from 5.9% in Q1 2012 to

14.0% in Q1 2023 for large cap stocks. Further, in Q1 2023 nearly half (48.0%) of NMLOs executed in less

than 1 second in large market capitalization stocks. See dataset “Conditional Cancel and Trade

Distribution,” available at https://www.sec.gov/marketstructure/downloads.html. See also infra notes 12161217 and accompanying text. See also Proposing Release, 88 FR 3786 at 3792, n.98 (Jan. 20, 2023).

For example, since the adoption of Rule 605 in 2000, the Commission has periodically revised certain of its

NMS rules, including the adoption of Regulation NMS in 2005. See, e.g., Regulation NMS Adopting

Release, 70 FR 37496 (June 29, 2005); and MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021).

See Concept Release on Equity Market Structure, 75 FR 3594 at 3605 (Jan. 21, 2010).

The archives of these meetings are available at https://www.sec.gov/spotlight/emsac/emsac-archives.htm.

amend Rule 605 to modernize it and increase the usefulness of available execution quality

disclosures.43 In addition, one broker-dealer petitioned the Commission to amend Rule 605.44

In 2018, the Commission modified Rule 606, which requires broker-dealers to disclose

the identity of market centers to which they route orders on behalf of customers.45 Rule

606(a)(1), which focuses on held orders,46 requires broker-dealers to produce quarterly public

reports regarding their routing of non-directed orders47 in NMS stocks that are submitted on a

held basis and these reports include the identity of regularly used venues, the percentage of

orders routed to each venue, and information about the broker-dealer’s relationship with each

venue.48 When adopting the 2018 Rule 606 Amendments, the Commission identified intensified

competition for customer orders, the rise in the number of trading centers, and the introduction of

new fee models for execution services as the main concerns with held orders for NMS stocks that

it sought to address with the proposal.49 The Commission adopted enhanced public disclosures

See Transcript from EMSAC Meeting (Aug. 2, 2016), available at

https://www.sec.gov/spotlight/emsac/emsac-080216-transcript.txt (“EMSAC I”); Transcript from EMSAC

Meeting (Nov. 29, 2016), available at https://www.sec.gov/spotlight/equity-market-structure/emsactranscript-112916.txt (“EMSAC II”); EMSAC Recommendations Regarding Modifying Rule 605 and Rule

606 (“EMSAC III”), Nov. 29, 2016, available at https://www.sec.gov/spotlight/emsac/emsacrecommendations-rules-605-606.pdf.

See Letter from Virtu Financial re Petition for Rulemaking to Amend SEC Rule 605 (Sept. 20, 2021)

(“Virtu Petition”), available at https://www.sec.gov/rules/petitions/2021/petn4-775.pdf.

The amendments to Rule 606 in 2018 (“2018 Rule 606 Amendments”) also modified Rule 605 to require

that the public order execution quality reports be kept publicly available for a period of three years. See

2018 Rule 606 Amendments Release, 83 FR 58338 (Nov. 19, 2018).

See supra note 4 (discussing held and not held orders).

A “non-directed order” means any order from a customer other than a directed order. See final 17 CFR

242.600(b)(66). A “directed order” means an order from a customer that the customer specifically

instructed the broker or dealer to route to a particular venue for execution. See final 17 CFR

242.600(b)(32).

See 17 CFR 242.606(a)(1). Held orders are typically used by individual investors. See, e.g., 2018 Rule 606

Amendments Release, 83 FR 58338 at 58372 (Nov. 19, 2018) (stating that retail investors’ orders are

typically submitted on a held basis and are typically smaller in size).

See 2018 Rule 606 Amendments Release, 83 FR 58338 at 58372 (Nov. 19, 2018).

pursuant to Rule 606(a)(1) that focused on increased transparency for the financial inducements

that broker-dealers face when determining where to route held order flow.50 The Commission

also adopted Rule 606(b)(3) to require detailed, customer-specific order handling disclosures that

can be requested by a customer that places, directly or indirectly, one or more orders in NMS

stocks that are submitted on a not held basis.51

At the time of the 2018 Rule 606 Amendments, the Commission considered suggestions

from the EMSAC and other commenters that the Commission include more or different

execution quality statistics in the required disclosures.52 But the Commission stated that the

enhancements to Rule 606(a) that it was adopting were appropriately designed to enable

customers—and retail customers in particular—to better assess their broker-dealers’ order

routing performance and, in particular, potential conflicts of interest that their broker-dealers face

when routing customer orders and how their broker-dealers manage those potential conflicts.53

The Commission further stated the limited modifications being adopted at that time were

reasonably designed to further the goal of enhancing transparency regarding broker-dealers’

order routing practices and customers’ ability to assess the quality of those practices, and that the

suggested execution quality statistics were not necessary to achieve that goal.54 However, the

See id. at 58373.

See 17 CFR 242.606(b)(3); 2018 Rule 606 Amendments Release, 83 FR 58338 at 58345 (Nov. 19, 2018)

(stating that 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).

See 2018 Rule 606 Amendments Release, 83 FR 58338 at 58379 (Nov. 19, 2018). See also Proposing

Release, 88 FR 3786 at 3790, n.66 (Jan. 20, 2023) and accompanying text.

See 2018 Rule 606 Amendments Release, 83 FR 58338 at 58379 (Nov. 19, 2018).

See id. The Commission further stated that the amendments to Rule 606 provide an appropriate level of

insight into the widespread financial arrangements between broker-dealers and execution venues that may

affect broker-dealers’ order routing decisions. See id.

Commission stated that its determination not to adopt the additional specific disclosures was not

an indication that the Commission had formed a decision on the validity or usefulness of the

suggested execution quality statistics.55

Separately, each broker-dealer has a legal duty to seek to obtain best execution of

customer orders.56 The duty of best execution requires broker-dealers to execute customers’

trades at the most favorable terms reasonably available under the circumstances.57 When

adopting Rules 605 and 606, the Commission stated that these rules do not address and therefore

do not change the existing legal standards that govern a broker-dealer’s duty of best execution.58

The Commission recognized that the information contained in the Rule 605 reports (and Rule

606 reports) will not, by itself, be sufficient to support conclusions regarding a broker-dealer’s

compliance with its legal responsibility to obtain the best execution of customer orders.59 As the

Commission stated, any such conclusions would require a more in-depth analysis of the broker-

See id.

See, e.g., Regulation NMS Adopting Release, 70 FR 37496 at 37537 (June 29, 2005); Newton v. Merrill,

Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 269-70, 274 (3d Cir.), cert. denied, 525 U.S. 811

(1998); Certain Market Making Activities on Nasdaq, Securities Exchange Act Release No. 40900, 53 SEC

1150, 1162 (1999) (settled case) (citing Sinclair v. SEC, 444 F.2d 399 (2d Cir. 1971); Arleen Hughes, 27

SEC 629, 636 (1948), aff’d sub nom. Hughes v. SEC, 174 F.2d 969 (D.C. Cir. 1949)). In addition, the

Commission has separately proposed a rule concerning broker-dealers’ duty of best execution. See

Securities Exchange Act Release No. 96496 (Dec. 14, 2022), 88 FR 5440 (Jan. 27, 2023) (“Regulation Best

Execution Proposing Release”). See also Proposing Release, 88 FR 3786 at 3790, n.69 (Jan. 20, 2023).

See Regulation NMS Adopting Release, 70 FR 37496 at 37538 (June 29, 2005) (referring to the best

reasonably available price and citing Newton, 135 F.3d at 266, 269-70, 274). Newton also specified certain

other factors relevant to best execution—order size, trading characteristics of the security, speed of

execution, clearing costs, and the cost and difficulty of executing an order in a particular market. See

Newton, 135 F.3d at 270, n.2. See also Proposing Release, 88 FR 3786 at 3791, n.70 (Jan. 20, 2023).

See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75420 (Dec. 1, 2000).

See id.

dealer’s order routing practices than will be available from the disclosures required by the

rules.60

Overview of the Proposal and Comments Received

In acknowledgment of the myriad changes to the securities markets since the adoption of

Rule 605 more than two decades ago, the proposed amendments to Rule 605 sought to ensure the

continued transparency and utility of the execution quality statistics required by Rule 605. The

Commission proposed to amend Rule 605 by expanding the scope of reporting entities to include

broker-dealers with a larger number of customers (“larger broker-dealers”).61 The Commission

also proposed to modify the set of required data to capture execution quality information for

more order types and sizes, require time-based execution statistics to be at a more granular level,

and enhance the utility of the statistics.62 The Commission further proposed to require that

reporting entities provide a report of summary execution quality statistics, in addition to the more

detailed reports.63

See id. For example, the execution quality statistics included in Rule 605 do not encompass every factor

that may be relevant in determining whether a broker-dealer has obtained best execution, and the statistics

in a market center’s reports typically will reflect orders received from a number of different routing brokerdealers. See id. See also infra notes 1097-1098 and accompanying text for discussion of an investment

adviser’s fiduciary duty, including the duty to seek best execution of a client’s transactions where the

investment adviser has the responsibility to select broker-dealers to execute client trades. See also

Proposing Release, 88 FR 3786 at 3791 (Jan. 20, 2023).

See Proposing Release, 88 FR 3786 at 3796-3801 (Jan. 20, 2023). Throughout the release, the term “larger

broker-dealer” refers to a broker-dealer that meets or exceeds the “customer account threshold,” as defined

in final Rule 605(a)(7). See also infra section II.A.

See Proposing Release, 88 FR 3786 at 3804-22 (Jan. 20, 2023).

See id. at 3823-25.

The Commission received numerous comment letters in response to the Proposing

Release, a large portion of which were from individual investors.64 Many commenters supported

updating the disclosures required by Rule 605.65 Several commenters, including industry groups,

broker-dealers, financial services firms,66 and investor advocacy groups, suggested clarifications

or changes to the scope of reporting entities and to certain proposed metrics included in the

detailed report or summary report.67 Other commenters broadly supported the more detailed

recommendations of other commenters.68

The Commission received comments from a wide range of market participants, including individual

investors, broker-dealers, academics, securities industry groups, national securities exchanges, and investor

advocacy groups. Comments received on the Proposing Release are available on the Commission’s

website, available at https://www.sec.gov/comments/s7-29-22/s72922.htm.

See, e.g., letters from: Ellen Greene, Managing Director, Equity & Options Market Structure, SIFMA (Mar.

31, 2023) (“SIFMA Letter II”) at 2; Stephen John Berger, Managing Director, Global Head of Government

and Regulatory Policy, Citadel Securities (Mar. 31, 2023) (“Rule 605 Citadel Letter”) at 1; Stephen W.

Hall, Legal Director and Securities Specialist, Better Markets, Inc. (Mar. 31, 2023) (“Better Markets

Letter”) at 1-2.

As used in this release, “financial services firm” refers to an entity that includes multiple types of affiliated

entities providing financial services, including broker-dealers, investment advisers, or banks.

See, e.g., SIFMA Letter II at 27-28; and letters from: Howard Meyerson, Managing Director, Financial

Information Forum (Mar. 31, 2023) (“FIF Letter”) at 2-5; Tyler Gellasch, President and CEO, Healthy

Markets Association (Mar. 31, 2023) (“Healthy Markets Letter”) at 16-18; Douglas A. Cifu, Chief

Executive Officer, Virtu Financial, Inc. (Mar. 30, 2023) (“Virtu Letter II”) at 10-12. These and other

comment letters discussing the scope of reporting entities and proposed metrics included in the detailed

report or summary report are described infra throughout this release.

See, e.g., Rule 605 Citadel Letter at 5; and letters from: Ryan Kwiatkowski, Chairman of the Board, and

James Toes, President & CEO, Security Traders Association (Apr. 3, 2023) (“STA Letter”) at 4-5; Derrick

Chan, Head of Equities, Fidelity Capital Markets (Mar. 31, 2023) (“Fidelity Letter”) at 2, 8; Naureen

Hassan, President, UBS Americas, Robert Karofsky, President, UBS Investment Bank, and Suni Harford,

President, UBS Asset Management, UBS (Mar. 31, 2023) (“UBS Letter”) at 2; Tim Gately, Managing

Director, Head of Equities Sales, Americas, Citigroup Global Markets Inc. (Mar. 31, 2023) (“CGMI

Letter”) at 1-2, 3; Jason Clague, Managing Director, Head of Operations, The Charles Schwab Corporation

(Mar. 31, 2023) (“Schwab Letter II”) at 2, 30, 33. These and other comment letters discussing the

recommendations of other commenters are described infra throughout this release. Several individual

investors stated that in Dec. 2022, FINRA and the Commission sent out risk alerts regarding a lack of

compliance with reports pursuant to Rule 606 of Regulation NMS and that “one would suspect that brokers

will be as non-compliant with the new 605 reports.” Letter Type D; Letter Type E; and Letter Type H at

https://www.sec.gov/comments/s7-29-22/s72922.htm. The Commission will monitor the implementation of

the amendments to Rule 605.

One industry group recommended that the Commission reissue the proposed rule after

incorporating comments from it and other market participants “to ensure that the final rule

achieves the Commission’s intended purpose and allow market participants to identify additional

enhancements.”69 A broker-dealer stated that the Commission should provide market participants

the opportunity to review and comment on such a revised proposal prior to finalization.70 The

Commission does not agree with these commenters. Delaying the adoption of a final rule, and

thereby delaying the benefits of Rule 605, is not warranted. The Commission has reviewed and

carefully considered the extensive comment file,71 which included input from a broad array of

market participants, and as discussed below, has made certain changes in response to these

comments.72 For these reasons, re-proposal of the Rule 605 amendments is not necessary.

Contemporaneously with the proposal to modify Rule 605, the Commission issued three

other proposals related to separate aspects of equity market structure and Regulation NMS.73 A

Letter from Howard Meyerson, Managing Director, Financial Information Forum (June 22, 2023) (“FIF

Letter II”) at 11. See also letter from Howard Meyerson, Managing Director, Financial Information Forum

(Feb. 14, 2024) (“FIF Letter III”) at 2, 5.

See letter from Stephen John Berger, Managing Director, Global Head of Government & Regulatory

Policy, Citadel Securities (Dec. 5, 2023) (“Equity Market Structure Citadel Letter II”) at 3.

The Commission voted to issue the Proposing Release on Dec. 14, 2022. The release was posted on the

Commission’s website that day, and comment letters were received beginning the same day. The comment

period closed on Mar. 31, 2023. The Commission has considered comments received since Dec. 14, 2022.

In addition, as discussed above, the EMSAC and commenters responding to the Commission’s Concept

Release on Equity Market Structure and to the 2018 Rule 606 Amendments recommended that the

Commission update Rule 605 and one broker-dealer petitioned the Commission to amend the Rule. See

supra notes 40-44, 52, and accompanying text. The Commission considered these suggestions when

proposing amendments to Rule 605. See Proposing Release, 88 FR 3786 at 3792-95 (Jan. 20, 2022).

See Regulation Best Execution Proposing Release, 88 FR 5440 (Jan. 27, 2023) (proposing rule that would

establish Commission rule-based best execution standards); and Securities Exchange Release Nos. 96494

(Dec. 14, 2022), 87 FR 80266 (Dec. 29, 2022) (“Minimum Pricing Increments Proposing Release”)

(proposing amendments to Regulation NMS to reduce minimum pricing increments, add a minimum

trading increment, reduce access fee caps, improve transparency of exchange fees and rebates, and enhance

the transparency of market data infrastructure); 96495 (Dec. 14, 2022), 88 FR 128 (Jan. 3, 2023) (“Order

Competition Rule Proposing Release”) (proposing rule that would enhance competition for the execution of

marketable orders of individual investors).

number of commenters provided comments on all four proposals jointly.74 Some commenters

requested that the Commission publicly release anonymized subsets of CAT data used in

connection with the tables and figures in the proposals’ economic analyses.75

The Commission is not releasing anonymized subsets of CAT data used in connection

with the proposals, including CAT data used in connection with data and figures in the Proposing

See, e.g., SIFMA Letter II (Mar. 31, 2023); Equity Market Structure Citadel Letter II (Dec. 5, 2023); and

letters from: Michael Blaugrund, Chief Operating Officer, NYSE Group, Inc., Jason Clague, Managing

Director, Head of Operations, Charles Schwab & Co., and Joseph Mecane, Head of Execution Services,

Citadel Securities (Mar. 6, 2023) (“NYSE, Schwab, and Citadel Letter”); Christopher A. Iacovella,

President & Chief Executive Officer, American Securities Association (Mar. 31, 2023) (“American

Securities Association Letter II”); Hope Jarkowski, General Counsel, NYSE Group, Inc. (Mar. 31, 2023)

(“NYSE Letter”); Stephen John Berger, Managing Director, Global Head of Government & Regulatory

Policy, Citadel Securities (Mar. 31, 2023) (“Equity Market Structure Citadel Letter”); Jason Clague,

Managing Director, Head of Operations, The Charles Schwab Corporation (Mar. 22, 2023) (“Schwab

Letter”); Kirsten Wegner, Chief Executive Officer, Modern Markets Initiative (Mar. 24, 2023) (“Modern

Markets Initiative Letter”); Joanna Mallers, Secretary, FIA Principal Traders Group (Mar. 31, 2023) (“FIA

PTG Letter II”); Peter D. Stutsman, Global Head of Equity Trading, and Timothy J. Stark, Head of Equity

Markets and Transaction Research, The Capital Group Companies, Inc. (Mar. 31, 2023) (“Capital Group

Letter”); Andrew Hartnett, NASAA President and Deputy Commissioner, Iowa Insurance Division, North

American Securities Administrators Association, Inc. (Mar. 31, 2023) (“NASAA Letter”); David Howson,

Executive Vice President, Global President, Cboe Global Markets, Nathaniel N. Evarts, Managing

Director, Head of Trading, Americas, State Street Global Advisors, Kimberly Russell, Market Structure

Specialist, Global SPDR Business, State Street Global Advisors, Mehmet Kinak, Global Head of Equity

Trading, T. Rowe Price, Todd Lopez, Americas Head of Execution Services, UBS Securities LLC, and

Douglas A. Cifu, Chief Executive Officer, Virtu Financial, Inc. (Mar. 24, 2023) (“Cboe, State Street, et al.,

Letter”); John A. Zecca, Executive Vice President, Global Chief Legal, Risk & Regulatory Officer,

Nasdaq, Inc. (Mar. 30, 2023) (“Nasdaq Letter”); Jennifer W. Han, Executive Vice President, Chief Counsel

& Head of Global Regulatory Affairs, Managed Funds Association (Mar. 30, 2023) (“Managed Funds

Association Letter”); Jonathan Kanter, Assistant Attorney General, Antitrust Division, U.S. Department of

Justice (Apr. 11, 2023) (“DOJ Letter”); Nathanial N. Evarts, Managing Director, Head of Trading,

Americas, and Kimberly Russell, Market Structure Specialist, Global SPDR Business, State Street Global

Advisors (Mar. 30, 2023) (“State Street Global Advisors Letter”); Michael Markunas, Deputy General

Counsel, Chief Compliance Officer, B. Riley Securities, Inc. (Mar. 31, 2023) (“B. Riley Letter”).

See, e.g., Virtu Letter at 1; Equity Market Structure Citadel Letter at 16-17; Schwab Letter II at 3-4 (“there

is a distinct absence of economic data to support many aspects of the Proposals and to support the

Commission’s analysis of costs versus benefits . . . CAT data is not publicly available and thus public

commenters … do not have access to the very data on which the Commission relies”); and letters from:

Ellen Greene, Managing Director, Equity & Options Market Structure, SIFMA (Feb. 8, 2023) (“SIFMA

Letter”) at 3-4; Kristen Malinconico, Director, Center for Capital Markets Competitiveness, U.S. Chamber

of Commerce (Mar. 31, 2023) (“Chamber of Commerce Letter”) at 2-3. Some of these commenters also

requested that the Commission identify the specific broker-dealers whose Rule 605 and Rule 606 reports,

which are publicly available, were used in the proposals. See, e.g., SIFMA Letter at 2; Virtu Letter at 1-2.

Release. The CAT database contains highly sensitive and granular market information.76 The

Commission fully described in the Proposing Release and this Release the CAT data used, the

methodology for analysis, and the results of its analyses. This provides notice of the

Commission’s use and analysis of CAT data in support of this rulemaking.77

Market participants, such as broker-dealers, may analyze their own order and transaction

information as well as commercially available data and use this analysis to provide meaningful

comment on the Proposing Release from their own perspectives.78 The level of aggregation that

would be required to protect market and proprietary information so that it cannot be used, either

itself, or with other commercially or publicly available information, to reverse engineer or

otherwise reveal market participants’ identities, market positions, or trading strategies would also

See, e.g., Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 at 56978 (Aug. 1,

2012) (stating that maintaining the confidentiality of customer and other information reported to CAT “is

essential” and that “[w]ithout adequate protections, market participants would risk the exposure of highlyconfidential information about their trading strategies and positions”); Securities Exchange Act Release No.

84696 (Nov. 15, 2016), 81 FR 84696 (Nov. 23, 2016) (stating that a security breach involving CAT data

could, among other things, “leak highly-confidential information about trading strategies or positions,

which could be deleterious for market participants’ trading profits and client relationships” or “expose

proprietary information about the existence of a significant business relationship with either a counterparty

or a client, which could reduce business profits”).

In addition, the Commission declines to provide the identities of the specific broker-dealers whose Rule

606 reports were used in connection with the Proposing Release. See supra note 75. The reports themselves

are publicly available and interested parties can analyze these reports using their own selection of brokerdealers. As with the CAT data, the Commission has fully described in the Proposing Release the Rule 606

data used, the methodology for analysis, and the results of its analyses. This information provides notice of

the Commission’s use and analysis of Rule 606 data used in support of this rulemaking.

For example, the SEC’s MIDAS analytics tool collects and processes data from the consolidated tapes as

well as from the separate proprietary feeds made individually available by each equity exchange. See

MIDAS: Market Information Data Analytics System, SEC, available at

https://www.sec.gov/marketstructure/midas-system. See also letter from John Ramsay, Chief Market Policy

Officer, Investors Exchange LLC (“IEX”) (Oct. 13, 2023) (“IEX Letter”) at 3 (stating that there are

“myriad sources of information that . . . market participants draw on to consider how orders are handled

and how markets compete with and compare to each other,” including NYSE TAQ data, other exchange

proprietary and consolidated market data, and FINRA’s reports on off-exchange trading). See also, e.g.,

infra note 330 (FIF Letter) and accompanying text; notes 113-114 (Professor Christopher Schwarz,

University of California Irvine, Professor Brad Barber, University of California, Davis, Professor Xing

Huang, Washington University in St. Louis, Professor Philippe Jorion, University of California, Irvine,

Professor Terrance Odean, University of California, Berkeley (Feb. 7, 2023) (“Professor Schwarz et al.

Letter”)) and accompanying text.

mean that the dataset would be substantially dissimilar from the actual data used in the

Commission’s analysis.

In addition, several commenters suggested a sequencing of the equity market structure

proposals, such that the Commission would implement the amendments to Rule 605 and evaluate

the execution quality data from the updated reports, before undertaking further action on the

remaining equity market structure proposals.79 One group of members of Congress

recommended that no equity market structure rule “should be finalized or implemented” until the

Commission “[c]onduct[s] a comprehensive cost-benefit analysis of the aggregate impact of

[these rules] and seek[s] public comment on this analysis[,]” and proposes “a reasonable,

workable, and staggered schedule for public comment on the adoption and implementation of the

See, e.g., SIFMA Letter II at 2 (“[o]nce an amended Rule 605 is implemented, the Commission will have

the data it needs to fully assess market quality and consider whether additional rulemaking is needed and

how any such rulemaking should be designed”); Equity Market Structure Citadel Letter II at 1-3; NYSE,

Schwab and Citadel Letter at 1-2; STA Letter at 4; Modern Markets Initiative Letter at 2; Cboe, State

Street, et al. Letter dated Mar. 24, 2023 at 1-2; Managed Funds Association Letter at 2; T. Rowe Letter at 3;

UBS Letter at 1-2; Virtu Letter II at 2; SIFMA Letter II at 11; Professor Schwarz et al. Letter at 5; and

letters from Bill Foster, French Hill, Henry Cuellar, Bill Huizenga, Wiley Nickel, Andy Barr, Ritchie

Torres, Ann Wagner, Brittany Pettersen, Dan Meuser, Josh Gottheimer, Mike Flood, Vicente Gonzalez,

Byron Donalds, Mike Quigley, Michael V. Lawler, David Scott, Andrew R. Garbarino, Gregory W. Meeks,

Monica De La Cruz, Sean Casten, Scott Fitzgerald, Bradley S. Schneider, Erin Houchin, Jim Himes, Young

Kim, Steven Horsford, Ralph Norman, Gwen Moore, Tom Emmer, Marc Veasey, and Zach Nunn, United

States House of Representatives (Sep. 26, 2023) at 2; Michelle Bryan Oroschakoff, Managing Director and

Chief Legal Officer, LPL Financial (Mar. 31, 2023) (“LPL Financial Letter”) at 3-4; Chester Spatt, Pamela

R. and Kenneth B. Dunn Professor of Finance, Tepper School, Carnegie Mellon University and former

Chief Economist, U.S. Securities and Exchange Commission (2004-2007), Thomas Ernst, Assistant

Professor of Finance, Smith School of Business, University of Maryland, Andrey Malenko, Professor of

Finance, Carroll School of Management, Boston College, Jian Sun, Assistant Professor of Finance, Le

Kong Chian School of Business, Singapore Management University (Nov. 29, 2023) (“Professor Spatt et

al. Letter”) at 5; see also letter from Patrick McHenry, French Hill, Frank Lucas, Pete Sessions, Bill Posey,

Blaine Luetkemeyer, Bill Huizenga, Ann Wagner, Andy Barr, Roger Williams, Tom Emmer, Barry

Loudermilk, Alexander X. Mooney, Warren Davidson, John Rose, Bryan Steil, William Timmons, Ralph

Norman, Dan Meuser, Scott Fitzgerald, Andrew R. Garbarino, Young Kim, Byron Donalds, Mike Flood,

Michael V. Lawler, Zach Nunn, Monica De La Cruz, Erin Houchin, and Andy Ogles, United States House

of Representatives (Sept. 26, 2023) (“McHenry et al. Letter”) at 2. But see IEX Letter at 5 (“the premise

that Rule 605 updates must be a precondition to any other changes looks more like a calculated stall than an

argument for careful, reasoned decision making”); letter from Stephen W. Hall, Legal Director and

Securities Specialist, Better Markets, Inc. (Oct. 31, 2023) (“Better Markets Letter II”) at 5 (“argument that

the Commission should first get more information is a delaying tactic designed to forestall meaningful

reforms that are already clearly necessary and appropriate”).

proposals, considering their overlapping nature, significant compliance and operational burdens,

and if they may be insurmountable for smaller or emerging firms.”80 As discussed below in the

economic analysis, the Commission uses as a baseline the world as it exists today, including

adopted rules but not proposed rules.81 Comments on how the adoption of the Rule 605

amendments should affect the timing or sequence of the other equity market structure proposals

will be considered if and when those rules are acted on. Similarly, because the effects of the final

rule are measured against the existing regulatory baseline, which does not include rules that have

not been adopted, the Commission does not agree that an additional analysis of the aggregate

impact of the several equity market structure rules is necessary before the adoption of the Rule

605 amendments.82

The proposed amendments to Rule 605, as well as the costs and benefits of the proposed

amendments, were detailed in the Proposing Release and received substantial public comment.

The proposed amendments to Rule 605 received broad support from many commenters. The

Commission has considered the comments received, updated its data analysis where needed, and,

in some instances, has modified the proposal in response to comments received.

See McHenry et al. Letter at 2. As discussed further below, Rule 605 as amended imposes reporting

requirements only on market centers and larger broker-dealers that meet the customer account threshold

(i.e., introduce or carry at least 100,000 customer accounts) and thus does not bring smaller or emerging

firms within scope on the basis of their customer-facing broker-dealer business. The Commission addresses

the impact of its rulemaking on smaller or emerging firms in its releases, including this release. See infra

section IX.D.1.d)(1). Further, the Regulatory Flexibility Act (“RFA”) (5 U.S.C. 601 et seq.) requires

Federal agencies, in promulgating rules, to consider the impact of those rules on small entities. See infra

section X for further discussion of the Commission’s consideration of the impact of the amendments on

small entities.

See infra note 981.

See id. The Order Competition Rule Proposing Release, the Regulation Best Execution Proposing Release,

and the Minimum Pricing Increments Proposing Release mentioned by commenters remain at the proposal

stage. To the extent that the Commission takes final action on any or all of those proposals, the baseline in

each of those subsequent rulemakings will reflect the regulatory landscape that is current at that time. See

also infra section IX.C.1.d).

Overview of Final Rule 605

After reviewing the comments received and considering the recommendations from

commenters,83 the Commission has determined to adopt the proposal with several modifications.

In some cases, final amendments to Rule 605 add new data elements that provide additional

context and information for both the detailed and summary execution quality reports. In adopting

the final amendments to Rule 605, the Commission aims to provide individual investors,

institutional customers, and broker-dealers with information that they can use to choose market

centers or broker-dealers that align with their investment and execution objectives. Further, as

with Rule 605 reports prior to these amendments,84 the Commission anticipates that third parties,

such as academics and journalists, will also utilize the reported execution quality data for

comparison purposes and analysis of market conditions.

As discussed in section II (Modifications to Reporting Entities) below, the Commission is

adopting the amendments to the scope of reporting entities largely as proposed, with a few

modifications. The Commission is retaining in the adopted amendments to Rule 605 the

proposed requirements that brokers and dealers introducing or carrying 100,000 or more

customer accounts prepare Rule 605 reports and that separate reports be prepared for a firm’s

broker-dealer activity and its market center activity. The Commission is also providing

additional explanation of these requirements. The Commission has determined not to require

market centers that operate a proposed qualified auction to prepare a separate report for covered

orders received for execution in the qualified auction. The Commission is specifying that ATSs

must prepare Rule 605 reports separately from their broker-dealer operators as proposed and is

See, e.g., FIF Letter, SIFMA Letter II.

See, e.g., supra note 16 (discussing studies by Boehmer et al. and Zhao & Chung).

also retaining the proposed requirement that a broker-dealer that operates an SDP prepare a

separate report for activity specific to the SDP, but with a modified description of what

constitutes an SDP.

In addition, as discussed in section III (Modifications to Scope of Orders Covered and

Required Information) below, the Commission is adopting amendments to the information

required to be reported in the detailed report required by Rule 605(a)(1) with modifications from

the proposal. The Commission is adopting amendments to the scope of covered orders largely as

proposed, with changes to the coverage of orders with stop prices. The Commission is also

revising the categorization by order size from the proposal to incorporate notional size buckets

and whether an order is for less than a share, is an odd-lot, or is a round lot. With respect to the

categorization by order type, the Commission is adopting the categorization of executable

NMLOs as proposed, but is modifying the categorization of NMLOs priced at or better than the

midpoint and adding more categories of immediate-or-cancel orders and more categories related

to orders submitted with stop prices. The Commission is also adopting a timestamp convention

of at least a millisecond as proposed, but eliminating the proposed statistics for median and 99th

percentile time to execution in favor of utilizing more granular time-to-execution buckets.

Further, the Commission is adopting the other required statistics for inclusion in the detailed

report with several changes from the proposal, including: (1) adding realized spread statistics for

more time intervals; (2) calculating effective spread and effective spread divided by quoted

spread for marketable order types and NMLOs priced more aggressively than the midpoint only;

(3) utilizing spread-based weighting to calculate effective spread divided by quoted spread; (4)

adding statistics for average quoted spread, average midpoint, and cumulative notional size; (5)

measuring size improvement at time of order receipt rather than time of execution, adding an

additional size improvement statistic focused on orders that can receive size improvement, and

calculating these size improvement statistics for marketable order types and NMLOs priced more

aggressively than the midpoint only; and (6) adding a relative fill rate statistic for NMLOs based

on order executions occurring on national securities exchanges.

Further, as discussed in section IV (Summary Execution Quality Report) below, the

Commission is adopting a requirement for a summary report pursuant to Rule 605(a)(2), with

several changes from the proposal. The Commission is changing the weighting of certain

statistics and grouping orders into notional size buckets. The Commission is modifying the

required statistics related to average order size in shares; share-weighted average percentage

price improvement; and effective spread divided by quoted spread. The Commission is including

additional metrics in the summary report for share-weighted average midpoint; share-weighted

average notional size; average percentage quoted spread; and average percentage realized spread

as calculated at two time horizons. The Commission also is requiring that the summary report be

provided in an alternative format.

Finally, as discussed in section V (Requirements for Making Rule 605 Reports Available

to the Public) below, the Commission is adopting procedures for making the Rule 605 reports

publicly available as proposed.

The Commission endeavors to ensure that investors are provided with timely and

accurate information needed to make informed investment decisions, and the final amendments

to Rule 605 reflect the Commission’s ongoing commitment to enhance transparency for

investors. Facilitating the ability of the public to compare and evaluate execution quality among

different market centers, brokers, and dealers, is an effective means of reconciling the need to

promote both vigorous price competition and fair competition among market centers and broker-

dealers, to the benefit of individual investors. Section 11A of the Exchange Act85 grants the

Commission the authority to promulgate rules necessary or appropriate to assure the fairness and

usefulness of information on securities transactions86 and to assure that broker-dealers transmit

and direct orders for the purchase or sale of qualified securities in a manner consistent with the

establishment and operation of a national market system.87 By requiring the uniform public

disclosure of useful and accessible statistics, amended Rule 605 will better promote competition

among market centers and broker-dealers on the basis of execution quality and ultimately

improve the efficiency of securities transactions, consistent with the objectives of our national

market system.88

II.

Modifications to Reporting Entities

Larger Broker-Dealers

Proposed Approach

Prior to the adopted amendments, Rule 605 of Regulation NMS required only market

centers, such as national securities exchanges, OTC market makers, and ATSs, to produce

publicly available, monthly execution quality reports. The Commission proposed to expand the

scope of entities that must prepare Rule 605 reports to include larger broker-dealers that

introduce or carry at least 100,000 customer89 accounts. The Commission reasoned that the

15 U.S.C. 78k-1.

15 U.S.C. 78k-1(c)(1)(B).

15 U.S.C. 78k-1(c)(1)(E).

The national market system objectives of section 11A of the Exchange Act include the economically

efficient executions of securities transactions; fair competition among brokers and dealers, among exchange

markets, and between exchange markets and markets other than exchange markets; the availability of

information on securities quotations and transactions; and the practicability of brokers executing investor

orders in the best market. See 15 U.S.C. 78k-1(a)(1)(C).

“Customer” means any person that is not a broker or dealer. See final 17 CFR 242.600(b)(28).

proposed expansion would “improve the usefulness of execution quality statistics, promote fair

competition, and enhance transparency by providing investors with information that they could

use to compare the execution quality provided by customer-facing broker-dealers.”90 As

discussed further below, the proposed minimum reporting threshold of 100,000 customers was

intended to balance the benefits of having broker-dealers produce execution quality statistics

with the costs of implementation and continued reporting.91

To implement this proposed expansion, the Commission proposed to insert references to

“brokers” and “dealers” where prior Rule 605 referred to “market centers.”92 In addition, the

Commission proposed to revise the definition of “covered order” in prior Rule 600(b)(22), which

referred to any market order or any limit order (including immediate-or-cancel orders) “received

by a market center,”93 to refer to orders “received by a market center, broker, or dealer.”94

Proposed Rule 605(a)(7) stated that a broker or dealer that is not a market center shall not

be subject to the requirements of Rule 605 unless that broker or dealer introduces or carries

100,000 or more customer accounts through which transactions are effected for the purchase or

sale of NMS stocks (the “customer account threshold”).95 As explained in the Proposing Release,

the Commission analyzed available data to determine the proposed customer account threshold

Proposing Release, 88 FR 3786 at 3795 (Jan. 20, 2023).

See id. at 3797.

See id. at 3796 (discussing amendments to Rule 605 in proposed Rule 605 introductory text, (a) heading,

(a)(1) introductory text, (a)(1)(i)(D), and (a)(3), (4), (5), and (6)).

Prior 17 CFR 242.600(b)(22).

See Proposing Release, 88 FR 3786 at 3796 (Jan. 20, 2023); proposed Rule 605(b)(30). The Commission

also proposed to require all market centers and broker-dealers that would be subject to Rule 605’s reporting

requirements to produce summary reports with aggregated execution quality information. See infra section

IV for further discussion of the summary report.

See Proposing Release, 88 FR 3786 at 3797 (Jan. 20, 2023).

given the additional costs that broad expansion of the rule to broker-dealers would entail.96

Utilizing a 100,000 customer account threshold as proposed would allow the Rule 605 reporting

requirements to capture those broker-dealers that introduce or carry the vast majority of customer

accounts, while subjecting only a relatively small percentage of broker-dealers that accept

customer orders for execution to the reporting obligation and excluding those broker-dealers that

introduce or carry fewer customer accounts.97

The proposed customer account threshold also required brokers-dealers to include in their

calculations the public customer accounts that they introduce, as well as the customer accounts

that they carry.98 Because an introducing broker-dealer may use an omnibus clearing

arrangement and not disclose certain information about its underlying customer accounts to the

clearing firm, the Commission proposed that, for purposes of Rule 605, a broker or dealer that

utilizes an omnibus clearing arrangement for any of its underlying customer accounts would be

considered to carry such underlying customer accounts when calculating the number of customer

accounts that it introduces or carries.99

See id. at 3797, 3886-87.

See id. (discussing analysis of the estimated number of broker-dealers that would be subject to Rule 605

reporting requirements according to different definitions of the customer account threshold). See infra note

146 and accompanying text for a discussion of an updated analysis.

See Proposing Release, 88 FR 3786 at 3797 (Jan. 20, 2023). An introducing broker-dealer is a brokerdealer that has a contractual arrangement with another firm, known as the carrying or clearing firm, under

which the clearing/carrying firm agrees to perform certain services for the introducing firm. Usually, the

introducing firm transmits its customer accounts and customer orders to the clearing/carrying firm, which

executes the orders and carries the account. See Securities Exchange Act Release No. 31511 (Nov. 24,

1992), 57 FR 56973 at 56978 (Dec. 2, 1992) (Net Capital Rule). Alternatively, some broker-dealers utilize

an “omnibus clearing arrangement,” where the clearing firm maintains one account for all customer

transactions of the introducing firm, rather than a “fully disclosed introducing relationship.” In an omnibus

arrangement, the clearing firm does not know the identity of the customers of the introducing firm, whereas

in a fully disclosed arrangement, the clearing/carrying firm knows the names, addresses, securities

positions, and other relevant data as to each customer. See id. at 56978, n.16.

See Proposing Release, 88 FR 3786 at 3797-98 (Jan. 20, 2023); proposed Rule 605(a)(7).

Proposed Rule 605(a)(7) stated that any broker or dealer that meets or exceeds the

customer account threshold and is also a market center shall produce separate reports pertaining

to each function.100 Further, as proposed a broker-dealer is excluded from Rule 605’s reporting

requirements only with respect to its customer-facing broker-dealer function (as opposed to its

market center function, if applicable) if the number of customer accounts that it introduces or

carries is less than the customer account threshold.101 However, under the proposal, a brokerdealer that meets or exceeds the customer account threshold for the first time has a grace period

of three calendar months before being required to comply with Rule 605’s reporting

requirements.102

Prior to the amendments, Rule 605 required that reporting entities calculate certain

statistics based on the time of order receipt.103 Moreover, Regulation NMS defined “time of

order receipt” based on the time an order was received by a market center for execution.104 In

100

See Proposing Release, 88 FR 3786 at 3798 (Jan. 20, 2023).

101

See id. at 3798-99. Proposed Rule 605(a)(7) stated that a broker or dealer that meets or exceeds the

customer account threshold shall be required to produce reports pursuant to this section for at least three

calendar months (“Reporting Period”). See id. at 3799. As proposed, the Reporting Period shall begin the

first calendar day of the next calendar month after the broker or dealer met or exceeded the customer

account threshold, unless it is the first time the broker-dealer had met or exceeded the customer account

threshold. See id. Any time after a broker or dealer has been required to produce reports pursuant to this

proposed section for at least a Reporting Period, if a broker or dealer falls below the customer account

threshold, the broker or dealer shall not be required to produce a report pursuant to this paragraph for the

next calendar month. See id.

102

See id. at 3799. The Commission also proposed that after the three-calendar month grace period, the

Reporting Period shall begin on the first calendar day of the fourth calendar month after the broker or

dealer has met or exceeded the customer account threshold. See id. As proposed, a broker-dealer that

crosses the customer account threshold for the first time is required to comply with the reporting

requirements of Rule 605 for at least a Reporting Period, even if that broker-dealer falls below the customer

account threshold during the grace period. See id.

103

See, e.g., prior 17 CFR 242.605(a)(1)(ii)(D) (measuring, for shares executed with price improvement, the

share-weighted average period from the time of order receipt to the time of order execution).

104

See prior 17 CFR 242.600(b)(92). See also Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75423 (Dec.

1, 2000) (“The definition [of ‘time of order receipt’] is intended to identify the time that an order reaches

the control of the market center that is expected, at least initially, to execute the order.”).

conjunction with the proposed expansion of Rule 605 to cover larger broker-dealers, the

Commission proposed to modify the definition of “time of order receipt” to specify that, in the

case of a broker or dealer that is not acting as a market center, the time of order receipt is the

time that the order was received by the broker or dealer for execution.105

Final Rule and Discussion

The Commission is adopting amendments to Rule 605 to include larger broker-dealers as

proposed and addresses certain commenters’ questions below. These amendments will provide

enhanced transparency to investors, allowing them to compare and evaluate execution quality

among different customer-facing larger broker-dealers and promoting competition among these

broker-dealers. As discussed in section II.A.2.a), the Commission is adopting the customer

account threshold as proposed. In addition, as discussed in section II.A.2.b), the Commission is

adopting as proposed the requirement that larger broker-dealers that are also market centers

produce separate reports pertaining to each function. Finally, as discussed in section II.A.2.c),

the Commission is adopting as proposed the requirement that all reporting entities, including

larger broker-dealers, measure certain statistics from the time of order receipt.

The Commission received comments from a variety of market participants on the

proposed expansion to require larger broker-dealers to provide Rule 605 reports. Certain

individual investors supported the proposed expansion of publicly available Rule 605 reports to

include broker-dealers because this expansion would increase transparency and encourage

105

See Proposing Release, 88 FR 3786 at 3799-800 (Jan. 20, 2023); proposed Rule 600(b)(109). The time that

the order is received by the market center for execution should be the same as the time that the order is

received by the broker-dealer for execution when the broker-dealer also acts as a market center for that

order.

competition among broker-dealers.106 One such commenter stated that the proposal would: (1)

require broker-dealers to provide more detailed information about the execution quality of their

trades, including data on execution speeds, price improvements, and order routing practices,

which would help retail investors “make more informed decisions about where to route our

orders and which broker-dealers to work with”; (2) provide more data on execution quality that

would “help level the playing field between individual investors and large institutional players

who currently have an information advantage”; and (3) “encourage broker-dealers to compete on

the quality of their executions, which would ultimately benefit all investors.”107 Two other

individual investors supported the inclusion of broker-dealers and the proposed rule overall,

stating that it would “provide a more detailed and comprehensive standard for broker-dealers to

follow, resulting in consistently robust best execution practices.”108 In addition, an academic and

an individual investor suggested expanding the Rule 605 reporting requirement to include all

broker-dealers, rather than just larger broker-dealers.109

For reasons similar to those offered by individual investors, financial services firms,

industry groups, and a group of academics supported the proposed expansion of Rule 605

106

See, e.g., letters from: Dylan Hodges (Dec. 27, 2022); Edward Murray (Dec. 26, 2022); Dr. Paul Pritchard

(Dec. 27, 2022); Cody Welch (Mar. 7, 2023) (“Welch Letter”); Abanes (Mar. 3, 2023) (“Abanes Letter”);

Ryan Macarthur (Feb. 24, 2023) (“Macarthur Letter”); David Genco, Jr. (Feb. 24, 2023) (“Genco Letter”).

107

Letter from Caleb C. (Mar. 18, 2023).

108

Letters from Justin West (Mar. 19, 2023); Ankit (Mar. 19, 2023).

109

See letter from Aswin Joy (Mar. 7, 2023) (“Joy Letter”); letter from James J. Angel, Georgetown

University (Mar. 31, 2023) (“Angel Letter”) at 2-3. See infra section II.A.2.a) for additional discussion

about the scope of the broker-dealer reporting requirement.

reporting requirements to larger broker-dealers.110 One financial services firm stated that the

proposed expansion would “fill a gap in coverage that currently obscures the order handling

practices of many broker-dealers” because many customer-facing broker-dealers do not meet the

definition of a market center and thus do not produce Rule 605 reports.111 This commenter stated

that the customers of these broker-dealers are left without any “reliable way to evaluate and

compare broker-dealer performance.”112 A group of academics that authored an academic

working paper concerning the execution quality of market orders received from various brokerdealers113 also submitted a comment letter supporting the proposed expansion and cited the need

110

See Fidelity Letter at 9 (stating that expanding Rule 605 reporting requirements to new entities will provide

greater transparency into execution quality differences and increase the ability to measure retail order

outcomes in a competitive environment); letter from Gregory Davis, Managing Director and Chief

Investment Officer, and Matthew Benchener, Managing Director, Personal Investor, The Vanguard Group,

Inc. (Mar. 31, 2023) (“Vanguard Letter”) at 3 (stating that the proposal will increase transparency by

empowering investors to compare execution quality across broker-dealers and make more informed

decisions about their choice of broker-dealer); Healthy Markets Letter at 16 (stating that Rule 605 reports

should cover large brokers that route orders for investors); Better Markets Letter at 5 (stating that the

proposed expansion of entities subject to Rule 605 disclosures will help the public compare and evaluate

execution quality among different market centers and broker-dealers, and thereby increase transparency of

order execution quality, increase information available to both retail and institutional investors, and help

promote competition among market centers and broker-dealers); Professor Schwarz et al. Letter at 2; and

letter from John L. Thornton, Co-Chair, Hal S. Scott, President, and R. Glenn Hubbard, Co-Chair,

Committee on Capital Markets Regulation (Mar. 31, 2023) (“CCMR Letter”) at 14 (stating that the

proposed expansion “will allow retail investors to determine the execution quality of their orders” and

“would likely enhance competition among retail broker-dealers based on price improvement and overall

execution quality”).

111

See Vanguard Letter at 3.

112

Id. at 3-4 (stating that requiring larger broker-dealers to make Rule 605 disclosures would address this

coverage gap and give their customers a “direct line of sight into broker-dealer performance”). See also

NASAA Letter at 5-6 (stating that the proposed expansion of reporting entities would “provide the public

with a more comprehensive view of order execution quality across the national market system” and “allow

brokerage customers to compare execution quality among different broker-dealers”).

113

See Proposing Release, 88 FR 3786 at 3832, n.529 (Jan. 20, 2023) and accompanying text (citing

Christopher Schwarz et al., The ‘Actual Retail Price’ of Equity Trades (Aug. 28, 2022)).

for improved public transparency based on their research.114 These commenters stated that, even

if retail investors do not pay attention to broker-level disclosures about execution quality if the

dollar cost to retail investors is low, such disclosures are likely to be scrutinized by brokers,

leading to greater competition and ultimately better execution for retail investors.115 A brokerdealer supported the proposed expansion to retail brokers, stating that it will make order

execution quality, and the marketplace generally, more transparent to retail investors.116 This

commenter also stated that, given the “highly competitive state of the current retail brokerage

market,” it is not certain that the proposed enhancements to Rule 605 would improve execution

quality for individual investors because outcomes for such investors could be “asymmetric.”117

However, this commenter stated that to the extent that there are opportunities to optimize

execution quality for individual investors, “empowering investors to compare execution quality

114

See Professor Schwarz et al. Letter at 1-2 (strongly supporting the inclusion of large broker-dealers given

their research study finding that shows economically and statistically significant price execution variation

across brokers; the level of such differences was previously unknown to retail traders and a large portion of

the financial industry). A group consisting of some of these academics submitted another comment letter in

which they cited a more recent academic working paper regarding competition among wholesalers and

stated that their results “emphasize the need for further price execution disclosure at the broker level.”

Letter from Xing Huang, Philippe Jorion, and Christopher Schwarz (Dec. 12, 2023) (“Huang et al. Letter”)

at 1 (attaching Xing Huang, Philippe Jorion, Jeongmin Lee & Christopher Schwarz, Who Is Minding the

Store? Order Routing and Competition in Retail Trade Execution (Nov. 19, 2023)).

115

See Professor Schwarz et al. Letter at 3. See also Better Markets Letter at 9-10 (stating that even though

some retail investors may not read Rule 605 reports, these investors will benefit indirectly by virtue of

enhanced disclosure that will “promote competition, improve regulatory oversight, and facilitate use by

third-party researchers and academics” to expose problematic order routing and execution practices).

116

See Virtu Letter II at 3.

117

See id. at 9. This commenter stated that the proposal “may lead to changes in the equilibrium mix of

customer types at each broker” because investors would migrate towards brokers that have better execution

quality statistics. See id. at 9, n.24. This commenter explained that “order execution quality tends to be

inversely related to the aggregate cost to provide liquidity to that broker’s customers’ orders because

market makers are willing to provide more price improvement to orders that are less expensive to service.”

Id. This commenter also stated that if the proposal “induces retail investors with more costly to service

orders to move to brokers that previously had less costly to service orders, it could cause execution quality

to worsen at the broker with previously less costly to service orders.” Id.

across retail brokers (and consequently to switch brokers based on this information) would be the

most efficient and effective way to address these concerns.”118

Some broker-dealers and financial services firms opposed the proposed expansion to

include larger broker-dealers, citing costs and the risk of confusion, especially for individual

investors.119 One such broker-dealer stated that retail customers are not asking for or seeking

information at the level of granularity required by the proposed rule, stating that the potential risk

of investor confusion seems disproportionate to the defined transparency benefits it may

provide.120 Another commenter opposed the proposed expansion because the 605 reports are

“overly complicated for the average investor” and may give a “false sense of comfort” about

order execution practices and quality.121

After considering the comments, the Commission is adopting the requirement for brokerdealers that meet the 100,000 customer account threshold to produce Rule 605 reports, as

proposed. To implement this requirement, the Commission also is adopting the related

118

Id. at 9.

119

See Robinhood Letter at 41-42 (stating that adding the proposed expansion to include larger broker-dealers

is not realistically going to get usable execution quality information in the hands of individual investors

because the voluminous data are in a format proven not to be particularly useful for them and that the

Commission underestimates the costs for a type of report not generally prepared by broker-dealers that are

not also market centers); letter from Seth A. Miller, President Advocacy & Administration, Cambridge

Investment Research, Inc. (Mar. 31, 2023) (“Cambridge Letter”) at 7 (stating in its capacity as a brokerdealer and investment adviser that the broad scope of the proposed inclusion of larger retail broker-dealers

will impose significant costs and is “likely to lead to misaligned, misleading comparisons between totally

different entities”); Schwab Letter II at 35 (stating that differences in certain execution statistics such as

E/Q may be attributable to different business models across firms rather than actual differences in E/Q

among comparable business models, and thus would create investor confusion rather than provide useful

information); Tastytrade Letter at 4-5 (observing that the proposal will significantly increase the number of

reported data points per ticker on approximately 10,000 NMS traded products, and expressing concern

about the ability of customers to digest the additional “confusing and complicated” data points in Rule 605

reports).

120

See Tastytrade Letter at 4 (“While we agree in general that greater transparency results in a level playing

field for retail customers, it seems counterproductive to do so in a manner that risks confusion.”).

121

See letter from Kelvin To, Founder and President, Data Boiler Technologies, LLC (Mar. 31, 2023) (“Data

Boiler Letter”) at 27-28.

amendments to Rules 600 and 605.122 The Commission agrees with commenters who recognized

the need for Rule 605 data pertaining to customer-facing larger broker-dealers. Larger brokerdealer reporting will be useful in increasing the transparency of larger broker-dealers’ order

execution quality so that investors have information available to compare and evaluate order

execution quality and order routing practices among market centers and larger broker-dealers. As

discussed further in section II.A.2.a) below, by limiting Rule 605 reporting requirements to

larger-broker dealers that meet the customer account threshold only, Rule 605 will balance the

benefits of broker-dealer reporting with the costs.

The Commission disagrees with commenters’ concerns that larger broker-dealer

reporting will be too confusing or misleading to investors, or will create a “false sense of

comfort” about order execution practices and quality.123 Individual investor commenters

expressed interest in receiving access to execution quality statistics pertaining to larger brokerdealers because this increased transparency would allow individual investors to make more

informed decisions and encourage competition among larger broker-dealers.124 Due to the

expansion of Rule 605 reporting requirements to larger broker-dealers, customers of these

broker-dealers, including individual investors, and other market participants will no longer need

to make inferences about these broker-dealers’ execution quality based on a combination of

122

See final 17 CFR 242.605(a)(7) (establishing the customer account threshold for larger broker-dealer

reporting requirements, production of separate reports, and applicable Reporting Period). See also final 17

CFR 242.605 (inserting references to “brokers” and “dealers” in introductory text, heading for (a), (a)(1)

introductory text, (a)(1)(i)(E), and (a)(3), (4), (5), and (6)). See also final 17 CFR 242.600(b)(27) (inserting

references to orders received by a “broker” or “dealer” in definition of “covered order”) and final 17 CFR

242.600(b)(103) (specifying that the definition of “time of order receipt,” in the case of a broker or dealer

that is not acting as a market center, is the time (at a minimum to the millisecond) that an order was

received by the broker or dealer for execution). For further discussion of these amendments, see Proposing

Release, 88 FR 3786 at 3796, 3798-99 (Jan. 20, 2023).

123

See supra notes 119-121 and accompanying text.

124

See supra notes 106-108 and accompanying text.

broker-dealers’ routing information contained in reports required by Rule 606 and market

centers’ Rule 605 reports. Instead, customers will be able to use execution quality information

contained in larger broker-dealers’ Rule 605 reports to make comparisons across these brokerdealers and select those broker-dealers that offer better execution quality. The availability of

information about larger broker-dealers’ execution quality also is expected to increase the extent

to which these broker-dealers compete on the basis of execution quality when making their order

routing decisions. Further, to the extent that broker-dealers increase the extent to which they

route orders to the market centers offering better execution quality, increased liquidity at those

venues may further improve execution quality, as a result of promoting the flow of orders to

market centers that offer better execution quality.

The stock-by-stock order execution information that will be provided in the detailed

report will allow market participants, including individual investors familiar with data analysis,

to make their own determinations about how to group stocks or orders when comparing

execution quality information across broker-dealers. However, the Commission is mindful that

the detailed report will contain a larger volume of statistical data and many market participants,

including individual investors, may not have the means to directly analyze the detailed report. As

discussed further below, the Commission is adopting a requirement that every market center,

broker, or dealer produce a summary execution quality report in addition to the more detailed

report required by Rule 605(a)(1).125 These summary reports will make available to market

participants and other interested parties readily accessible, aggregated data that will allow them

to compare some of the more significant aspects of the execution quality provided by specific

125

See infra section IV.B.

market centers and larger broker-dealers. These summary reports will provide human-readable

information that any investor, including individual investors, can assess without needing

technical expertise or relying on an intermediary.126 Moreover, even individual investors that do

not read Rule 605 reports from larger broker-dealers will benefit from independent analysts,

consultants, broker-dealers, the financial press, or market centers analyzing and producing more

digestible information using Rule 605 data.127

One industry group stated that it remains unclear whether broker-dealers’ Rule 605

reports would increase competition.128 This commenter stated its concern that producing Rule

605 statistics without accounting for different broker-dealer business models could lead investors

to make incorrect decisions regarding broker-dealer selection.129 This commenter further stated

that differences in execution quality could be the result of a myriad of factors, including “the

customers . . . different brokers serve and the equities the customers trade.”130 In response to this

126

See infra section IV.B.2. For a discussion of comments regarding investor education or testing related to

the summary reports, see infra section IV.B.3. As the new Rule 605 requirements, including the expansion

of scope to include larger broker-dealers, are implemented, the Commission will consider whether there is a

need for additional educational resources to assist investors.

127

See infra notes 1075-1077 and accompanying text (discussing ways in which third parties have used Rule

605 reports to produce information that is meant for public consumption).

128

See SIFMA Letter II at 29.

129

See id. at 30. This commenter also stated it does not understand on what basis the Commission believes

that differences in business models are well-known by market participants, and particularly retail investors,

for purposes of evaluating execution quality statistics. See id. (discussing Proposing Release, 88 FR 3786 at

3800 (Jan. 20, 2023)). However, the Commission’s statement in the Proposing Release was made in

specific reference to market participants’ use of Rule 605 reports to compare a market center and a brokerdealer, rather than use of Rule 605 reports to compare broker-dealers with one another. The Commission

agrees with the commenter that differences between broker-dealer business models may not be ex ante

well-known to market participants. However, market participants, including individual investors, will be

able to use the information in Rule 605 detailed reports and the Rule 605 summary reports to account for

differences in broker-dealer order flow, and broker-dealers are not precluded from separately providing

their customers with information that can be used to contextualize the information in the Rule 605 reports.

130

See id. at 30 (stating that when pointing to potential shifts in order flow from one broker-dealer to another,

the Commission does not account for any potential effects on execution quality caused by the shifting of

the order flow itself or the potential for order flow to consolidate among a smaller number of firms, thereby

reducing competition and ultimately hurting execution quality).

commenter, the Commission agrees that, as a result of different business models, a particular

broker-dealer’s order flow may be made up of a different mixture of securities, order types, and

order sizes, which may impact or constrain that broker-dealer’s overall execution quality level.131

However, under these amendments, larger broker-dealers will be required to categorize the

execution quality information required by Rule 605 by individual security, different types of

orders, and different order sizes. Giving market participants access to this information in Rule

605 reports will help ensure that they are able to control for these differences in order flow

characteristics and make apples-to-apples comparisons when assessing and comparing execution

quality information across broker-dealers.132

An industry group suggested that the Commission allow firms an opportunity to provide

a statement in their Rule 605 reports explaining how to contextualize the report based on the

nature of the firm’s order flow.133 In addition, a broker-dealer suggested that the Commission

permit retail brokers to provide background and contextual information to explain how their

obligations are different from those of wholesalers or other market centers that currently report

under Rule 605.134 The Commission is not adopting the suggestion to include a descriptive

statement within the Rule 605 reports because it would be inconsistent with the structure of these

reports, which are designed to be structured, standardized, machine-readable, quantitative

131

See Proposing Release, 88 FR 3786 at 3831 (Jan. 20, 2023). See also infra note 984 for an example of how

differences in order flow characteristics may impact inferences about execution quality. For further

discussion, see infra section IX.C.1.a).

132

That some of the information contained in the summary execution quality report will be useful for

controlling for differences across differences in order flow characteristics of broker-dealer was supported

by comment. See, e.g., comments in support of including average notional order size and average realized

spreads in the summary reports, discussed in infra section IV.B.1.b).

133

See SIFMA Letter II at 31.

134

See Virtu Letter II at 3-4.

disclosures.135 As the Commission stated in the original adopting release for Rule 605, Rule 605

is intended to establish a baseline level of disclosure and facilitate cross-market comparisons of

execution quality.136 Similarly, the adopted amendments to Rule 605 provide a baseline level of

disclosure that all market centers and larger broker-dealers must meet. Rule 605 does not

preclude larger broker-dealers from disclosing additional information concerning their order

execution practices that they believe would provide useful context concerning the quality of their

services on their websites or through other means of communication.137

A broker-dealer recommended that rather than expanding Rule 605 to include larger

broker-dealers, the Commission should update Rule 606, which already applies to nonmarket

center broker-dealers, to require additional information regarding execution quality.138 In

response to the commenter’s suggestion, the Commission considers the inclusion of larger

broker-dealers in Rule 605 as adopted to be the preferable option. Although providing Rule 605

data within an expanded version of the existing Rule 606 reports could result in lower

compliance costs as a result of broker-dealers’ existing experience with preparing and filing Rule

606 reports, many of the costs associated with the initial reporting of execution quality statistics

would still be incurred by broker-dealers and therefore broker-dealers would not benefit from a

significant reduction in compliance costs overall. Moreover, the format and frequency of the

135

See Rule 605 NMS Plan at 2 (providing that the detailed report must be in standard, pipe-delimited ASCII

format); final 17 CFR 242.605(a)(2) (providing that the summary report must be made available using the

most recent version of the schema for CSV format and the associated PDF renderer).

136

See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75419 (Dec. 1, 2000).

137

Any such statements will be subject to applicable securities laws and regulations.

138

See Robinhood Letter at 42 (“Instead of unnecessarily imposing additional costs on the industry to create

new Rule 605 reports that may not have the desired result of empowering investors to analyze brokerdealers’ execution quality, the SEC should require broker-dealers that already publish Rule 606 reports …

to add execution quality statistics to their Rule 606 reports.”).

Rule 606 reports differs because the data are more aggregated and the reports are issued

quarterly.139 In contrast, Rule 605 reports are monthly and provide detailed, symbol-by-symbol

data that will allow market participants and other users of the report to analyze the data and

consider the execution quality that a broker-dealer provides for orders with specific

characteristics. Further, while Rule 606 covers all brokers or dealers, subject to a de minimis

exception, as described below, the customer account threshold will focus the Rule 605 reporting

requirement on those larger broker-dealers for which the provision of Rule 605 data will include

data for most of the customer accounts handled by broker-dealers and, therefore, will balance the

benefits of broker-dealer reporting with the costs of reporting.140

Customer Account Threshold

An investor advocacy group and a national securities exchange specifically supported the

proposed customer account threshold that would include in scope a broker or dealer that

introduces or carries 100,000 or more customer accounts.141 An academic and an individual

139

See supra notes 45-51 and accompanying text (discussing Rule 606(a)(1) reports that provide quarterly

information about order routing and payment arrangements).

140

See infra section II.A.2.a) (discussing the Commission’s analysis to support the adoption of the customer

account threshold, which indicates that approximately 85 broker-dealers introduce or carry more than

100,000 customer accounts and these broker-dealers together handle over 98% of customer accounts). See

also infra section IX.E.5.b) (discussing a reasonable alternative to expand Rule 606 reporting

requirements).

141

See Healthy Markets Letter at 16, n.38; Nasdaq Letter at 43 (stating that the proposed customer account

threshold “appears to balance the associated implementation costs on those broker-dealers that may provide

the execution quality statistics with the greatest benefit”).

investor suggested that all broker-dealers should be required to submit Rule 605 reports.142 In

contrast, a broker-dealer stated that it is not clear why it is necessary to include such a broad

scope of larger broker-dealers.143 According to this commenter, the proposal would require larger

retail broker-dealers to produce execution quality reporting and metrics that are identical to those

required of securities exchanges and market makers, even if those broker-dealers do not direct

client orders.144

After considering the comments, the Commission is adopting the 100,000 customer

account threshold, as proposed. The Commission’s analysis of available data on the number of

broker-dealers that will meet the minimum reporting threshold of 100,000 customers confirmed

that such threshold will balance the benefits of having broker-dealers produce execution quality

statistics with the costs of implementation and continued reporting,145 given the smaller amount

of benefits relative to costs that there would be if the Rule 605 reporting requirements extended

to broker-dealers that introduce or carry a smaller number of customer accounts. Specifically,

142

See Joy Letter; Angel Letter at 2-3 (stating that all broker-dealers should be required to show execution

quality information, and that CAT could easily produce Rule 605 reports at low incremental cost). See also

Robinhood Letter at 44-45 (recommending that, if the Commission decides to proceed with the proposed

rule, it should require all broker-dealers to report under Rule 605, because the number of large brokerdealers is relatively small (6.7% of all broker-dealers); the limited application of the rule would create an

information gap about execution quality for investors that use smaller broker-dealers and new retail broker

entrants). With respect to the commenter’s suggestion that CAT data could be used to produce Rule 605

reports, see infra section V.B.2.b) for a discussion of the potential alternative to generate order execution

quality reports using CAT data.

143

See Cambridge Letter at 7 (“such breadth cannot be justified in light of the likely significant costs to be

imposed on certain participants”).

144

See id.

145

See infra section IX.D.2.a)(1) for a discussion of the costs related to expanding the scope of Rule 605

reporting entities. As discussed further below, broker-dealers that were not previously required to publish

Rule 605 reports will incur initial costs to prepare and post Rule 605 reports for the first time, which may

include developing any policies and procedures that may be needed to do so, and all broker-dealers will

face ongoing costs to continue to prepare the reports each month. See also infra section IX.E.1.a) for a

discussion about the estimated costs of utilizing a different number of customer accounts as the minimum

reporting threshold.

this analysis indicates that approximately 85 broker-dealers introduce or carry more than 100,000

customer accounts and these broker-dealers together handle over 98% of customer accounts.146

The Commission is not subjecting all broker-dealers to Rule 605 reporting requirements, as

suggested by certain commenters, because of the lower benefits relative to costs for brokerdealers with a smaller number of customer accounts.147 Conversely, the Commission disagrees

with the commenter that states that the scope of larger broker-dealers that will be required to

provide Rule 605 reports is overbroad.148 The relative market-wide benefit of having a brokerdealer prepare Rule 605 reports increases when the broker-dealer has more customers.149 The

Commission’s updated analysis indicates that utilizing a lower customer account threshold, such

as 10,000 customer accounts, would nearly triple both initial and ongoing costs for non-market

146

Analysis from the Proposing Release was repeated regarding the estimated number of broker-dealers that

will be subject to Rule 605 reporting requirements according to different definitions of the customer

account threshold. See Proposing Release, 88 FR 3786 at 3886-87 (Jan. 20, 2023). For a description of how

this analysis differs from the analysis in the Proposing Release, see infra note 1747. This updated analysis

indicates that approximately 85 broker-dealers (or approximately 6.7% of customer-carrying brokerdealers) introduce or carry more than 100,000 customer accounts and these broker-dealers together handle

over 98% of customer accounts. See infra Table 13 for a cost-benefit analysis of different customer account

thresholds that could be used to define “larger broker-dealer” and accompanying text for methodology. For

example, approximately 244 broker-dealers introduce or carry more than 10,000 customer accounts and

these broker-dealers together handle over 99% of customer accounts. Further, approximately 1,245 brokerdealers introduce or carry at least 1 customer account.

147

See infra section IX.E.1.a) (reducing the customer account threshold from 100,000 to 10,000 would almost

triple both initial and ongoing costs); see also infra section IX.E.1.b) (discussing the alternative of requiring

all broker-dealers to prepare Rule 605 reports).

148

See supra notes 143-144 and accompanying text. It is unclear, and the commenter does not explain, why

any of the required execution quality metrics will not be appropriate for reporting by a larger broker-dealer

and the commenter does not suggest any alternative metrics. It is also unclear, and the commenter does not

explain, how a Rule 605 report prepared by a retail broker will be less useful if the retail broker did not

direct client orders. Even though the same underlying order may be reflected on multiple Rule 605 reports,

the aggregated statistics within each report will provide different views of execution quality specific to the

group of orders received by each reporting entity. Thus, a Rule 605 report prepared by a retail broker will

allow that retail broker’s customers, as well as other market participants, to view the execution quality

specific to those orders received by the specific retail broker.

149

See Proposing Release, 88 FR 3786 at 3797, n.167 (Jan. 20, 2023) and accompanying text (discussing

potential initial and ongoing costs that broker-dealers would incur as a result of the proposed amendments

to Rule 605).

center broker-dealers (which are not otherwise subject to Rule 605’s reporting requirements) and

yet would result in capturing only modestly more customer accounts than the 100,000 customer

account threshold.150 The Commission’s updated analysis also indicates that utilizing a higher

customer account threshold, such as 250,000 customer accounts, would lower costs but also

decrease coverage of customer accounts and customer order originations.151 Thus, utilizing

100,000 customer accounts as the adopted minimum reporting threshold will better balance the

benefits of having broker-dealers produce execution quality statistics with the costs of

implementation and reporting.

The customer account threshold will require brokers-dealers to include in their

calculations the customer accounts that they introduce, as well as the customer accounts that they

carry. Rule 605 reports that reflect orders received from customer accounts that a broker-dealer

introduces or carries will provide useful information to market participants because both

introducing and carrying broker-dealers make decisions about where to route those orders and it

will be helpful for customers to be able to evaluate the execution quality received as a result of

those decisions.

One industry group requested an exception from the Rule 605 reporting requirement for

an introducing firm that routes all of its customer orders to its clearing firm, on a non-directed

basis, where the clearing firm makes all routing decisions and the introducing firm does not

150

See infra section IX.E.1.a) and Table 13 (demonstrating that, for example, reducing the customer account

threshold from 100,000 to 10,000 would increase estimated initial and ongoing compliance costs from

about $3.4 million and $4.4 million, respectively, to about $9.8 million and $12.6 million, respectively,

while increasing the coverage of customer accounts by 1.4% and the coverage of customer order

originations by 21%). See also infra notes 1749-1751 (discussing why lowering the customer account

threshold to include these customers might not be particularly beneficial).

151

See Table 13 (demonstrating that raising the customer account threshold to 250,000 would lower estimated

initial and ongoing compliance costs to about $2.4 million and $3.1 million, respectively, while decreasing

the coverage of customer accounts by 1.1% and the coverage of customer order originations by 55.7%).

receive payment for order flow (“PFOF”).152 This commenter explained that its request would

reduce the reporting burden for smaller introducing firms.153 This commenter stated that, given

its suggested conditions for the exception from reporting requirements that an introducing broker

would be required to examine the clearing firm’s Rule 605 report and not have reason to believe

the clearing firm’s report materially misrepresents the introducing broker’s order flow, the

quality of the disclosure should not be impacted.154 A second industry group made a similar

request for an exception from reporting for certain introducing broker-dealers, stating that when

introducing broker-dealers send customer orders to a clearing broker that makes the routing

decisions, the introducing broker may not be in the best position to generate Rule 605 reports.155

The Commission considered these commenters’ suggestion that Rule 605 provide an

exception for certain introducing broker-dealers, but is not adopting the suggested exception for

the following reasons: (1) Rule 605 reports prepared by larger broker-dealers will provide market

participants and other interested parties with information relevant to evaluating how relationships

among broker-dealers may affect execution quality, and the payment of PFOF is not the only

circumstance that leads to conflicted relationships between an introducing broker-dealer and its

customers;156 (2) an introducing firm would not be able to determine whether or not its clearing

152

See FIF Letter at 6.

153

See FIF Letter II at 2.

154

See id.

155

See letter from William C. Thum, Managing Director and Assistant General Counsel, SIFMA AMG (Mar.

31, 2023) (“SIFMA AMG Letter”) at 6.

156

For instance, retail brokers potentially face conflicts of interest when making order routing decisions,

including whether to route to a particular wholesaler. See infra section IX.C.4.a)(2). As an example, brokerdealers face conflicts of interest when making routing decisions due to their own affiliation with market

centers (e.g., if the broker-dealer operates its own ATS), from the presence of liquidity fees and rebates on

some market centers, or from payments that some retail brokers receive from wholesalers to attract the

order flow of their individual investor customers (i.e., PFOF). See infra notes 1300-1304 and

accompanying text.

firm’s Rule 605 report materially misrepresents the introducing firm’s order flow without

independently calculating its own execution quality statistics, and if the introducing firm needed

to make these calculations to do this assessment, then any additional burden due to the

requirement to prepare Rule 605 reports will be minimal; (3) different firms could have differing

interpretations of how much variation there could be in execution quality statistics between an

introducing firm and its clearing firm before the clearing firm’s Rule 605 report would

“materially misrepresent” the introducing firm’s order flow; and (4) even if an introducing firm

determined that it has no reason to believe that its clearing firm’s Rule 605 report materially

misrepresents the introducing firm’s order flow, the introducing firm’s customers could consider

certain differences between the execution quality statistics of the introducing firm and its

clearing firm to be meaningful.157

An industry group asked for clarification regarding how firms would calculate their

number of customer accounts for purposes of the customer account threshold.158 In response, the

Commission is providing the following guidance. First, the introducing broker-dealer generally

should only count the institutional top-level account when an introducing broker-dealer that is

157

In some instances, the same underlying order may be reflected on the Rule 605 reports provided by both an

introducing firm and its clearing firm, but the separate reports will provide different views of execution

quality specific to the group of orders handled by each broker-dealer. See also Proposing Release, 98 FR

3786 at 3798 (Jan. 20, 2023).

158

See FIF Letter at 5-6 (requesting clarifications on how a firm would calculate its number of accounts to

determine whether it meets the customer account threshold in the following circumstances: 1) an

introducing firm that is not a clearing firm, where the introducing firm establishes a top-level trading

account for an institutional asset manager and the asset manager allocates trade executions to sub-accounts;

2) a firm that has accounts for non-U.S. customers; 3) a firm that provides routing services for other brokerdealers; and 4) a firm that has authorized an account to trade NMS stocks but that account has never traded

an NMS stock or has not traded an NMS stock for an extended period of time).

not a clearing broker-dealer establishes a top-level account for an institutional asset manager.159

The Commission recognizes that in such instances the introducing broker-dealer often utilizes an

omnibus clearing arrangement and thus does not have specific knowledge of how many

underlying accounts a top-level account may represent.160 Second, broker-dealers generally

should count and only count the accounts for all of their customers that are authorized by their

broker-dealers to trade NMS stocks, including non-U.S. customers. A focus on customers that

are authorized to trade NMS stocks generally should align with the scope of Rule 605 reports

because these reports relate to covered orders in NMS stocks.161 Third, broker-dealers that

provide routing services for other broker-dealers could have customer accounts for that portion

of their business and the routing broker-dealer generally should consider whether a top-level

account pertains to customer orders and count only those top-level accounts that the routing

broker-dealer introduces or carries that are associated with customer orders. Fourth, brokerdealers generally should count only active customer accounts. Broker-dealers generally should

consider customer accounts as active in the same manner as defined and reported in their

Financial and Operational Combined Uniform Single (“FOCUS”) Reports on Form X-17A-5.162

Consistent with their FOCUS reports, larger broker-dealers reporting under Rule 605 generally

159

In this scenario as presented by the commenter, the asset manager submits orders using this top-level

account and separately establishes multiple underlying accounts with the clearing broker-dealer to allocate

trades post-execution. See id. at 5-6.

160

See supra note 98 and accompanying text (discussing omnibus clearing arrangements in which the clearing

firm does not know the identity of the customers of the introducing firm). Having an introducing brokerdealer count the top-level account through which trading occurs is consistent with the approach for

reporting transactions to the CAT. See FINRA CAT FAQ M4, available at https://catnmsplan.com/faq

(stating that in scenarios involving managed accounts where an order may be placed in a master account

with subaccount allocations made at a later time, the identifier representing the master/top account should

be reported to CAT for transaction events requiring such identifier).

161

See final 17 CFR 242.605(a)(1); final 17 CFR 242.605(a)(7).

162

See Instructions to FOCUS Report – Form X-17A-5 at 2.

should count only active accounts that have a non-zero cash or securities balance at the end of

the reporting period. Leveraging an existing classification of active accounts in these FOCUS

reports generally should facilitate the identification of inactive accounts.

Production of Separate Reports

Two investor advocacy groups expressed their support for the proposed requirement that

larger broker-dealers that are also market centers produce separate reports for each activity.163

After considering the comments, the Commission is adopting the requirement that larger

broker-dealers that are also market centers produce separate reports pertaining to each function,

as proposed. As explained in the Proposing Release, requiring a firm to produce separate reports

pertaining to its market center function and its broker-dealer function will allow market

participants and other interested parties to view the firm’s execution quality from the perspective

of how it operates in each of these separate roles.164

An industry group stated that the proposed distinction between broker-dealer activity and

market center activity in Rule 605 reports requires clarification and asked specific questions to

clarify this distinction for purposes of grouping orders to prepare the separate reports.165 In

163

See Healthy Markets Letter at 16 (“[B]rokers that are also market centers (including as OTC market

makers) should be required to separately report their market center functions for all covered orders (e.g.

ATS or SDP operations).”); Better Markets Letter at 5, n.12.

164

See Proposing Release, 88 FR 3786 at 3798 (Jan. 20, 2023).

165

See SIFMA Letter II at 28 (asking the following questions as to how a firm should group different

transactions for Rule 605 separate reports: 1) “If a firm is an OTC market maker and introduces or carries

100,000+ customer accounts, how should the firm determine which orders to report as broker-dealer trades

versus those executed as a market center?”; 2) “If a firm engages in a mixed capacity trade involving both a

portion executed as agent and a portion executed as principal, would this order need to be bifurcated

between the two reports?”; 3) “If a firm trades in a riskless principal capacity, but the transaction was part

of its internal broker-dealer business and not its OTC market making business, should the firm nonetheless

attribute the riskless principal trade to its market center Rule 605 report? The Commission only discusses a

market center engaging in riskless principal transactions, but it seems possible that a non-market center

might transact on a riskless principal basis as well.”).

response, the Commission provides the following clarifications. First, a firm that is an OTC

market maker and introduces or carries over 100,000 customer accounts (i.e., meets the customer

account threshold for larger broker-dealers) generally should include in its Rule 605 report

pertaining to its broker-dealer function all covered orders in NMS stocks that the firm’s brokerdealer received for execution as part of its customer-facing line of business. The firm generally

should include in its Rule 605 report pertaining to its market center function all covered orders in

NMS stock that the firm received for execution that are the type of order for which the firm

serves as an OTC market maker. The set of orders pertaining to a firm’s broker-dealer function

may overlap with the set of orders pertaining to its market center function. The firm generally

should include an order in both of its Rule 605 reports if its broker-dealer received the order

from a customer and the firm also acts as a market center for that type of order.

Second, a firm that engages in a mixed capacity trade (i.e., a trade involving both a

portion executed as agent and a portion executed as principal) generally should include in its

Rule 605 report pertaining to its broker-dealer function the entire covered order that it received

for execution as part of its customer-facing line of business and subsequently executed in a

mixed capacity. Based on the firm’s execution of a portion of the order as principal, as a general

matter, the firm acts as an OTC market maker for that type of order and, because an OTC market

maker falls within the definition of a “market center,”166 that portion of the order generally

should be included in its report pertaining to its market center function. The firm’s execution of a

portion of the order as agent generally should not be determinative of whether the firm acts as an

OTC market maker for that type of order. The firm also generally should include in its Rule 605

166

See final 17 CFR 242.600(b)(55).

report pertaining to its market center function the portion of the covered order that it executed as

agent if it received the order for execution as an OTC market maker.167 Whether the firm

received the entire covered order in its capacity as an OTC market maker (and thus as market

center) or only a portion of the order in its capacity as an OTC market maker generally will

depend on the types of orders for which it acts as an OTC market maker.168

Third, a firm that trades in a riskless principal capacity with respect to a transaction

handled by its non-market center, internal broker-dealer business rather than its OTC market

making business generally should not need to include the transaction in its Rule 605 report

pertaining to its market center function because this division of business lines suggests that the

firm is acting in its capacity as a broker-dealer only. However, the firm generally should evaluate

whether or not it acts as an OTC market maker in connection with its internal broker-dealer

167

When a market center, broker, or dealer receives a covered order for execution, it may execute in part at the

receiving market center, broker, or dealer and in part at an away venue, but the entire covered order will be

included in the firm’s Rule 605 report. See final 17 CFR 242.605(a)(1)(i)(E) (requiring a market center,

broker, or dealer to report the cumulative number of shares of covered orders executed at the receiving

market center, broker, or dealer, excluding shares executed on a riskless principal basis) and final 17 CFR

242.605(a)(1)(i)(F) (requiring a market center, broker, or dealer to report the cumulative number of shares

of covered orders executed at any other venue).

168

The Commission agrees with the previous guidance provided by the staff that the Rule 605 reporting

requirement for market centers generally should apply to broker-dealers insofar as they act as a market

center with respect to orders received from other persons. See Proposing Release, 88 FR 3786 at 3798,

n.180 (Jan. 20, 2023) (citing Division of Market Regulation: Staff Legal Bulletin No. 12R (Revised),

Question 4 (June 22, 2001), available at https://www.sec.gov/interps/legal/slbim12a.htm). The Commission

provides the following example to illustrate. Assume that Firm A generally acts as an OTC market maker

for XYZ stock. If Firm A receives an order for 100 shares of XYZ stock, it may choose to execute as

principal 50 shares of XYZ stock that it holds in inventory and execute as agent the 50 shares of XYZ stock

necessary to fill the entire order. Firm A generally would have received the entire 100-share order in its

capacity as an OTC market maker, notwithstanding its execution of a portion of the order as agent. In

contrast, Firm B acts as an OTC market maker for XYZ stock but not ABC stock. If Firm B receives an

order for 50 shares of XYZ stock and an order for 50 shares of ABC stock, Firm B generally would have

received the order for 50 shares of XYZ stock in its capacity as an OTC market maker, regardless of

whether it executed those shares as principal or as agent. In this scenario, Firm B generally would not have

received the order for 50 shares of ABC stock in its capacity as an OTC market maker and therefore

generally would have received this order in connection with its broker-dealer function only.

business, in which case that portion of the business may be a market center and thus be required

to be reported as such.

A financial services firm requested clarification of whether a broker-dealer that

principally facilitates the trading of fractional shares must publish a separate Rule 605 report as a

market center.169 In response, the Commission clarifies that under the adopted amendments to

Rule 605 a reporting entity must produce a separate Rule 605 report as a market center if it meets

the definition of an “OTC market maker” and receives “covered orders” for execution in such

capacity.170 As stated in the Proposing Release, as a general matter, a broker-dealer generally

should categorize a customer’s submitted order for an NMS stock, whether it be for a fractional

share, whole shares, or whole shares with a fractional share component, as a “held” order (and

thus a covered order) if the customer reasonably expects its broker-dealer to attempt to execute

such order immediately.171

One group of academics suggested that the Commission require separate disclosures for

each account type at each broker-dealer to reflect the observation that execution quality differs

across platforms with different commission and PFOF structures.172 A group consisting of some

of these academics also suggested that the Commission require separate disclosures of specific

169

See Fidelity Letter at 9-10.

170

See supra note 3 for the definition of “OTC market maker.” The term “covered order” is defined in final 17

CFR 242.600(b)(27). As discussed above, a firm may act as an OTC market maker for certain types of

orders only. For example, Firm C acts as an OTC market maker for fractional shares only. If Firm C

receives an order for 51.25 shares of XYZ stock, it may execute as principal 0.25 shares of XYZ stock and

execute as agent 51 shares of XYZ stock. Firm B generally would have received only the fractional share

component of the order (i.e., 0.25 shares) in its capacity as an OTC market maker and therefore only the

fractional share component generally should be included in Firm C’s Rule 605 report pertaining to its

market center function.

171

See Proposing Release, 88 FR 3786 at 3789, n.36 (Jan. 20, 2023).

172

See Professor Schwarz et al. Letter at 5. See also Better Markets Letter at 5, n.14 (agreeing with this

recommendation).

“broker-wholesaler pairs” consisting of a broker-dealer and each wholesaler to which the brokerdealer routes orders from retail investors.173 A broker-dealer stated that execution quality

metrics, including the proposed summary reports, would be more informative if Rule 605 reports

differentiated between retail investors and professional customers because the nature of order

flow and resulting execution quality may be quite different.174 Another broker-dealer stated that

“each firm’s order flow is unique” and suggested that the Commission “consider the balance of

this additional transparency of order flow” both: (1) “in the context of reporting fragmentation

for trading venues that have built in segmentation (i.e., ATS with multiple pools or an exchange

that has a continuous order book and a retail price improvement order book)”; and (2) “in the

context of retail brokers where experience may be materially different within a broker-dealer

(i.e., a retail broker chooses to offer retail customers different experiences within the same

broker-dealer).”

The Commission is not adopting these commenters’ suggestions that larger brokerdealers be required to produce multiple reports that differentiate between account types, business

segments, or routing destinations. Requiring larger broker-dealers to split their orders amongst

multiple Rule 605 reports pertaining to their broker-dealer function would create additional

implementation costs and potentially undercut the goal of having standardized reports that are

comparable across entities. For instance, differences among how firms structure different

173

See Huang et al. Letter at 1 (“[O]ur results suggest that disclosures for each broker-wholesaler pair should

provide additional helpful information to monitor broker and wholesaler performance. This would allow

within-broker comparisons of execution quality that are more meaningful than comparisons solely across

brokers.”).

174

See Rule 605 Citadel Letter at 8 (recommending that the Commission engage with market participants to

appropriately define a retail order, such as by reference to an order or trade threshold and stating that forty

trades per day would be inappropriately high).

business lines would pose challenges in ensuring that each firm is capturing order flow with

similar characteristics in the same way, which could impede the comparability of reports.

Time of Order Receipt

One investor advocacy group stated that broker-dealers should be required to calculate

time of order receipt based on when that broker-dealer received the order because, in the

commenter’s view, the use of the time the order was received would show if there are orderdelays and thereby provide a useful metric for anyone examining order-routing latency across

brokers.175 An industry group and a financial services firm suggested instead of the proposed rule

text that broker-dealers should be required to calculate time of order receipt based on the time

that the broker-dealer first routes the order.176 The industry group questioned whether execution

metrics should be measured before or after the broker-dealer has applied risk controls and

decided whether to reject the order.177 This commenter stated that current order management

systems may not generate a timestamp for when risk controls have been applied and it would be

costly to generate such markers.178 For this reason, this commenter suggested permitting a

routing firm to use the time of its first route as the time of order receipt and stated that the time

of first route would be consistent with the Staff frequently asked questions (FAQs) regarding

175

See Healthy Markets at 16-17.

176

See FIF Letter at 18-19; Schwab Letter II at 33; letter from Jason Clague, Managing Director, Head of

Operations, The Charles Schwab Corporation (Sep. 28, 2023) (“Schwab Letter III”) at 5.

177

See FIF Letter at 19.

178

See id.

Rule 606.179 The financial services firm stated that Rule 605 reports for a non-market center

should use the time of order routing, not the time of order receipt, because broker-dealers

perform necessary review activities following receipt of the order but prior to routing the

order.180

After consideration of comments, the Commission is adopting the requirement that larger

broker-dealers calculate time of order receipt based on the time that they received the initial

order, as proposed.181 Time of order receipt, rather than order route time, is more relevant to

customers of a broker-dealer because it will show how the broker-dealer handled the order from

the time of receipt by the broker-dealer. Time of order receipt will show any delays in executing

the order, and any resulting consequences on the execution quality the broker-dealer obtained for

that order, because the execution quality statistics will be measured based on the prevailing

market prices at the time the order was received. In addition, counting time of order receipt from

the time that a broker-dealer initially receives the order will allow broker-dealers to assign a time

of order receipt in a prompt and uniform manner and thus help to ensure that the time of order

receipt is assigned in a non-manipulatory manner.182

179

See id. (citing Rule 606 Staff FAQs, FAQ 11.01). Rule 606 Staff FAQs are available at:

https://www.sec.gov/tm/faq-rule-606-regulation-nms. Staff reports, Investor Bulletins, and other staff

documents (included those cited herein) represent the views of Commission staff and are not a rule,

regulation, or statement of the Commission. The Commission has neither approved nor disapproved the

content of these staff documents and, like all staff documents, they have no legal force or effect, do not

alter or amend the applicable law, and create no new or additional obligations for any person.

180

See Schwab Letter II at 33; Schwab Letter III at 5 (“The use of order receipt time rather than route time

would result in some execution quality statistics like execution speed not being fairly represented in the

reports due to outliers caused by market access review activities.”).

181

See final 17 CFR 242.600(b)(103).

182

See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75423 (Dec. 1, 2000) (discussing a commenter’s

concern that a market center might attempt to manipulate the time of receipt for its order flow by, for

example, monitoring market movements before and/or after receipt of any order and assigning the NBBO

that is most favorable to them during that brief option period).

A financial services firm that suggested the use of order route time stated that larger share

orders are more likely to be sent to a review queue and could have a “disproportionate negative

impact” on average execution speed.183 This commenter further stated that, “[c]onsequently,

using order receipt time could create a perverse incentive for firms to diminish time spent on

necessary reviews in an effort to improve execution speed statistics.”184 The Commission

disagrees that broker-dealers will be incentivized to circumvent their risk controls because timeto-execution statistics take into account the period during which a broker-dealer is performing

various reviews and before the broker-dealer routes an order. Broker-dealers have multiple

reasons to implement risk controls upon the receipt of customer orders. For example, brokerdealers are subject to other regulatory requirements, including the Commission’s market access

rule, that will continue to apply.185 The existence of such requirements means that broker-dealers

will continue to utilize risk controls necessary to comply with these requirements, including risk

controls implemented to comply with the market access rule, because the potential consequences

of failing to comply with these requirements likely would counterbalance any perceived benefits

of being able to report faster execution times. Broker-dealers also have reputational and business

concerns that serve as additional incentives to continue to apply risk controls. Further, to the

extent that larger orders received by broker-dealers may result in slower execution times due to

the application of risk controls, measuring time to execution at the time of order receipt may

motivate broker-dealers to make their risk controls more efficient. Moreover, time-to-execution

183

See Schwab Letter II at 33; Schwab Letter III at 5.

184

Schwab Letter II at 33; Schwab Letter III at 5.

185

See 17 CFR 240.15c3-5.

statistics are only one aspect of execution quality statistics and price-based execution quality

statistics will provide a different dimension of the reporting firms’ execution quality.

An industry group requested confirmation that orders rejected based on the application of

risk and compliance controls would not count as having been received for purposes of Rule 605

reporting.186 In response, the Commission confirms that a broker-dealer generally should not

include orders rejected based on the application of risk and compliance controls within its Rule

605 reports. Including these rejected orders in Rule 605 reports would not provide data useful to

understanding the execution quality provided by the reporting broker-dealer because these orders

would not have been received by the firm in a form where execution was possible. Thus, these

rejected orders generally should not be treated as “received” by the broker-dealer for Rule 605

reporting purposes.

Qualified Auction Mechanisms

Proposed Approach

In today’s equity markets, retail brokers often identify and route the marketable orders of

individual investors in NMS stocks to wholesalers and the wholesalers often internalize these

orders.187 At the same time that the Commission proposed the amendments to Rule 605

discussed herein, the Commission separately proposed rules that generally would require that

individual investor orders be exposed to order-by-order competition in fair and open auctions

designed to obtain the best prices before such orders could be internalized by wholesalers or any

186

See FIF Letter at 19.

187

This practice of separately identifying and routing the marketable orders of individual investors to

wholesalers is a form of “segmentation.”

other type of trading center that restricts order-by-order competition.188 The proposal focused on

the treatment of segmented orders, which the Commission proposed to define as an order for an

NMS stock that is for an account that is: (1) of a natural person or an account held in legal form

on behalf of a natural person or group of related family members; and (2) in which the average

daily number of trades executed in NMS stocks was less than 40 in each of the six preceding

calendar months.189 The intent of the proposed definition was to encompass the marketable

orders of individual investors that retail brokers currently route to wholesalers for handling and

execution.190 Under those proposed rules, a “restricted competition trading center” would not be

allowed to execute internally a segmented order for an NMS stock until after a broker or dealer

has exposed such order to competition at a specified limit price in a “qualified auction” that met

certain requirements and was operated by an “open competition trading center.”191

If the Commission adopts the order competition rule proposal, a national securities

exchange or NMS Stock ATS that serves as an open competition trading center and is required to

prepare execution quality reports under Rule 605 would be required to include covered orders

that it received for execution in a qualified auction within its blended execution quality statistics.

188

For a full description and discussion of the order competition rule proposal, see Order Competition Rule

Proposing Release, 88 FR 128 (Jan. 3, 2023); proposed 17 CFR 242.615 (“Rule 615”).

189

See Order Competition Rule Proposing Release, 88 FR 128 at 149 (Jan. 3, 2023); proposed Rule 600(b)(91)

(defining “segmented order”).

190

See Order Competition Rule Proposing Release, 88 FR 128 at 149 (Jan. 3, 2023).

191

See id. at 243; proposed Rule 600(b)(87) (defining “restricted competition trading center”); proposed Rule

615(a) (describing the order competition requirement). An “open competition trading center” would be a

national securities exchange or NMS Stock ATS that meets certain requirements, including being

transparent and having a substantial trading volume in NMS stocks independent of qualified auctions. See

Order Competition Rule Proposing Release, 88 FR 128 at 243 (Jan. 3, 2023); proposed Rule 600(b)(64)

(defining “open competition trading center”). A “qualified auction” would be an auction operated by an

open competition trading center pursuant to specified requirements that are designed to achieve

competition. See Order Competition Rule Proposing Release, 88 FR 128 at 243 (Jan. 3, 2023); proposed

Rule 600(b)(81) (defining “qualified auction”); proposed Rule 615(c) (setting forth requirements for

operation of a qualified auction).

Because of concerns that differences in execution quality for orders executed within proposed

qualified auctions as compared to orders executed outside of these qualified auctions would not

be apparent in blended execution quality statistics, the Commission proposed to amend Rule

605(a)(1) to state that market centers that operate a qualified auction must prepare a separate

report under Rule 605 pertaining only to covered orders that the market center receives for

execution in a qualified auction.192

Final Rule and Discussion

In this release, the Commission is not acting on the proposal to require separate Rule 605

reports for orders that a market center receives for execution from a qualified auction. The

Commission received generally supportive comments from a variety of market participants,

including individual investors, on this proposed amendment.193 Some industry commenters

suggested that Rule 605 reports should distinguish between segmented and non-segmented

orders, as described in the Order Competition Rule Proposing Release.194

The Commission is still considering the order competition rule proposal and the proposal

to require separate Rule 605 reports for orders that a market center receives for execution in a

qualified auction. Therefore, the qualified auctions contemplated by the Order Competition Rule

Proposing Release do not exist as a place of execution at this time. Accordingly, in this release,

192

See Proposing Release, 88 FR 3786 at 3802 (Jan. 20, 2023).

193

See, e.g., Joy Letter; Pritchard Letter; and letters from Julio Cesar (Feb. 24, 2023) (“Cesar Letter”); Nevin

Varghese (Dec. 26, 2022) (“Varghese Letter”).

194

See FIF Letter at 13 (stating that segmented orders would likely need to be separate from non-segmented

orders); Fidelity Letter at 9 (recommending that the Commission distinguish Rule 605 data by segmented

and non-segmented order flow and display such orders separately in detailed reports and summary reports);

SIFMA Letter II at 29 (stating that it is unclear why retail broker-dealers should have to report on

segmented orders because execution quality will depend on the qualified auction rather than actions by the

originating broker, and suggesting instead a single Rule 605 report that evaluates all qualified auctions).

the Commission is not acting on the proposed separate Rule 605 reporting requirement for orders

a market center receives for execution in a qualified auction.

NMS Stock ATSs and SDPs

Proposed Approach

Under Rule 605 prior to the amendments, firms that operate two separate markets must

prepare separate Rule 605 reports for each market center.195 This requirement allows market

participants to assess the execution quality of each market individually and prevents differences

in the nature of each market from obscuring information about execution quality. The

Commission proposed to specify in Rule 605(a)(1) that an NMS Stock ATS (as defined in

Regulation ATS196) shall prepare reports separately from their broker-dealer operators to the

extent such entities are required to prepare reports.197 The Commission also proposed to require

in Rule 605(a)(1) that any market center that provides a separate routing destination that allows

persons to enter orders for execution against the bids and offers of a single dealer shall produce a

separate report pertaining only to covered orders submitted to such routing destination.198 This

provision would have covered an SDP operated by a broker-dealer and required a separate report

195

See prior 17 CFR 242.605(a)(1) (requiring “every” market center to produce a report). See also Rule 605

NMS Plan at n.1 (“An entity that acts as a market maker in different trading venues (e.g., as a specialist on

an exchange and as an OTC market maker) would be considered as a separate market center under the Rule

for each of these trading venues. Consequently, the entity should arrange for a Designated Participant for

each market center/trading venue (e.g., an exchange for its specialist trading and an association for its OTC

trading).”) For a description of “Designated Participant” as defined in the Rule 605 NMS Plan, see infra

note 869.

196

17 CFR 242.300(k). “Regulation ATS” consists of 17 CFR 242.300 through 242.304 (Rules 300 through

304 under the Exchange Act).

197

See Proposing Release, 88 FR 3786 at 3803 (Jan. 20, 2023).

198

See id. To the extent that a reporting firm produces more than one Rule 605 report, the firm could label

each report with the type of business reflected on the report.

pertaining to those orders submitted to the SDP, allowing customers and other market

participants to distinguish SDP activity from more traditional dealer activity.199

Final Rule and Discussion

The Commission is specifying that NMS Stock ATSs must report separately from their

broker-dealer operators, as proposed, and adopting a separate reporting requirement for SDPs

largely as proposed. In each instance, separate reporting under Rule 605 will bring transparency

to these segments of the OTC equity market.

The Commission received generally supportive comments from a variety of market

participants regarding having firms produce separate Rule 605 reports for NMS Stock ATSs and

for SDPs.200 After considering the comments, and for the reasons discussed in the Proposing

Release, the Commission is specifying the separate reporting requirement for NMS Stock ATSs

as proposed.

Two commenters requested clarification and confirmation that order and execution

management systems (“OEMSs”) will not need to register as ATSs under the Commission’s

199

See id.

200

See, e.g., Healthy Markets Letter at 16 (“[B]rokers that are also market centers (including as OTC market

makers) should be required to separately report their market center functions for all covered orders (e.g.

ATS or SDP operations).”); Better Markets Letter at 5, n.10 (“[R]equiring SDPs and ATSs to produce Rule

605 reports independently from their broker-dealers operations would increase transparency by allowing

market participants to distinguish such activity from more traditional broker-dealer activity.”); Varghese

Letter (“Expanding the scope of entities subject to Rule 605 to include … single dealer platforms will

ensure that a wider range of market participants are held to the same standards of transparency and

accountability.”).

proposal to amend the definition of “exchange” under 17 CFR 240.3b-16 (“Rule 3b-16”)201 and

thus need not comply with Rule 605’s separate reporting requirement for NMS Stock ATSs.202

The Commission is still considering whether to adopt the proposed changes to the definition of

“exchange” discussed in the 2022 Regulation ATS/Definition of Exchange Proposing Release

and 2023 Regulation ATS/Definition of Exchange Reopening Release. Any need to comply with

Rule 605’s separate reporting requirement under any future rulemaking is outside the scope of

this rulemaking.

An industry group and a broker-dealer requested additional clarity around what

constitutes an SDP.203 The broker-dealer suggested that the Commission avoid an over-inclusive

definition of SDPs by focusing on the order types used by non-retail investors to interact with

SDPs, such as immediate-or-cancel (“IOC”) orders and fill-or-kill orders (“FOKs”), while also

capturing substantially similar trading activities to ensure a level playing field.204 This

201

Securities Exchange Act Release No. 94062 (Jan. 26, 2022), 87 FR 15496 (Mar. 18, 2022) (“2022

Regulation ATS/Definition of Exchange Proposing Release”). The comment period was reopened on May

9, 2022, and ended on June 13, 2022: Securities Exchange Act Release No. 94868 (May 9, 2022), 87 FR

29059 (May 12, 2022). The Commission reopened the comment period for the 2022 Regulation

ATS/Definition of Exchange Proposing Release again in the 2023. See Securities Exchange Act Release

No. 97309 (Apr. 14, 2023), 88 FR 29448 (May 5, 2023) (“2023 Regulation ATS/Definition of Exchange

Reopening Release”). The 2023 Regulation ATS/Definition of Exchange Reopening Release provided

supplemental information and economic analysis regarding trading systems that trade crypto asset

securities that would be newly included in the definition of “exchange” under the proposed rules. See id.

202

See letter from Hubert De Jesus, Managing Director, Global Head of Market Structure and Electronic

Trading, Samantha DeZur, Managing Director, Global Public Policy Group, BlackRock, Inc. (Mar. 31,

2023) (“BlackRock Letter”) at 4-5 (“Unlike market centers, OEMSs only route orders based on explicit

order handling direction provided by a user. … OEMSs would not have the necessary data – and are not

structured in a manner – that would allow them to file Rul

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