# Disclosure of Order Execution Information > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2022-27614 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** January 20, 2023 - **Citation:** 88 FR 3786 ## Text SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 242 [Release No. 34-96493; File No. S7-29-22] RIN 3235-AN22 Disclosure of Order Execution Information AGENCY: Securities and Exchange Commission. ACTION: Proposed rule. SUMMARY: The Securities and Exchange Commission (“Commission” or “SEC”) is proposing to amend existing requirements under the Securities Exchange Act of 1934 (“Exchange Act”) to update the disclosure required for order executions in national market system (“NMS”) stocks. First, the Commission is proposing to expand the scope of reporting entities subject to the 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 Commission is proposing to 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 Commission is proposing modifications to 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. As part of the changes to these categories, the Commission is proposing to capture execution quality information for fractional share orders, odd-lot orders, and larger-sized orders. Additionally, the Commission is proposing to 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 Commission is also proposing to eliminate time-to-execution categories in favor of average time to execution, median time to execution, and 99th percentile time to execution, each as measured in increments of a millisecond or finer and calculated on a share-weighted basis. In order to better reflect the speed of the marketplace, the Commission is proposing 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 both 15 seconds and one minute. Finally, the Commission is proposing to enhance the accessibility of the required reports by requiring all reporting entities to make a summary report available. DATES: Comments should be received on or before March 31, 2023. ADDRESSES: Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's internet comment form ( http://www.sec.gov/rules/submitcomments.htm ); or • Send an email to rule-comments@sec.gov. Please include File Number S7-29-22 on the subject line. Paper Comments • Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number S7-29-22. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method of submission. The Commission will post all comments on the Commission's website ( http://www.sec.gov/rules/proposed.shtml ). Comments are also available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Operating conditions may limit access to the Commission's Public Reference Room. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any materials will be made available on the Commission's website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT: Kathleen Gross, Senior Special Counsel, Lauren Yates, Senior Special Counsel, Christopher Chow, Special Counsel, or David Michehl, Special Counsel, at (202) 551-5500, Division of Trading and Markets, Commission, 100 F Street NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to 17 CFR 242.600 of Regulation National Market System (“Regulation NMS”) under the Exchange Act (“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 of Regulation NMS under the Exchange Act (“Rule 605” or “Rule”) as proposed to be amended; as well as amendments to Rule 605. Table of Contents I. Introduction II. Current Reporting of Execution Quality Statistics A. Adoption of Rule 11Ac1-5 B. Scope and Content of Rule 605 1. Scope 2. Required Information 3. Procedures for Making Reports Available to the Public C. Other Relevant Rules D. Overview of Need for Modernization E. EMSAC Recommendations, Petition for Rulemaking, and Other Comments III. Proposed Modifications to Reporting Entities A. Larger Broker-Dealers B. Qualified Auction Mechanisms C. ATSs and Single-Dealer Platforms IV. Proposed Modifications to Scope of Orders Covered and Required Information A. Covered Order 1. Orders Submitted Pre-Opening/Post-Closing 2. Stop Orders 3. Non-Exempt Short Sale Orders B. Required Information 1. Categorization by Order Size 2. Categorization by Order Type 3. Timestamp Conventions 4. Changes to Information Required for All Types of Orders 5. Additional Required Information for Market, Marketable Limit, Marketable IOC, and Beyond-the-Midpoint Limit Orders 6. Additional Required Information for Executable NMLOs, Executable Stop Orders, and Beyond-the-Midpoint Limit Orders V. Proposed Summary Execution Quality Reports VI. Paperwork Reduction Act A. Summary of Collection of Information B. Proposed Use of Information C. Respondents D. Total PRA Burdens E. Request for Comment VII. Economic Analysis A. Introduction B. Market Failure C. Baseline 1. Regulatory Baseline 2. Current Rule 605 Disclosure Requirements 3. Markets for Brokerage and Trading Services for NMS Stocks Under Current Rule 605 Disclosure Requirements D. Economic Effects 1. Benefits 2. Costs 3. Economic Effects on Efficiency, Competition, and Capital Formation E. Reasonable Alternatives 1. Reasonable Alternative Modifications to Reporting Entities 2. Reasonable Alternative Modifications to Scope of Covered Orders 3. Reasonable Alternative Modifications to Required Information 4. Reasonable Alternative Modifications to Accessibility 5. Other Reasonable Alternatives F. Request for Comment VIII. Consideration of Impact on the Economy IX. Initial Regulatory Flexibility Analysis Statutory Authority and Text of Proposed Rule I. Introduction The Commission is proposing to update the requirements to disclose order execution information under Rule 605. Currently, market centers that execute investor orders are required to make monthly disclosures of basic information concerning their quality of executions. The required disclosures have provided significant insight into execution quality at different market centers; however, both the scope and the content of Rule 605 reports have not kept pace with technological and market developments. The proposal would require broker-dealers with a larger number of customers (“larger broker-dealers”) 1 to prepare execution quality reports, would capture execution quality information for more order types and sizes, and would require time-based metrics to be recorded at a more granular level that reflects current market speed. By providing more relevant and accessible metrics, the proposal would 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 national market system objectives. 2 1 Throughout the release, the term “larger broker-dealer” refers to a broker-dealer that meets or exceeds the “customer account threshold,” as defined in proposed Rule 605(a)(7). See also infra section III.A (discussing proposed Rule 605(a)(7)). 2 15 U.S.C. 78k-1. 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. 3 These objectives guide the Commission as it seeks to ensure market structure rules keep pace with continually changing economic conditions and technological advancements. However, these objectives, in particular the goal of promoting opportunities for the most willing seller to meet the most willing buyer ( i.e., order interaction) and the goal of promoting competition among markets, can be difficult to reconcile. 4 The Rule, along with 17 CFR 242.606 (“Rule 606”) of Regulation NMS, was adopted in 2000 and together these rules required the public disclosure of execution quality and order routing practices. 5 In adopting these rules, the Commission recognized the importance of vigorous competition among buyers and sellers in an individual security. 6 However, the Commission also recognized the importance of competition among market centers, which entails some fragmentation of order flow. 7 Such competition has benefits to investors including the development of innovative trading services, lower fees, and faster executions. 8 The Commission characterized the rules as a “minimum step necessary to address fragmentation” 9 and stated that by making visible the execution quality of the securities markets, the rules are intended to spur more vigorous competition among market participants to provide the best possible prices for investor orders. 10 3 See 15 U.S.C. 78k-1(a)(1)(C). 4 See Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594, 3597 (Jan. 21, 2010) (“Concept Release on Equity Market Structure”). 5 See Securities Exchange Act Release No. 43590 (Nov. 17, 2000), 65 FR 75414, 75416 (Dec. 1, 2000) (Disclosure of Order Execution and Routing Practices) (“Adopting Release”). 6 See id. at 75415. 7 See id. at 75416. 8 See id. 9 Id. 10 See id. at 75414. Although the Rule has provided visibility into execution quality at different market centers, the content of the disclosures required by the Rule has not been substantively updated since the Rule was adopted in 2000. 11 Changed equity market conditions and technological advancements have eroded the utility of the Rule. The speed and nature of trading have changed dramatically as a result of technological improvements and the markets' response to the changing regulatory landscape. 12 Trading has moved from being concentrated on a given security's listing exchange 13 to being spread across a highly fragmented market where national securities exchanges, alternative trading systems (“ATSs”), single-dealer platforms (“SDPs”), off-exchange market makers, and others compete for order flow. Orders may be matched, routed, or cancelled in microseconds and market information is transmitted nearly instantaneously. At the same time, individual investor 14 participation in the equity markets has increased. 15 Further, the average share prices of certain stocks have continued to increase over time. 16 11 In 2018, the Commission amended Rule 600, 605, and 606 of Regulation NMS (“the 2018 Rule 606 Amendments”). The 2018 Rule 606 Amendments modified Rule 605 to require that the public order execution quality reports be kept publicly available for a period of three years. See Securities Exchange Act Release No. 84528 (Nov. 2, 2018), 83 FR 58338 (Nov. 19, 2018) (“2018 Rule 606 Amendments Release”). 12 For example, since the adoption of the Rule in 2000, the Commission has periodically revised certain of its NMS rules, including the adoption of Regulation NMS in 2005. See, e.g., Securities Exchange Act Release Nos. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005) (“Regulation NMS Adopting Release”); and 90610 (Dec. 9, 2020), 86 FR 18596 (Apr. 9, 2021) (“MDI Adopting Release”). 13 For example, in January 2005, the New York Stock Exchange Inc. (“NYSE”) executed approximately 79.1% of the consolidated share volume in its listed stocks, compared to 25.1% in October 2009. See Concept Release on Equity Market Structure, 75 FR 3594 (Jan. 21, 2010) at 3595. 14 As used in this release, the term “individual investor” will refer to natural persons that trade relatively infrequently for their own or closely related accounts. 15 See, e.g., Caitlin McCabe, “New Army of Individual Investors Flexes Its Muscle,” The Wall Street Journal (Dec. 30, 2020), available at https://www.wsj.com/articles/new-army-of-individual-investors-flexes-its-muscle-11609329600. 16 See MDI Adopting Release, 86 FR at 18606-07 (citing Securities Exchange Act Release No. 88216 (Feb. 14, 2020), 85 FR 16726, 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”)). The Commission continues to believe that facilitating the ability of the public to compare and evaluate execution quality among different market centers is an effective means of reconciling the need to promote both vigorous price competition and fair competition among market centers. Providing increased visibility into the execution quality of larger broker-dealers would similarly encourage competition among market participants. It is the Commission's task continually to monitor market conditions and competitive forces and to evaluate whether the structure of the national market system as it evolves is achieving its Exchange Act objectives. 17 Section 11A of the Exchange Act 18 grants the Commission authority to promulgate rules necessary or appropriate to assure the fairness and usefulness of information on securities transactions 19 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. 20 Through the proposed updates to Rule 605, the Commission seeks to promote increased transparency of order execution quality, increase the information available to investors, and help to promote competition among market centers and broker-dealers, while ameliorating the potentially adverse effects of fragmentation on efficiency, price transparency, best execution of investor orders, and order interaction. 21 17 See Securities Exchange Act Release No. 42450 (Feb. 23, 2000), 65 FR 10577, 10585 (Feb. 28, 2000) (“Fragmentation Release”). 18 15 U.S.C. 78k-1. 19 15 U.S.C. 78k-1(c)(1)(B). 20 15 U.S.C. 78k-1(c)(1)(E). 21 See Concept Release on Equity Market Structure, 75 FR 3594 (Jan. 20, 2010) at 3597. II. Current Reporting of Execution Quality Statistics A. Adoption of Rule 11Ac1-5 When the Commission adopted Rule 11Ac1-5, which was later re-designated as Rule 605, in 2000, there was little publicly available information to enable investors to compare and evaluate execution quality among different market centers. 22 The Commission proposed and adopted Rule 11Ac1-5 together with Rule 11Ac1-6, which was later re-designated as Rule 606, requiring broker-dealers to disclose the identity of market centers to which they route orders on behalf of customers. When adopting these rules, the Commission stated that, taken together, they should significantly improve the opportunity for investors to evaluate what happens to their orders after they submit them to a broker-dealer for execution. 23 The Commission reasoned that 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. 24 Rule 11Ac1-5 was intended to remedy an absence of public information about how broker-dealers 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. 25 22 See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75416. For clarity, when this release discusses the adoption of Rule 605, it is referring to the Adopting Release, supra note 5. 23 See id. at 75414. 24 See id. at 75419. Although it is difficult to isolate the effects of the Rule 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, Robert Jennings & Li Wei, 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”). 25 See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75418, 75419. 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 infra notes 545-547 and accompanying text. B. Scope and Content of Rule 605 1. Scope Currently, Rule 605 requires market centers to make available, on a monthly basis, standardized information concerning execution quality for covered orders in NMS stocks that they received for execution. Market centers must provide specified measures of execution quality, including effective spread, average amount of price improvement, number of shares executed, and speed of execution. 26 26 See 17 CFR 242.605. (a) Market Centers Regulation NMS defines the term “market center” to mean any exchange market maker, 27 OTC market maker, 28 ATS, 29 national securities exchange, 30 or national securities association. 31 This definition was intended to cover entities that hold themselves out as willing to accept and execute orders in NMS securities. 32 Further, a market center must report on orders that it “received for execution from any person,” which was intended to assign the disclosure obligation to an entity that controls whether and when an order will be executed. 33 27 “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 17 CFR 242.600(b)(32). 28 “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 17 CFR 242.600(b)(64). 29 “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 17 CFR 242.600(b)(4) (stating that “alternative trading system” has the meaning provided in 17 CFR 242.300(a)). 30 “National securities exchange” means any exchange registered pursuant to section 6 of the Exchange Act. See 17 CFR 242.600(b)(53). 31 See 17 CFR 242.600(b)(46). “National securities association” means any association of brokers and dealers registered pursuant to section 15A of the Exchange Act. See 17 CFR 242.600(b)(52). 32 See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75421. 33 See id. In many instances, broker-dealers accept orders from customers for execution and then route these customer orders to various execution venues, but do not execute customer orders directly. These broker-dealers generally do not fall within the definition of “market center” and therefore fall outside of the scope of Rule 605's reporting requirements. 34 34 See, e.g., 17 CFR 242.605(a) (monthly electronic reports by market centers). In some instances, broker-dealers accept orders from customers for execution and execute a small portion of their order flow internally ( e.g., fractional share orders), and therefore would fall within the definition of “market center” in Rule 600(b)(46) with respect to the portion of their order flow for which they hold themselves out as being willing to buy or sell for their own account on a regular or continuous basis. However, if, for example, they only act as a market center for orders smaller than 100 shares, then these market centers would not be required to prepare Rule 605 reports currently because the portion of their order flow for which they act as a market center would include only orders that fall below the smallest order size category ( i.e., 100 to 499 shares). See 17 CFR 242.600(b)(defining “categorized by order size”); 17 CFR 242.605)(a)(1) (stating that a market center's monthly report “shall be categorized by security, order type, and order size”). (b) Covered Orders The covered order definition is limited by several conditions and exclusions in order to include those orders that provide a basis for meaningful and comparable statistical measures of execution quality. A “covered order” is 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 the national best bid and national best offer is being disseminated, and, if executed, is executed during regular trading hours. 35 This definition serves two purposes: (1) because the nature and execution quality for regular and after-hours trading differs, it avoids blending statistics for orders executed after-hours with those executed during the regular trading day; and (2) because many of the statistical measures included in the rule rely on the availability of the national best bid and offer (“NBBO”) at the time of order receipt, it excludes orders for which execution quality metrics could not be calculated. 35 See 17 CFR 242.600(b)(22). Covered orders do not include any orders for which the customer requests special handling, which include, but are not limited to, market on open and market on close orders, stop orders, all or none orders, and “not held” orders. 36 The Commission reasoned that special handling instructions could skew general execution quality measures. 37 36 See id. 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 (Nov. 19, 2018) at 58340. As a general matter, if a customer submits an order for an NMS stock to its broker-dealer, whether it be for a fractional share, whole shares, or whole shares with a fractional share component, and the customer reasonably expects its broker-dealer to attempt to execute such order immediately, then the broker-dealer generally should categorize the order as a held order. 37 See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75421. 2. Required Information Rule 605 reports contain a number of execution quality metrics for covered orders, including statistics for all NMLOs with limit prices within ten cents of the NBBO at the time of order receipt as well as separate statistics for market orders and marketable limit orders. Under the Rule, the information is categorized by (1) individual security, 38 (2) one of five order types, 39 and (3) one of four order sizes. 40 These categories provide users flexibility in determining how to summarize and analyze the information. 41 38 See 17 CFR 242.605(a)(1). 39 See id. “Categorized by order type” refers to categorization by whether an order is a market order, a marketable limit order, an inside-the-quote limit order, an at-the-quote limit order, or a near-the-quote limit order. See 17 CFR 242.600(b)(14). 40 See 17 CFR 242.605(a)(1). The current size categories are: 100 to 499 shares; 500 to 1999 shares; 2000 to 4999 shares, and 5000 or greater shares. See 17 CFR 242.600(b)(11). On June 22, 2001, the Commission granted exemptive relief to any order with a size of 10,000 shares or greater, 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, dated June 22, 2001 (“Large Order Exemptive Letter”). 41 See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75417. For instance, a user could analyze execution quality for a group of securities and by size and order type. Within each of the three categories, the reports are required to include statistics about the total number of orders submitted as well as 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 time-to-execution buckets, and average realized spread. 42 For market and marketable limit orders, the reports also must include average effective spread; number of shares executed better than the quote, at the quote, or outside the quote; average time to execution when executed better than the quote, at the quote, or outside the quote; as well as average dollar amount per share that orders were executed better than the quote or outside the quote. 43 In addition, time of order execution and time of order receipt are required to be measured to the nearest second. 44 42 See 17 CFR 242.605(a)(1)(i). 43 See 17 CFR 242.605(a)(1)(ii). 44 See 17 CFR 242.600(b)(91), (92). The categorization by order type does not currently include away-from-the-quote NMLOs, i.e., those orders with a limit price more than ten cents away from the NBBO. In proposing to exclude these orders in 2000, the Commission indicated that the execution quality statistics for these types of orders may be less meaningful because execution of these types of orders may be more dependent on the extent to which the orders' limit prices were outside the consolidated best bid and offer (“BBO”) and price movement in the market than on their handling by the market center. 45 45 See Securities Exchange Act Release No. 43084 (July 28, 2000), 65 FR 48406, 48414 (Aug. 8, 2000) (File No. S7-16-00) (Disclosure of Order Execution and Routing Practices) (“Proposing Release”) (stating that the Commission preliminarily believed that the rule's statistical measures ( e.g., fill rates and speed of execution) for this type of order may be less meaningful because they would be more dependent on the extent to which the orders' limit prices were outside the consolidated BBO (and movements in market prices) than on their handling by a market center). 3. Procedures for Making Reports Available to the Public The Rule 605 NMS Plan establishes procedures for market centers to make data available to the public in a uniform, readily accessible, and usable electronic form. 46 The Plan also requires market centers to post their monthly reports on an internet website that is free of charge and readily accessible to the public. 47 Generally, reports are posted on market centers' own websites; however, they may be posted on a third-party vendor site if a market center uses a vendor to prepare its reports. 48 In addition, formatting for Rule 605 data is governed by the Plan. Among other things, the Plan sets forth the file type and structure of the reports and the order and format of fields, yielding reports that are structured and machine-readable. 49 46 See 17 CFR 242.605(a)(2) and Securities and Exchange Commission File No. 4-518 (National Market System Plan Establishing Procedures Under Rule 605 of Regulation NMS) (“Rule 605 NMS Plan” or “Plan”). See also Securities Exchange Act Release No. 44177 (Apr. 12, 2001), 66 FR 19814 (Apr. 17, 2001) (order approving the Plan). 47 Currently, the parties to the Plan are the 16 registered national securities exchanges trading NMS stocks and 1 national securities association (the “Participants”). Although not all market centers are Participants, the Participants are required to enforce compliance with the terms of the Plan by their members and person associated with their members. See 17 CFR 242.608(c). Market centers that are not Participants must make arrangements with a Participant to act as their “Designated Participant.” See Plan at IV. Each market center must notify its Designated Participant of the website where its reports may be downloaded, and each Designated Participant must maintain a comprehensive list of links for all market centers for which it functions as a Designated Participant. See Plan at IV, VIII(c). 48 See Plan at n.3. 49 See id. at 2 (“Section V . . . provides that market center files must be in standard, pipe-delimited ASCII format”). C. Other Relevant Rules Rule 606 reports address order handling information and Rule 606's reporting requirements differ for held orders versus not held orders. With respect to held orders, Rule 606(a)(1) requires broker-dealers to produce quarterly public reports regarding their routing of non-directed orders 50 in NMS stocks that are submitted on a held basis. These reports must identify certain regularly-used venues to which the broker-dealer routed non-directed orders for execution and provide data on the percentage of orders routed to each venue. 51 These reports also must provide information, for each venue identified, about the payment relationship between the broker-dealer and the venue, including any payments made by a venue to a broker-dealer for the right to trade with its customer order flow ( i.e., payment for order flow or “PFOF”) or rebates, 52 and a description of the material aspects of the broker-dealer's relationship with the venue and the terms of arrangements that may influence a broker-dealer's order routing decision. 53 In addition, Rule 606(b)(1) requires broker-dealers to provide to their customers, upon request, reports that include high-level customer-specific order routing information, such as the identity of the venues to which the customer orders were routed for execution in the prior six months and the time of the transactions, if any, that resulted from such orders. 54 For orders submitted on a held basis, the reports required by Rule 606 do not contain any execution quality information. However, a customer of a reporting broker-dealer may access the execution quality reports produced pursuant to Rule 605 by each venue identified as a routing destination in the broker-dealer's Rule 606 reports, to the extent that venue is a market center. 55 50 A “non-directed order” means any order from a customer other than a directed order. See 17 CFR 242.600(b)(56). 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 17 CFR 242.600(b)(27). 51 See 17 CFR 242.606(a)(1)(ii) (stating that each section in the required report shall include the identity of the ten venues to which the largest number of total non-directed orders for the section were routed for execution and of any venue to which five percent or more of non-directed orders were routed). 52 See 17 CFR 242.606(a)(1)(iii). 53 See 17 CFR 242.606(a)(1)(iv). 54 See 17 CFR 242.606(b)(1). 55 See supra note 23 and accompanying text. In contrast, Rule 606 requires broker-dealers to produce reports that provide detail regarding execution quality in connection with not held orders, which are typically used by institutional investors. 56 Specifically, Rule 606(b)(3) requires broker-dealers to produce reports pertaining to order routing upon the request of a customer that places, directly or indirectly, one or more orders in NMS stocks that are submitted on a not held basis. 57 These customer-specific reports generally must include detailed information, by venue, including metrics pertaining to the broker-dealer's routing of the customer's orders and the execution of such orders. 58 In particular, the venue-by-venue order execution information must include aggregated metrics such as fill rate, percentage of shares executed at the midpoint, and percentages of total shares executed that were priced on the side of the spread more favorable to the order and on the side of the spread less favorable to the order. 59 56 See 2018 Rule 606 Amendments Release, 83 FR 58338 (Nov. 19, 2018) at 58345 (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). In contrast, held orders are typically used by individual investors. See, e.g., id. at 58372 (stating that retail investors' orders are typically submitted on a held basis and are typically smaller in size). 57 See 17 CFR 240.606(b)(3). 58 See 17 CFR 240.606(b)(3). 59 See 17 CFR 240.606(b)(3)(ii). Current Rule 606 reflects significant changes that were made in the 2018 Rule 606 Amendments. 60 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. 61 The Commission stated that the more prevalent use of financial inducements to attract order flow from broker-dealers that handle retail investor orders created new, and in many cases significant, potential conflicts of interests for these broker-dealers. 62 Further, the Commission stated that enhanced public disclosures for held orders should focus on providing more detailed information regarding these financial inducements, as opposed to the different information geared towards not held orders from customers that is set forth in Rule 606(b)(3). 63 Therefore, the Commission adopted enhanced public disclosures 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. 64 The Commission stated that this enhancement would allow customers to better assess the nature and quality of broker-dealers' order handling services, including the potential for broker-dealer conflicts of interest, and would also benefit customers to the extent that broker-dealers were spurred to compete further by providing enhanced order routing services and better execution quality. 65 60 See generally 2018 Rule 606 Amendments Release. 61 See 2018 Rule 606 Amendments Release, 83 FR 58338 (Nov. 19, 2018) at 58372. 62 See id. 63 See id. The Commission also considered but did not adopt an aspect of the proposal that would have required broker-dealers to make publicly available a report that would have aggregated Rule 606(b)(3) order handling information pertaining to not held orders. See id. at 58369-70. The Commission stated that its decision stemmed from fundamental differences between held order flow and not held order flow, because held orders are typically non-directed orders with no specific order-handling instructions for the broker-dealer. See id. at 58371 (stating that held order flow is handled similarly by broker-dealers—held orders are generally small orders that are internalized or sent to OTC market makers if marketable or fully executed on a single trading center if not marketable). The Commission further stated that, by contrast, not held order flow is diverse and customers may provide specific order handling instructions to their broker-dealers, limit the order handling discretion of their broker-dealers, or have specific needs that impact the broker-dealers' handling of these orders. See id. Therefore, the Commission concluded that the disparate behavior of customers when using not held orders limited the potential ability for customers and broker-dealers to use aggregated Rule 606(b)(3) order handling information to better understand broker-dealers' routing behavior or compare broker-dealers' order routing performance. See id. 64 See 2018 Rule 606 Amendments Release, 83 FR 58338 (Nov. 19, 2018) at 58373. 65 See id. In comparison, with respect to the addition of customer-specific order-handling disclosures in Rule 606(b)(3), the Commission stated that these disclosures are particularly suited to customers that submit not held NMS stock orders because the disclosures set forth detailed order handling information that is useful in evaluating how broker-dealers exercise the discretion attendant to not held orders and, in the process, carry out their best execution obligations and manage the potential for information leakage and conflicts of interest. See id. at 58344. As part of the 2018 Rule 606 Amendments, the Commission added Rule 606(b)(3) to require broker-dealers to make detailed, customer-specific order handling disclosures available to institutional customers, in particular, who previously were not entitled to disclosures under the rule for their order flow, or were entitled to disclosures that had become inadequate in a highly automated and more complex market. See id. At the time of the 2018 Rule 606 Amendments, the Commission considered suggestions from the Equity Market Structure Advisory Committee (“EMSAC”) and other commenters that the Commission include more or different execution quality statistics in the required disclosures. 66 But the Commission stated that the limited modifications to Rule 606(a) that it was adopting 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. 67 However, the Commission noted 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. 68 66 See id. at 58379. See also EMSAC III at 2-3 (suggesting that the Commission modify the enhancements to Rule 606 to include, among other things, execution quality statistics by routing destination). 67 See 2018 Rule 606 Amendments Release, 83 FR 58338 (Nov. 19, 2018) at 58379. 68 See id. Separately, each broker-dealer has a legal duty to seek to obtain best execution of customer orders. 69 The duty of best execution requires broker-dealers to execute customers' trades at the most favorable terms reasonably available under the circumstances. 70 When adopting Rule 605 and Rule 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. 71 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. 72 As the Commission stated, any such conclusions would require a more in-depth analysis of the broker-dealer's order routing practices than will be available from the disclosures required by the rules. 73 69 See, e.g., Regulation NMS Adopting Release, 70 FR at 37537; 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 is separately proposing a rule concerning broker-dealers' duty of best execution. See Securities Exchange Act Release No. 96496 (Dec. 14, 2022) (File No. S7-32-22) (Regulation Best Execution). The Commission encourages commenters to review that proposal to determine whether it might affect their comments on this proposing release. 70 See Regulation NMS Adopting Release, 70 FR 37496 (Jun. 29, 2005) at 37538 (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. 71 See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75420. 72 See id. 73 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 broker-dealers. See id. See also infra notes 564-565 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. D. Overview of Need for Modernization The U.S. equity markets have evolved significantly since the Commission adopted the Rule in 2000. For instance, the equities markets have become increasingly fragmented, as both the market shares of individual national securities exchanges became less concentrated and an increased percentage of order flow moved off-exchange. In 2000, there were 9 registered national securities exchanges and one registered national securities association. 74 A large proportion of the order flow in listed equity securities was routed to a few, mostly manual, trading centers, 75 and the primary listing exchanges retained a high percentage of the order flow for exchange-listed equities. 76 74 See Securities and Exchange Commission, Annual Report for fiscal year 2000, at 38 available at https://www.sec.gov/pdf/annrep00/ar00full.pdf. 75 See Securities Exchange Act Release No. 78309 (July 13, 2016), 81 FR 49432, 49436 (July 27, 2016) (“Rule 606 Proposing Release”); Fragmentation Release, 65 FR 10577 (Feb. 28, 2000) at 10579-80. 76 See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75415 (stating that in September 2000, for example, 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 (Jan. 21, 2010) at 3595 (stating that in January 2005, NYSE executed approximately 79.1% of the consolidated share volume in its listed stocks, as compared to 25.1% in October 2009). In addition, NYSE-listed stocks were traded primarily on the floor of the NYSE in a manual fashion until October 2006, at which time NYSE began to offer fully automated access to its displayed quotations. See Concept Release on Equity Market Structure, 75 FR 3594 (Jan. 21, 2010) 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 (Feb. 28, 2000) at 10580. In contrast, trading in the U.S. equity markets today is highly automated and spread 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 SRO trading facilities; 77 (2) ATSs that trade NMS stocks (“NMS Stock ATSs”); 78 (3) exchange market makers; (4) wholesalers; 79 and (5) any other broker-dealer that executes orders internally by trading as principal or crossing orders as agent. 80 In the first quarter of 2022, NMS stocks were traded on 16 national securities exchanges, and off-exchange at 32 NMS Stock ATSs and at over 230 other FINRA members. 81 National securities exchanges executed approximately 60% of NMS share volume. 82 The majority of off-exchange volume was executed by wholesalers, who executed almost one quarter of total volume (23.9%) and about 60% of off-exchange volume. 83 Some OTC market makers, such as wholesalers, operate SDPs through which they execute institutional orders in NMS stocks against their own inventory. 84 77 See 17 CFR 242.600(b)(89) (defining “SRO trading facility” as, among other things, a facility operated by a national securities exchange that executes orders in a security). 78 An “NMS Stock ATS” as used in this release is an ATS that has filed an effective Form ATS-N with the Commission. 79 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. 80 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 17 CFR 242.600(b)(95) (defining “trading center”). 81 See infra note 766 and accompanying text; Table 7. 82 See infra note 767 and accompanying text; Table 7. 83 See infra Table 7. 84 See infra note 768 and accompanying text. 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. 85 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. Moreover, it is generally more profitable for liquidity providers such as wholesalers to execute against orders with lower adverse selection risk because of the reduced risk that prices will move against the liquidity provider. 86 Wholesalers may provide different execution quality to different broker-dealers, depending on factors including the level of adverse selection risk of their order flow. 87 85 There are six wholesalers that internalize the majority of individual investors' marketable orders. See infra note 766 and accompanying text. 86 See infra note 608 and accompanying text. 87 Analysis of Consolidated Audit Trail (“CAT”) data from the first five months of 2022 found that wholesalers provide different execution quality to different retail brokers, and in particular that broker-dealers with higher adverse selection risk systematically receive higher effective spreads and lower price improvement than broker-dealers with lower adverse selection risk. See infra notes 609-613 and accompanying text; Table 3. For further discussion of differences in execution quality across broker-dealers, see infra section VII.C.1.a). Some retail brokers may face conflicts of interest when making order routing decisions, including whether to route to a particular wholesaler. 88 For example, broker-dealers could 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 (PFOF). 89 88 See infra section VII.C.3.a)(2). See also 2018 Rule 606 Amendments Release, 83 FR 58338 (Nov. 19, 2018) at 58372 (stating that financial inducements to attract order flow from broker-dealers that handle retail investor orders have become more prevalent and for some broker-dealers such inducements may be a significant source of revenue); supra note 62 and accompanying text (stating that these financial inducements have created new, and in many cases significant, potential conflicts of interest for these broker-dealers). 89 See infra notes 759-762 and accompanying text. The Commission is concerned that variations in execution quality across broker-dealers may be difficult to assess using current Rule 605 and Rule 606 reports. In particular, broker-dealers that route customer orders externally, rather than executing customer orders internally, are not required to prepare Rule 605 reports because they do not meet the definition of market center. Customers of a broker-dealer can use Rule 606 reports to identify market centers to which the broker-dealer routes, and then access those market centers' Rule 605 reports to review the execution quality that the market center provides to all orders that the market center received for execution. However, to the extent that the market center may provide different execution quality to orders based on different order routing arrangements with different broker-dealers, current Rule 605 and 606 do not require reports that provide investors with a way to assess these differences. In addition, developments in trading, including the increased speed of trading, further necessitate proposing updates to the Rule. Average stock prices have continued to increase over time, 90 and odd-lots 91 and fractional shares 92 continue to trade with increasing frequency. Similarly, odd-lot quotes in higher-priced stocks continue to offer prices that are frequently better than the round lot NBBO for these stocks, 93 and this better-priced odd-lot liquidity is distributed across multiple price levels. 94 In addition, odd-lot rates have increased among lower priced stocks. 95 Because current Rule 605 size categories exclude orders smaller than 100 shares, a significant proportion of market activity is currently excluded. 96 An analysis of Rule 605 data shows that Rule 605 coverage has likely declined in the decades since the initial adoption of Rule 605. 97 Further, because order size categories are tied to the number of shares, the categories may group orders of very different notional values, which may complicate comparisons of aggregate execution quality. Finally, the speed of the market has increased exponentially since 2000, 98 rendering the Rule's current one-second timestamp conventions less meaningful. 90 See supra note 16. 91 See MDI Adopting Release, 85 FR 18612 (Apr. 2, 2020) at 18616 (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, high-priced stocks). Analysis using the NYSE Trade and Quote database (obtained via Wharton Research Data Services (WRDS) (“TAQ data” or “NYSE TAQ data”) found that odd-lots increased from around 15% of trades in January 2014 to more than 55% of trades in March 2022. An analysis of data from the SEC's MIDAS analytics tool available at https://www.sec.gov/marketstructure/datavis.html#.YoPskqjMKUk shows that, in Q1 2022, odd-lots made up 81.2% of on-exchange trades (40% of volume) for stocks in the highest price decile and 25% of on-exchange trades (2.72% 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. 92 Analysis using CAT data for executed orders in March 2022 found that an estimated 46.63 million originating orders with a fractional share component were eventually executed on- or off-exchange. This represents approximately 2% of all executed orders and 14% of executed orders from individual accounts. Generally, accounts classified as “individual” in CAT are attributed to natural persons. See also infra note 647 and accompanying text. 93 See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at 18729. 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 (Feb. 1, 2022), available at SSRN: https://ssrn.com/abstract=4027099 (“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 January 2019 to January 2022). 94 See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at 18613 n.202 (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). 95 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 and June 2022 (34%, 39%) as compared to 2019 and 2020 (26%, 29%). 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 and June 2022 (26%, 29%) compared to 2019 and 2020 (20%, 23%). See SEC market structure analytics data, available at https://www.sec.gov/marketstructure/midas.html. 96 See supra notes 91-92. See also infra notes 619-622 and accompanying text (estimating, based on analysis of Tick Size Pilot data, coverage of current Rule 605 reporting requirements). 97 Analysis comparing one market center's volume (NYSE) to TAQ data shows that an estimated 50% of shares executed during regular market hours were included in Rule 605 reports as of February 2021, and shows that this number has been on a slightly downward trend since around mid-2012. See infra section VII.C.2.b) and infra Figure 3. 98 Analysis of data from the SEC's MIDAS analytics tool shows that the percent of on-exchange NMLOs that are fully executed within one millisecond (as a percentage of all fully executed on-exchange NMLOs) has increased from 2.1% in Q1 2012 to 10.3% in Q1 2022 for small cap stocks, and from 5.9% in Q1 2012 to 15.7% in Q1 2022 for large cap stocks. Further, in Q1 2022 more than half (51.6%) of NMLOs executed in less than one second in large market cap stocks. See dataset “Conditional Cancel and Trade Distribution,” available at https://www.sec.gov/marketstructure/downloads.html. See also infra note 692 and accompanying text. E. EMSAC Recommendations, Petition for Rulemaking, and Other Comments The EMSAC 99 as well as commenters responding to the Commission's Concept Release on Equity Market Structure 100 and to the 2018 Rule 606 Amendments, 101 have recommended that the Commission amend Rule 605 to modernize the Rule and increase the usefulness of available execution quality disclosures. In addition, one broker-dealer petitioned the Commission to make “modest rule amendments” to Rule 605 and further stated that “[i]mproving these metrics is essential for a market participant to quantitatively and qualitatively assess whether any particular broker-dealer obtained the most favorable terms under the circumstances for customer orders.” 102 99 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/emsac-transcript-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/emsac-recommendations-rules-605-606.pdf. 100 See, e.g., Letter from Christopher Nagy, CEO, and Dave Lauer, President, KOR Group LLC (Apr. 4, 2014) (“KOR Group I”); Letter from Citigroup Global Markets Inc. and its affiliates re Concept Release on Equity Market Structure (Release No. 34-61358; File No. S7-02-10) (Aug. 7, 2014) (“Citigroup Letter”); Letter from Consumer Federation of America re File Number S7-02-10, Comments on Concept Release on Equity Market Structure (Sept. 9, 2014) (“Consumer Federation I”); Letter from BlackRock, Inc. re Equity Market Structure Recommendations; Concept Release on Equity Market Structure, File No. S7-02-10; Regulation Systems Compliance and Integrity, File No. S7-01-13; and Equity Market Structure Review (Sept. 12, 2014) (“BlackRock Letter”); Letter from Financial Information Forum re Rule 605/606 Enhancements from a Retail Perspective (Oct. 22, 2014) (“FIF I”); Letter from Securities Industry and Financial Markets Association re Recommendations for Equity Market Structure Reforms (Oct. 24, 2014) (“SIFMA Letter”); Healthy Markets Proposal re SEC Rule 605/606 Reform (referenced in Aug. 2, 2016 statement of Christopher Nagy before the EMSAC) (“Healthy Markets II”) at 2; Letter from Healthy Markets re Notice of Meeting of Equity Market Structure Advisory Committee Meeting (File No. 265-29); List of Rules to be Reviewed Pursuant to the Regulatory Flexibility Act (File No. S7-21-16); Concept Release on Equity Market Structure (File No. S7-02-10) (Apr. 3, 2017) (“Healthy Markets III”); Letter from Healthy Markets re Potential Reforms Regarding the Provision of Market Data, Concept Release on Equity Market Structure (Rel. No. 34-61358; File No. S7-02-10), and Market Data and Market Access Roundtable (Rel. No. 4-729) (Jan. 3, 2020) (“Healthy Markets IV”). Comments on the Commission's 2010 Concept Release on Equity Market Structure are available at https://www.sec.gov/comments/s7-02-10/s70210.shtml. As with various other comments referenced herein, including, without limitation, comments received in connection with the Concept Release, the comments were not provided with reference to the proposals discussed in this release. 101 See, e.g., Letter from James J. Angel, Ph.D., CFA, Georgetown University re Disclosure of Order Handling Information, File S7-14-16 (Aug. 26, 2016) (“Angel Letter”); Letter from Consumer Federation of America re File Number S7-14-16, Disclosure of Order Handling Information (Sept. 26, 2016) (“Consumer Federation II”); Letter from Fidelity Investments re Disclosure of Order Handling Information; File No. S7-14-16 (Sept. 26, 2016) (“Fidelity Letter”); Letter from Financial Information Forum re Release No. 34-78309; File No. S7-14-16; Disclosure of Order Handling Information (Sept. 26, 2016) (“FIF II”); Letter from Financial Services Roundtable re Disclosure of Order Handling Information Proposal [File No. S7-14-16] (Sept. 26, 2016) (“Financial Services Roundtable Letter”); Letter from Healthy Markets Association re Disclosure of Order Handling Information (S7-14-16) (Sept. 26, 2016) (“Healthy Markets I”); Letter from IHS Markit re Disclosure of Order Handling Information; Proposed Rule, Release No. 34-78309; File No. S7-14-16 (Sept. 26, 2016) (“IHS Markit Letter”). Comments receiving in connection with the 2018 Rule 606 Amendments are available at https://www.sec.gov/comments/s7-14-16/s71416.htm. 102 Letter from Virtu Financial re Petition for Rulemaking to Amend SEC Rule 605 (Sept. 20, 2021) (“Virtu Petition”) at 2, available at https://www.sec.gov/rules/petitions/2021/petn4-775.pdf. The EMSAC and commenters generally support expanding the Rule's scope beyond market centers. 103 In particular, in November 2016, the EMSAC recommended that the Commission “[e]xpand the scope of Rule 605 by requiring every broker-dealer to report with an exemption for broker[-]dealers with de minimis order flow, aligning the scope of Rule 605 reporting with Rule 606.” 104 The EMSAC's recommendation acknowledged that there would be compliance and implementation costs associated with this expansion, but stated that the use of third-party vendors may mitigate some of these concerns. 105 Further, the EMSAC's recommendation stated that having all broker-dealers provide Rule 605 data would create an opportunity for market participants, academics, and the press to evaluate these statistics in a consistent manner. 106 103 See EMSAC III at 2; IHS Markit Letter at 2; Healthy Markets II at 2. 104 EMSAC III at 2 (adopting recommendations of the Customer Issues Subcommittee). 105 See id. 106 See id. When the EMSAC met to consider this recommendation, panelists provided some explanation of the gaps in current execution quality disclosures. One panelist stated that the current reporting regime “miss[es] important information about the overall execution quality of a covered order” because Rule 605 reports only pertain to order routing handled by market centers. 107 This panelist explained that orders are handled by smart order routers that may not be located within a market center, and the Rule 605 data does not capture price slippage or delays that may occur as these orders are received by multiple non-executing market centers or broker-dealers. 108 Another panelist described the difficulties that he encountered when trying to compare the execution quality of brokers using data available under the existing rules. 109 According to the panelist, he “had to make very rough inferences about the brokers' executions because of the gaps in the disclosure requirements.” 110 Moreover, this panelist stated that one fundamental problem with making these inferences was that a market maker's average execution quality across all of its orders received from brokers may be better or worse than its execution quality with respect to a particular broker's order flow. 111 107 See EMSAC I at 0103:23-0104:7 (Frank Hatheway, NASDAQ). 108 See id. at 0104:7-12 (Frank Hatheway, NASDAQ). 109 See id. at 0094:6-0100:12 (Bill Alpert, Barron's). 110 Id. at 0096:12-15 (Bill Alpert, Barron's). See also id. at 0097:3-8 (Bill Alpert, Barron's) (stating that “the only effective, objective way to use the available disclosures was to score each broker with a weighted sum of their order flow fractions from the routing reports and then weight those with the effective over quoted measures of the market makers that they were sending their orders to”); 0096:25-0097:3 (stating that some brokers voluntarily disclose execution quality information, but they use different information and so the information is not comparable). 111 See EMSAC I at 0097:14-22 (Bill Alpert, Barron's). See also id. at 0096:18-22 (Bill Alpert, Barron's) (stating that “almost every broker” claimed that the execution quality that it received at a particular market maker was above average). This panelist also argued, based on the introduction of voluntary disclosures regarding price improvement for odd-lot orders by a few brokers and market makers, that disclosure improves behavior. See id. at 0098:6-0099:9 (Bill Alpert, Barron's) (stating the price improvement on odd-lot orders improved within a year after voluntary disclosures started). See also id. at 0132:6-11 (Brad Katsuyama, IEX) (stating that improving disclosures leads to improved performance). One EMSAC committee member acknowledged that retail brokerage firms did not favor the recommendation to expand Rule 605 reporting to broker-dealers, and stated that these firms would argue that aggregate statistics are more important for retail investors, who they claim are not going to look at the Rule 605 reports. 112 This committee member stated that the counter-argument to this position is that if everyone is preparing Rule 605 reports, it would be possible to do various types of aggregation using that data. 113 When the EMSAC met later to approve the recommendation, one committee member stated that the goal is to make data publicly available so that “experts can help people make better decisions” and that different groups would turn the data into usable reports, so it is not necessary to scale back the disclosures for the consumer. 114 112 See id. at 0136:24-0137:7 (Manisha Kimmel, Thomson Reuters). But see id. at 0102:22-0103:2) (Frank Hatheway, NASDAQ) (“While individual retail investors generally don't review 605 statistics themselves, . . . the existence of the reports appears to provide precisely the form of discipline that the Commission envisioned when it adopted Rule 605 and 606.”). 113 See EMSAC I at 0137:7-10 (Manisha Kimmel, Thomson Reuters). See also Statement of Christopher Nagy, Healthy Markets Association, at 6 (suggesting that the Commission mandate reporting of some execution quality statistics for retail orders); Healthy Markets I at 5-6 (recommending that the Commission modify Rule 606 to include select execution quality statistics from Rule 605 for each identified routing destination). 114 EMSAC II at 0065:1-16 (Brad Katsuyama, IEX). But see id. at 0064:18-24 (Jamil Nazarali, Citadel) (stating that his firm's retail broker clients expressed concerns with the recommendation that Rule 606 include the execution quality of the market makers that they route to, because there is a lot of important criteria that goes into routing and the reports could be misleading). When the Commission solicited comment on the 2018 Rule 606 Amendments, several commenters recommended that the Commission expand the required reporting of execution quality statistics to better cover retail investors. 115 One commenter stated that the type of standardized execution statistics that several firms voluntarily publish on a quarterly basis measure the quality of trade executions on retail investor orders in exchange-listed stocks and help investors evaluate their particular retail brokerage firm. 116 Another commenter stated that there is a “fundamental flaw” in the logic of Rule 605 and Rule 606 because “[t]he structure of the rules implicitly assumes that execution quality is solely a function of the market center and that the brokerage firm has no impact on execution quality.” 117 According to this commenter, execution quality is a product of both the broker's skill and the quality of the market center's execution, and therefore requiring brokers to show where they route orders does not provide retail investors with useful information about the actual execution quality that their orders receive. 118 Another commenter stated that even though most retail investors may not use the disclosures directly, disclosures provide indirect benefits by promoting competition and by facilitating use by third-party analysts and academic researchers that provide an in-depth review of the disclosures. 119 115 See Angel Letter at 3 (recommending that brokers should be required to provide execution quality statistics by providing information on individual trade confirmations and displaying summary statistics on their websites); Fidelity Letter at 7-8 (recommending that the Commission require brokers to make publicly available certain execution quality statistics); Healthy Markets I at 7, 11 (recommending that execution quality metrics should be provided to retail customers); IHS Markit Letter at 2 (recommending that all brokers that receive client orders and subsequently route orders on behalf of the client should provide information on the execution quality received at each venue). See also Consumer Federation II at 10; Financial Services Roundtable Letter at 4-5. 116 See Fidelity Letter at 7-8. For additional discussion about this voluntary effort to provide aggregated execution quality statistics, see infra notes 450-451 and accompanying text. See also Consumer Federation II at 10 (stating that voluntary disclosures by several market participants show that such disclosures are possible, and undercut arguments that doing so is too costly or burdensome). 117 Angel Letter at 3. 118 See id. However, this commenter also stated that the Rule 605 data on execution quality is too raw for most investors to interpret. See id. at 2. See also Consumer Federation II at 10 (stating that the only way to assess whether customers are being best served by their broker-dealer's routing decisions is by requiring execution quality statistics); Financial Services Roundtable Letter at 4-5 (stating that currently Rule 605 reports require investors to draw an inference that they will achieve the same performance as the average order sent to that venue, and additional data would help an investor compare the execution quality that various broker-dealers obtain at a particular execution venue). 119 See Consumer Federation II at 10. See also IHS Markit Letter at 29-30 (stating that large retail routing brokers use private, internal versions of Rule 605 reports to calculate execution quality metrics for different market centers, leading to significant improvement in execution quality statistics for covered orders, and that voluntary reporting of execution quality metrics has also improved execution quality). One market participant, in a letter recommending that the Commission require broker-dealers to publish monthly cost of execution statistics, stated that Rule 605 and Rule 606 statistics published by market centers and broker-dealers do not provide a means for customers to judge how their brokers have performed with respect to keeping commissions low without adversely affecting execution quality. 120 This commenter further remarked that matching a broker's routing statistics up with a receiving market center's execution quality statistics is “essentially impossible.” 121 120 See Letter from Thomas Peterffy, Chairman, Interactive Brokers Group (Aug. 1, 2014), at 3 (“Interactive Brokers Letter”), available at https://www.interactivebrokers.com/download/execution_stats_comment_letter.pdf (“Payment for order flow has often been justified by its advocates based on the claim that the receipt of such payments allows brokers to keep commissions low and does not affect execution quality (or if it does, such costs are passed back to customers in the form of lower commissions). . . . [T]he current Rule 605 and 606 statistics published by market centers and brokers . . . do not provide a basis for regulators to judge these claims, or for customers to judge their broker's performance.”). 121 Interactive Brokers Letter at 3. Commenters have also suggested various ways to expand or modify the definition of covered order, including broadening its scope to capture additional order types. 122 In particular, the petitioner for rulemaking recommended including short sales, stop orders, and pre-market orders in Rule 605 reports. 123 The petitioner stated that these order types are “critical to a complete assessment of execution quality,” and stated that many retail brokers include these orders when measuring the execution quality provided by market centers. 124 A commenter to the 2018 Rule 606 Amendments also recommended including orders submitted prior to the market open in Rule 605 reports and stated that the marketable or non-marketable characteristics of such orders cannot be determined under the current framework. 125 122 See Letter from Financial Information Forum re Request for Comment—FIF Rule 605 Modernization Recommendations (Jan. 30, 2019) (“FIF III”), available at https://www.sec.gov/comments/s7-02-10/s70210-5002077-182848.pdf; EMSAC III; IHS Markit Letter; Healthy Markets II; FIF Letter I; KOR Group I. 123 See Virtu Petition at 5. 124 Id. 125 See FIF II at 11-12. The EMSAC and commenters have also suggested bringing smaller and larger order sizes within scope. 126 The petitioner stated that bucketing orders solely by numbers of shares is skewing comparisons. 127 Another commenter, responding to the Commission's Concept Release on Equity Market Structure, recommended the following order size buckets: one share to 99 shares; 100 shares up to 9,999 shares, divided into 100 share increments; 10,000 shares to 24,999 shares; greater than 25,000 shares. 128 One commenter that offered recommendations to modify Rule 605 suggested including a $500,000 notional cap on all share size buckets. 129 Another market participant expressed support for that cap or a different one. 130 The market participant suggested that a cap of $200,000, consistent with the definition of “block size” in 17 CFR 242.600(b)(12)(ii), would make sense, but noted that benchmark has not changed with inflation. 131 The market participant also stated that the use of notional buckets in the “categorized by order size” definition would account for fractional share and odd-lot orders. 132 126 See EMSAC III at 2; FIF III at 4; Healthy Markets II at 3; IHS Markit Letter at 9-10, 34. 127 See Virtu Petition at 5. 128 See Healthy Markets II at 4. 129 See FIF III at 4. 130 See “Would 605 Work Better in Dollars?”, Phil Mackintosh, Chief Economist and Senior Vice President, Nasdaq (Sept. 16, 2021), available at: https://www.nasdaq.com/articles/would-605-work-better-in-dollars-2021-09-16. 131 See id. The market participant stated that “a lower [than $500,000] notional cap makes sense too, given the small sizes of retail orders, especially when we consider the limits of the typical depth of book to fill covered orders.” Id. 132 See id. Commenters have also raised concerns about the current provisions in the Rule for timestamps, especially given the speed of today's marketplace. 133 Others have also suggested modifications to improve the accessibility and standardizations of reports, including centralizing report creation and requiring summary statistics. 134 In several contexts in which the Commission has received general feedback on equity market structure, commenters have suggested that the Commission require a simplified execution quality report, particularly for retail investors. 135 One commenter on the Concept Release on Equity Market Structure stated that if the Commission's goal was for execution quality statistics to make the markets more transparent for retail investors, the commenter did not believe that was occurring, and the average retail investor might benefit more from a simplified version of the report. 136 One EMSAC committee member stated that some retail firms have argued that aggregate statistics are more important for the retail investor, and that retail investors are not going to look at Rule 605 reports. 137 This EMSAC committee member further stated that an issue with aggregation is what to include in the aggregate statistics, and depending on a firm's business model, the firm may want to put in different things. 138 Separately, the EMSAC, as well as a commenter to the 2018 Rule 606 Amendments, recommended that the Commission incorporate Rule 605 and 606 data into the Commission's data visualization tool. 139 133 See KOR Group I at 2, FIF I at 2. 134 See EMSAC I at 0099:25-0100:3, 0106:14-25; EMSAC III at 2; Healthy Markets II at 3; BlackRock Letter at 3; Citi Letter at 8; Consumer Federation II at 6. 135 See, e.g., Citigroup Letter at 8 (suggesting in connection with the Concept Release on Equity Market Structure that a simplified execution quality report geared towards retail investors should contain a simple chart or graph showing how often a customer's trades are executed at the NBBO or better, how fast the trade is done, and whether the customer received enhanced liquidity); SIFMA Letter at 12 (stating in providing recommendations for equity market structure reforms that regulators should direct broker-dealers to provide public reports of order routing and execution quality metrics that are geared towards retail investors, and these reports should include relevant information in a uniform format that is easy to understand). 136 See Citigroup Letter at 8. 137 See EMSAC I at 0137:4-7 (Manisha Kimmel, Thomson Reuters). See also id. at 0137:7-10 (“The counter argument to that is, if everybody is doing the 605 [reports], then you could have all sorts of aggregation based on that . . .”). 138 See id. at 0137:11-16 (Manisha Kimmel, Thomson Reuters). 139 See EMSAC III at 2; FIF II at 13. See also EMSAC I at 0139:20-0140:11 (Gary Stone) (stating that individual investors need the Commission to provide the data, because they cannot rely on vendors that will charge for that service); EMSAC I at 0105:20-0106:7 (Frank Hatheway, NASDAQ) (stating that before replacing these existing offerings by data vendors of data visualization tools for Rule 605 and 606 data, the Commission may want to consider alternatives for making the data widely available and accessible); EMSAC I at 0140:12-15 (Bill Alpert, Barron's) (stating that it would be salutary to have competition between vendors, the Commission, and the press to develop easier to use tools and better presentations). III. Proposed Modifications to Reporting Entities A. Larger Broker-Dealers Rule 605 of Regulation NMS requires market centers, such as national securities exchanges, OTC market makers, and ATSs, to produce publicly available, monthly execution quality reports. However, broker-dealers are not included within the scope of Rule 605's reporting requirements unless they are market centers. Although Rule 606 requires broker-dealers to identify the venues, including market centers, to which they route customer orders for execution, customers of those broker-dealers do not have access to comprehensive information about execution quality. For example, to the extent that a market center's execution quality differs for orders received from one broker-dealer versus another broker-dealer, that difference would not be apparent from currently available execution quality statistics. The Commission is proposing to expand the scope of entities that must prepare Rule 605 reports to include larger broker-dealers, which have a customer-facing line of business. As proposed, Rule 605 would include broker-dealers as reporting entities, in addition to market centers, but exclude from that expanded requirement broker-dealers that do not introduce or carry at least 100,000 customer 140 accounts. This expansion of the scope of Rule 605 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. Further, limiting these reporting obligations to broker-dealers that have a larger number of customers would focus the associated implementation costs on those broker-dealers for which the availability of more specific execution quality statistics would provide a greater benefit. 140 “Customer” means any person that is not a broker or dealer. See 17 CFR 242.600(b)(23). Rule 605 and Rule 606 operate together to allow investors to evaluate what happens to their orders after investors submit their orders to a broker-dealer for execution. 141 In the current regulatory environment, customers that submit held orders (in many cases, individual investors) have a limited ability to assess the execution quality that their broker-dealers are providing. A customer of a broker-dealer can use a broker-dealer's Rule 606 reports to identify certain regularly-used venues to which the broker-dealer routes orders for execution. However, with respect to held orders, these Rule 606 reports are not required to include any detailed execution quality information. 142 Moreover, Rule 605 reports prepared by market centers commingle orders from all broker-dealers that send covered order flow to the reporting market center. Yet a market center may provide different execution quality to customers of different broker-dealers, and in some cases this difference may be substantial. 143 Therefore, a customer of that broker-dealer must make an inference about the execution quality achieved by that particular broker-dealer at a market center based on a Rule 605 report that covers all orders received by the market center, even though that inference may not be accurate. 144 141 See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75414. 142 See supra notes 50-55 and accompanying text. 143 See supra notes 108-110 and accompanying text (discussing an EMSAC panelist's observations after trying to infer execution quality based on available data that one “fundamental problem” with making these inferences was that a market maker's execution quality may vary according to each broker's order flow). See also supra note 87 and accompanying text. 144 See supra notes 107-111, 115-118, and 120-121 and accompanying text. Due to this gap in the reporting requirements, variations in execution quality provided by a market center to a particular broker-dealer submitting the order are not observable by market participants and other interested parties using publicly available execution quality reports. 145 When requiring each market center to report on all orders that it received for execution, the Commission intended to assign the disclosure obligation to the entity that would control whether and when the order would be executed. 146 The Commission required market centers to include in their Rule 605 reports those orders that they routed to another venue for execution, thereby recognizing that market centers' decisions about whether and how to route orders can affect execution quality. 147 Likewise, broker-dealers that route customer orders make decisions that affect the execution quality that their customers' orders receive. 145 The Commission preliminarily believes that many institutional customers regularly conduct, directly or through a third-party vendor, transaction cost analysis of their orders to assess execution quality against various benchmarks, but this information is not publicly available. The Commission believes that some institutional investors may currently use aggregated statistics or summaries of Rule 605 reports prepared by third parties, who make these reports available for a fee. See infra section VII.C.1.(c)(2). 146 See supra note 33 and accompanying text (citing Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75421). 147 When adopting Rule 605, the Commission stated that from the perspective of the customer who submitted the order, the fact that a market center chooses to route the order away “does not reduce the customer's interest in a fast execution that reflects the consolidated BBO” that is “as close to the time of order submission as possible,” and that, consequently, in evaluating the quality of order routing and execution, it is important for customers to know how the market center handles “all orders that it receives, not just those it chooses to execute.” Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75423. In addition, while the Commission adopted Rule 605 in 2000 as a “minimum step necessary to address fragmentation,” 148 the equities markets have grown even more fragmented since that time. 149 Broker-dealers have many choices about where to route customer orders for execution. But broker-dealers may face conflicts of interest when discussing arrangements regarding the outsourcing of customer order flow, including those that involve PFOF, and making routing decisions. 150 With respect to orders submitted on a held basis, broker-dealers must include information about their payment relationships with execution venues in quarterly reports prepared pursuant to Rule 606(a)(1). 151 Without information about the execution quality that broker-dealers in the business of routing customer orders obtain for those orders, market participants and other interested parties lack key information that would facilitate their ability to evaluate how these payment relationships may affect execution quality. Recognizing these and other concerns, the EMSAC and other commenters in multiple contexts have suggested that the Commission expand the scope of Rule 605 to require reporting by broker-dealers. 152 148 See supra note 9 and accompanying text. 149 See supra notes 74-84 and accompanying text. 150 See supra notes 88-89 and accompanying text. 151 See supra notes 50-52 and accompanying text. As discussed above ( supra section II.D), Rule 606 requires broker-dealers to identify and report data according to execution venue, rather than by market center. Not all execution venues reflected on Rule 606 reports will necessarily fall within Regulation NMS's definition of “market center.” See, e.g., 2018 Rule 606 Amendments Release, 83 FR 58338 (Nov. 19, 2018) at 58365 (stating that the Commission's reference to “venues” for purposes of Rule 606(b)(3) is meant to refer to external liquidity providers to which the broker-dealer may send actionable indications of interest (“IOIs”), and that this category of market participants likely would include market centers as defined in Rule 600(b)(38), but may not be limited to such market centers). 152 See generally supra section II.E. Consequently, the Commission is now proposing to require larger broker-dealers to prepare and publish execution quality reports pursuant to Rule 605, through the proposed revisions to Rule 605 and the addition of proposed Rule 605(a)(7). This expansion of the scope of reporting entities would increase transparency into the differences in execution quality achieved by broker-dealers when they route customer orders to execution venues, and thereby would make the execution quality statistics more useful to market participants and other interested parties. 153 This change would increase competition among broker-dealers that accept customer orders for execution by providing information that market participants can use to evaluate and compare broker-dealers' execution quality. This could lead to faster executions, better price improvement, and a shift in order flow to those broker-dealers offering the best execution quality for their customers. This would further the national market system objectives set forth in section 11A(a)(1) of the Exchange Act, including the efficient execution of securities transactions, fair competition among market participants, the public availability of information on securities transactions, and the best execution of investor orders. 154 153 Among the commenters that raised concerns about the lack of available information regarding the execution broker-dealers provide to their customers' orders, one commenter stated that there is a “fundamental flaw” in the logic of Rule 605 and Rule 606 because these rules assume that execution quality is solely the function of the market center, but instead execution quality is a product of a combination of the broker's skill and the quality of the market center's execution. See supra notes 117-118 and accompanying text. The proposal would address this concern by requiring larger broker-dealers to produce execution quality reports, rather than leaving market participants and other interested parties to rely solely on the execution quality reports produced by the market centers to which a particular broker-dealer routes orders. 154 See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75414 n.1, 75417 (citing 15 U.S.C. 78k-1). Specifically, the Commission is proposing to amend Rule 605 to apply the reporting requirements contained therein to brokers and dealers, in addition to market centers. Where current Rule 605 refers to “market centers,” the Commission is proposing to insert references to “brokers” and “dealers.” 155 The proposed expansion of Rule 605's reporting requirements to cover broker-dealers would also affect Rule 600 of Regulation NMS. Specifically, the definition of “covered order” in Rule 600(b)(22) refers to “any market order or any limit order (including immediate-or-cancel orders) received by a market center.” 156 The Commission is proposing to amend this provision to refer to orders “received by a market center, broker, or dealer.” 157 Further, as noted above, the Plan establishes procedures for market centers to follow in making available to the public the monthly reports required by the Rule. 158 Because of the proposed amendments to the Rule, the existing Plan would no longer comply with proposed Rule 605(a)(3) and thus would need to be updated in order to incorporate references to broker-dealers subject to the Rule. 159 As is currently the case for market centers that are not Participants, the Participants would be required to enforce compliance with the terms of the Plan by their members and person associated with their members. 160 155 See proposed Rules 605 (introductory paragraph), 605(a) (caption), 605(a)(1), 605(a)(1)(i)(D), 605(a)(3), 605(a)(4), 605(a)(5), and 605(a)(6). 156 17 CFR 242.600(b)(22). The Commission is proposing to renumber the definition of “covered order” as proposed Rule 600(b)(30). 157 See proposed Rule 600(b)(30). 158 See supra section II.B.3. 159 The Plan details procedures for market centers to follow and, among other things, specifies the order and format of fields in a manner that aligns with current Rule 605(a)(1). See Plan generally and section VI(a) of the Plan. Under current Rule 605(a)(2), every national securities exchange trading NMS stocks and each national securities association is required to act jointly in establishing procedures for market centers to follow in making the reports required by Rule 605(a)(1) available to the public in a uniform, readily accessible, and usable electronic form. See 17 CFR 242.605(a)(2). The proposal would add brokers and dealers to the scope of entities to be covered by the Plan's procedures and renumber Rule 605(a)(2) as Rule 605(a)(3). See proposed Rule 605(a)(3). The Plan would also need to be updated to accommodate any new data elements in the order and format of fields. 160 See 17 CFR 242.608(c). See also supra note 47 (describing Participants and Designated Participants under the Plan). The Commission is mindful that Rule 605's execution quality reports contain a large volume of statistical data, and as a result it may be difficult for individual investors to review and digest the reports. The Commission considered the volume of execution quality statistics that would be produced when adopting Rule 605, and stated that the large volume of statistics reflects a deliberate decision by the Commission to avoid the dangers of overly general statistics that could hide significant differences in execution quality. 161 By requiring brokers-dealers to report stock-by-stock order execution information in a uniform manner, the proposal would make it possible for market participants and other interested parties to make their own determinations about how to group stocks or orders when comparing execution quality across broker-dealers. 162 Further, to the extent that certain market participants may not have the means to directly analyze the detailed statistics, 163 the Commission expects that independent analysts, consultants, broker-dealers, the financial press, and market centers will respond to the needs of investors by analyzing the disclosures and producing more digestible information using the data, as the Commission anticipated when approving the predecessor to Rule 605 and has observed since that time. 164 As discussed further below, the Commission also is proposing 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. 165 Requiring broker-dealers to produce more detailed execution quality data would help ameliorate potential concerns about overly general statistics, or about the specific categorization of orders and selection of metrics in the summary reports, by allowing market participants and other interested parties to conduct their own analysis based on alternative categorizations of the underlying data. 161 See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75419. See also id. (stating that after this basic information is disclosed by all market centers in a uniform manner, market participants and other interested parties will be able to determine the most appropriate classes of stocks and orders to use in comparing execution quality across market centers). 162 See, e.g., supra note 113 and accompanying text. 163 See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75419, text accompanying n.27 (stating that most individual investors likely would not obtain and digest the reports themselves). See also supra note 112 and accompanying text (EMSAC committee member stating that retail investors will not look at the Rule 605 reports); note 118 (commenter stating that Rule 605 data is too raw for most investors to interpret); note 119 and accompanying text (commenter stating that most retail investors may not use the disclosures directly). 164 See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75419. See also supra notes 106, 114, 116 and accompanying text; infra notes 544-546 and accompanying text. 165 See infra section V. Proposed Rule 605(a)(7) states 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”). 166 The Commission is mindful of the additional costs that broad expansion of the rule to broker-dealers would entail. The relative benefit of having a broker-dealer prepare Rule 605 reports increases when the broker-dealer has more customers. The Commission is proposing a minimum reporting threshold of 100,000 customers to balance the benefits of having broker-dealers produce execution quality statistics with the costs of implementation and continued reporting. 167 166 In addition, as discussed further below, proposed Rule 605(a)(7) states that any broker or dealer that meets or exceeds this customer account threshold and is also a market center shall produce separate reports pertaining to each function. 167 See infra section VII.D.2 for a discussion of the costs of the proposed amendments to Rule 605. As discussed further below, broker-dealers that were previously not required to publish Rule 605 reports would incur initial costs to develop the policies and procedures to post Rule 605 reports for the first time, and all broker-dealers would face ongoing costs to continue to prepare them each month. Other potential costs include a potential for less transparency or lower execution quality, and the costs to update best execution methodology. See also infra section VII.E.1.(a) for a discussion about the potential costs of imposing Rule 605's reporting requirements on broker-dealers with a smaller number of customer accounts. Analysis indicates that approximately 85 broker-dealers (or approximately 6.7% of customer-carrying broker-dealers) introduce or carry more than 100,000 customer accounts and these broker-dealers together handle over 98% of customer accounts. 168 Utilizing a 100,000 customer account threshold 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 a smaller number of customer accounts. Although utilizing a lower customer account threshold, such as 10,000 customer accounts, would result in capturing substantially more transactions, the lower customer account threshold would result in capturing only marginally more customer accounts. This implies that the additional customer coverage would result from a small number of accounts that trade in large volumes. Therefore, the additional coverage may not be as beneficial because many of the additional customer accounts that would be included with a lower threshold likely belong to institutional traders that have access to alternative execution quality information and also are likely to use not held orders, which are not included in Rule 605 reports. 169 168 See infra Table 13 for cost-benefit analysis of different customer account thresholds defining “larger broker-dealer” and infra note 1008 and accompanying text for methodology. For example, approximately 45 broker-dealers introduce or carry more than 500,000 customer accounts and these broker-dealers together handle over 96% of customer accounts. Further, approximately 235 broker-dealers introduce or carry more than 10,000 customer accounts and these broker-dealers together handle over 99% of customer accounts. See infra Table 13. 169 See infra note 1011 and accompanying text; Table 13. See also infra section VII.E.1.(a) for further discussion of alternative customer account thresholds. The Commission considered using the volume of broker-dealers' customer transactions, rather than the number of their customer accounts, for purposes of establishing a reporting threshold. Although establishing a reporting threshold using the number of customer transactions would likely capture a larger number of customer orders than the proposed customer account threshold, this approach would likely exclude broker-dealers that have a larger number of relatively inactive customer accounts and include broker-dealers that have a small number of customer accounts associated with large amounts of trading volume. In each respect, the reporting threshold would be less likely to capture individual investor orders and more likely to capture institutional investor orders, and therefore the threshold would be less likely to target the types of orders that may be most useful for consumers of Rule 605 reports. In addition, utilizing a threshold based on the number of customer transactions may result in a less stable set of broker-dealers that are subject to Rule 605's reporting requirements, because transaction volume is more likely than customer account numbers to vary significantly from month to month based on market conditions. Further, the number of their customer accounts is likely less costly for broker-dealers to calculate and track as compared to the volume of transactions associated with their customer accounts. 170 170 See infra section VII.E.1.(c) for further discussion about using a threshold based on the number of customer transactions. The Commission also considered EMSAC's recommendation to expand the scope of Rule 605 to cover all broker-dealers, which contemplated excluding only broker-dealers with de minimis order flow. 171 The Commission is preliminarily concerned that subjecting a significantly larger number of broker-dealers to Rule 605's reporting requirements would substantially increase the costs of the proposal and that the increase in cost that would accompany the use of a de minimis threshold would not be justified by the corresponding benefit. 172 This concern about requiring smaller broker-dealers to prepare Rule 605 reports is present with any de minimis threshold, whether based on order flow as the EMSAC suggested or on some other measure such as number of customer accounts. 171 See supra notes 104-106 and accompanying text. 172 See infra note 1011 and accompanying text and Table 13 (showing that, for example, adjusting the customer account threshold from 100,000 customer accounts to 10,000 customer accounts would increase the estimated costs from approximately $5 million to approximately $13.9 million). The proposed customer account threshold would require brokers-dealers to include in their calculations the public customer accounts that they introduce, as well as the customer accounts that they carry. 173 Rule 605 reports that reflect orders received from customer accounts that a broker-dealer introduces or carries would provide useful information to market participants because both introducing and carrying broker-dealers make decisions about where to route those orders and it would be helpful for customers to be able to evaluate the execution quality received as a result of those decisions. 174 An introducing broker-dealer may choose to utilize an omnibus clearing arrangement and not disclose certain information about its underlying customer accounts to the clearing firm. 175 In such circumstances, because the clearing broker may not have access to information about how many customer accounts a particular omnibus account represents, the proposal specifies that when an omnibus clearing arrangement is used the underlying customer accounts would be required to be counted as accounts carried by the introducing broker-dealer rather than by the clearing broker. Therefore, 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. 176 173 See proposed Rule 605(a)(7). 174 An introducing broker-dealer is a broker-dealer 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, 56978 (Dec. 2, 1992) (Net Capital Rule). 175 Some broker-dealers utilize an “omnibus clearing arrangement,” where the clearing firm maintains one account for all of 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. 176 See proposed Rule 605(a)(7). For example, an introducing broker-dealer that utilizes an omnibus clearing arrangement for 100,000 customer accounts and separately carries 50,000 customer accounts would be considered, for purposes of proposed Rule 605, to carry 150,000 customer accounts. In contrast, a broker-dealer who introduces, on a fully-disclosed basis, 125,000 customer accounts would be considered, for purposes of proposed Rule 605, to introduce 125,000 customer accounts. In both cases, the introducing broker-dealers would exceed the proposed customer account threshold. Requiring both introducing broker-dealers and carrying broker-dealers to prepare Rule 605 reports might result, in some instances, in the same underlying order being reflected on multiple broker-dealers' Rule 605 reports. However, Rule 605 does not require reports that reflect execution quality on an order-by-order basis and the separate reports would provide different views of execution quality specific to the group of orders handled by each broker-dealer. Moreover, the current structure of Rule 605 already contemplates that certain orders may be reflected on more than one report, in the case of orders that are received by one market center and then routed to another market center for execution. 177 177 See 17 CFR 242.605(a)(1). Proposed Rule 605(a)(7) states 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. Therefore, a broker-dealer that meets or exceeds the customer account threshold and is also a market center would be required to produce one report that includes all of the covered orders in NMS stocks that it received for execution when acting as a market center and a separate report that includes all of the covered orders in NMS stocks that it received for execution when acting as a broker-dealer. Requiring a firm to produce separate reports pertaining to its market center function and its broker-dealer function would 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. This aspect of the proposal would not change how a firm should determine when it is acting as a market center, as that term is defined in Rule 600(b)(46). 178 In particular, some firms that are larger broker-dealers also act as OTC market makers, which are a type of market center. Currently, to the extent that a dealer 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, that dealer is defined as an OTC market maker. 179 For example, if a broker-dealer executes certain types of orders internally ( e.g., fractional share orders, small-sized orders, or orders in particular symbols), that broker-dealer may be acting as an OTC market maker, and thus a market center, for those specific types of orders. Moreover, Rule 605 requires that any report pertaining to a market center include all covered orders that it received for execution from any person, whether executed at the market center or at any other venue. 180 As is the case under Rule 605 currently for market centers that route orders away, under the proposal, the fact that a larger broker-dealer has routed certain covered orders away for execution would not alone be the basis on which to determine that it did not act as a market center with respect to those orders. 181 178 See 17 CFR 242.600(b)(46). The Commission is proposing to renumber the definition of “market center” as proposed Rule 600(b)(56). 179 See supra note 28. See also Securities Exchange Act Release No. 37619A (Sept. 6, 1996), 61 FR 48290, 48318-19 (Sept. 12, 1996) (Order Execution Obligations) (stating that dealers that internalize customer order flow in particular stocks by holding themselves out to customers as willing to buy and sell on an ongoing basis would fall within the definition of “OTC market maker” as defined in the predecessor to Rule 602 of Regulation NMS, even though they may not hold themselves out to all other market participants, and that dealers that hold themselves out to particular firms as willing to receive customer order flow, and execute those orders on a regular or continuous basis, also would fall within the definition of an OTC market maker); id. at 48319 (stating that broker-dealers will not be considered to be holding themselves out as regularly or continuously willing to buy or sell a security if they occasionally execute a trade as principal to accommodate a customer's request, and that, in response to the suggestion of some commenters, the Commission has modified the proposed amendment to the definition of “OTC market maker” to make clear that more than an isolated transaction is necessary before a dealer is designated an OTC market maker). 180 See 17 CFR 242.605(a)(1). We note that the staff has provided their views on a way that a firm might determine the scope of covered orders for which it acts as a market center, see 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 Rule applies to broker-dealers insofar as they act as a `market center' with respect to orders received from other persons. Consequently, for orders in securities for which Firm X does not act as an OTC market maker, Firm X would not be acting as a market center in those securities and therefore need not report on orders in those securities that it receives as an agent and routes elsewhere for execution. Conversely, the orders that Firm X receives from any person in the 500 securities in which it acts as an OTC market maker (and therefore is a market center) generally must be included in Firm X's monthly reports, even if Firm X ultimately routes some of the orders to other market centers for execution.”). Staff reports, Investor Bulletins, and other staff documents (including 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 statements, they have no legal force or effect, do not alter or amend applicable law, and create no new or additional obligations for any person. 181 See supra notes 143-144 and accompanying text. For a larger broker-dealer that is also a market center, the report pertaining to its broker-dealer function would cover all orders that the broker-dealer received for execution as part of its customer-facing line of business, whether executed internally or routed away. An order would need to be reflected on both the report regarding the firm's market center function and the report regarding its broker-dealer function, if the broker-dealer received the order from a customer and also acts as a market center for that type of order. Each report would provide a different view of the firm's execution quality based on a different aspect of its business, and because reports reflect orders grouped by symbol, order type, and size, would reflect different execution quality metrics to the extent that the group of orders covered by the different reports did not overlap completely. 182 182 For certain firms regarding certain symbols, order types, or order sizes, the group of orders for which the firm acts as a larger broker-dealer may overlap completely with the group of orders for which the firm acts as a market center. However, broker-dealer firms are structured in myriad different ways, and the degree of overlap among reports might not remain stable over time; therefore, requiring firms to produce reports according to the orders for which they act as a market center and the orders for which they act as a broker-dealer would help keep the reports consistent with firms' lines of business. As proposed, pursuant to Rule 605(a)(7), a broker-dealer would be excluded from Rule 605's reporting requirements only with respect to its customer-facing broker-dealer function (as opposed to its function as market center, if applicable) as long as the number of customer accounts that it introduces or carries continues to be less than the customer account threshold. A broker-dealer would no longer be excluded from Rule 605 once and as long as it meets or exceeds the customer account threshold; however, a broker-dealer that meets or exceeds the customer account threshold for the first time would have a grace period before being required to comply with Rule 605's reporting requirements, as described further below. Proposed Rule 605(a)(7) states 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”). The Reporting Period would 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 has met or exceeded the customer account threshold. 183 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 would not be required to produce a report pursuant to this paragraph for the next calendar month. 184 The Reporting Period would start on the first day of the next calendar month after the customer account threshold has been crossed because this timing would align with Rule 605's monthly reporting period and avoid requiring broker-dealers to produce a report that covers a partial month, which would be less comparable with the monthly reports of other broker-dealers. Moreover, brokers-dealers that may at times fall below the customer account threshold would be required to produce reports pursuant to Rule 605 for at least three calendar months, because this minimum reporting period would help ensure a period of continuity in reporting. If instead a broker-dealer could fluctuate in and out of being required to comply with the reporting requirements from month-to-month, it would potentially be disruptive to the broker-dealer to have to coordinate compliance with the Rule on some months but not others and could interfere with customers' or market participants' ability to look at a broker-dealer's execution quality over time by analyzing historical data. 185 183 See proposed Rule 605(a)(7). 184 See id. 185 When discussing the 2018 amendments to Rule 605(a)(2) that required market centers to keep Rule 605(a) reports posted on a public website for a period of three years, the Commission stated that it expected customers and the public to use the historical information to compare information from the same time period. See 2018 Rule 606 Amendments Release, 83 FR 58338 (Nov. 19, 2018) at 58380 (also stating that, with respect to market centers voluntarily posting Rule 605(a) reports that were created prior to the amended rule's effectiveness, making historical data available to customers and the public could be useful to customers or market participants seeking to analyze such data). The Commission is proposing that, the first time a broker or dealer has met or exceeded the customer account threshold, there would be a grace period of three calendar months before the Reporting Period begins and the broker or dealer must comply with the reporting requirements of Rule 605. 186 A limited three-month grace period is appropriate because it would provide a broker-dealer that crosses the customer account threshold for the first time with a period of time in which to come into compliance with Rule 605's reporting requirements. The three-month grace period would afford a broker-dealer adequate time to develop the systems and processes and organize the resources necessary to generate the reports pursuant to Rule 605, while still requiring the broker-dealer to begin reporting without an overly long delay. At the same time, should a broker-dealer subsequently fall below the customer reporting threshold, the Commission preliminarily believes that the broker-dealer should already have the necessary systems and processes in place and therefore a grace period would not be necessary if that broker-dealer again meets or exceeds the customer account threshold and becomes subject to Rule 605's requirements. The Commission notes that Rule 606 similarly provides for a three-month grace period for brokers or dealers subject to Rule 606(b)(3)'s reporting requirements for the first time only. 187 186 See proposed Rule 605(a)(7). After the three calendar month grace period, the Reporting Period would 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 described above, a broker-dealer that meets or exceeds the customer account threshold would be required to produce Rule 605 reports for at least a Reporting Period. See supra notes 183-184 and accompanying text. Therefore, a broker-dealer that crosses the customer account threshold for the first time would be 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. 187 See 17 CFR 242.606(b)(4). Rule 605 requires that reporting entities calculate certain statistics based on the time of order receipt. 188 Moreover, Regulation NMS defines “time of order receipt” based on the time an order was received by a market center for execution. 189 In conjunction with the proposed expansion of Rule 605 to cover larger broker-dealers, it is necessary to modify this definition to specify how broker-dealers that are not acting as market centers would be required to calculate “time of order receipt.” The Commission has considered requiring broker-dealers to calculate the “time of order receipt” based on the time that the broker-dealer received the order or on the time that the broker-dealer transmitted the order to a market center for execution. Measuring “time of order receipt” based on when a broker-dealer received the order would provide a view of how that broker-dealer handled that order from the time the order was within its control, rather than limiting that view to what happened after the broker-dealer sent the order to a particular market center for execution. In this way, calculating execution quality statistics based on the time that a broker-dealer received the order could provide information about whether a broker-dealer's delay in sending the order to a market center for execution may have affected the execution quality obtained for that order, because the execution quality statistics would be measured based on the prevaili [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2022-27614. Public record. Not legal advice.