Disclosure of Order Execution Information

Federal RegisterApr 15, 2024

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 242

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

RIN 3235-AN22

Disclosure of Order Execution Information

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission (“Commission” or “SEC”) is adopting amendments to a rule under the Securities Exchange Act of 1934 (“Exchange Act”) that requires disclosures for order executions in national market system (“NMS”) stocks. First, the amendments expand the scope of reporting entities subject to the preexisting rule that requires market centers to make available to the public monthly execution quality reports to encompass broker-dealers with a larger number of customers. Next, the amendments modify the definition of “covered order” to include certain orders submitted outside of regular trading hours and certain orders submitted with stop prices. In addition, the amendments modify the information required to be reported under the rule, including changing how orders are categorized by order size as well as how they are categorized by order type. The amendments, as part of the changes to the order size categories, modify the rule to capture execution quality information for fractional share orders, odd-lot orders, and larger-sized orders. Additionally, the amendments modify reporting requirements for non-marketable limit orders (“NMLOs”) in order to capture more relevant execution quality information for these orders by requiring statistics to be reported from the time such orders become executable. The amendments modify time-to-execution categories and require average time to execution to be measured in increments of a millisecond or finer and calculated on a share-weighted basis for all orders. The amendments require that the time of order receipt and time of order execution be measured in increments of a millisecond or finer, and that realized spread be calculated at multiple time intervals. Finally, the amendments enhance the accessibility of the reported execution quality statistics by requiring all reporting entities to make a summary report available.

DATES:

Effective date:

The final rules are effective June 14, 2024.

Compliance date:

See section VII, titled “Transition Matters,” for further information on transitioning to the final rules.

FOR FURTHER INFORMATION CONTACT:

Kathleen Gross, Senior Special Counsel, Lauren Yates, Senior Special Counsel, Susie Cho, Special Counsel, Christopher Chow, Special Counsel, David Michehl, Special Counsel, or Laura Harper Powell, Special Counsel at (202) 551-5500, Division of Trading and Markets, Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

The Commission is adopting amendments to 17 CFR 242.600 (“Rule 600”) to add new defined terms to and modify certain existing defined terms in Rule 600 that are used in 17 CFR 242.605 (“Rule 605”) as amended, as well as amendments to Rule 605; and to make conforming amendments to defined terms in 17 CFR 242.602, 242.611, and 242.614; and conforming amendments to defined terms in 17 CFR 240.3a51-1, 240.13h-1, 242.105, 242.201, 242.204, and 242.1000.

Table of Contents

I. Introduction and Background

A. Overview of Need for Rule Modernization

B. Overview of the Proposal and Comments Received

C. Overview of Final Rule 605

II. Modifications to Reporting Entities

A. Larger Broker-Dealers

1. Proposed Approach

2. Final Rule and Discussion

B. Qualified Auction Mechanisms

1. Proposed Approach

2. Final Rule and Discussion

C. NMS Stock ATSs and SDPs

1. Proposed Approach

2. Final Rule and Discussion

III. 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 and Time-to-Execution Statistics

4. Execution Quality Statistics

IV. Summary Execution Quality Report

A. Proposed Approach

B. Final Rule and Discussion

1. Required Information

2. Required Format

3. Investor Testing and Education

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

A. Proposed Approach

B. Final Rule and Discussion

1. Accessibility of Rule 605 Reports

2. Alternatives to Rule 605 Proposal

VI. Existing Commission Exemptive Relief and Staff Statements

VII. Transition Matters

VIII. Paperwork Reduction Act

A. Summary of Collection of Information

B. Proposed Use of Information

C. Respondents

D. Total PRA Burdens

IX. Economic Analysis

A. Introduction

B. Market Failure

C. Baseline

1. Regulatory Baseline

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

3. Disclosure Requirements under Preexisting Rule 605

4. Markets for Brokerage and Trading Services for NMS Stocks under Preexisting 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

X. Regulatory Flexibility Act Certification

XI. Other Matters

Statutory Authority

I. Introduction and Background

On December 14, 2022, the Commission proposed amendments to Rule 605 under Regulation National Market System (17 CFR 242.600 through 242.614) (“Regulation NMS”) to update the disclosure of order execution quality statistics in national market system (“NMS”) stocks.

Rule 605, formerly known as Rule 11Ac1-5, was adopted in 2000

and requires market centers

make available standardized monthly reports of statistical information concerning covered orders

in NMS stocks

that they received for execution.

Prior to these amendments, the Rule 605 report contained a number of execution quality metrics for covered orders.

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

and (3) one of four order sizes.

Within each of the three categories, the Rule 605 report that was required prior to these amendments included statistics about the total number of orders submitted, and the total number of shares submitted, shares cancelled prior to execution, shares executed at the receiving market center, shares executed at another venue, shares executed within different time-to-execution buckets, and average realized spread.

For market and marketable limit orders specifically, the report required by Rule 605 prior to these amendments also included statistics about the (1) average effective spread; (2) number of shares executed better than the quote, at the quote, or outside the quote; (3) average time to execution when executed better than the quote, at the quote, or outside the quote; and (4) average dollar amount per share that orders were executed better than the quote or outside the quote.

To calculate the required statistics, the time of order execution and time of order receipt were measured to the nearest second.

See

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

See

Securities Exchange Act Release No. 43590 (Nov. 17, 2000), 65 FR 75414 at 75416 (Dec. 1, 2000) (Disclosure of Order Execution and Routing Practices) (“Rule 11Ac1-5 Adopting Release”). Along with Rule 11Ac1-5, the Commission also adopted Rule 11Ac1-6 as part of the Rule 11Ac1-5 Adopting Release.

See

17 CFR 242.606 (“Rule 606”). When the Commission later adopted Regulation NMS in 2005, Rule 11Ac1-5 was re-designated as Rule 605, and Rule 11Ac1-6 was re-designated as Rule 606. See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005) (“Regulation NMS Adopting Release”). Rule 606 requires the public disclosure of order routing practices and was amended in 2018.

See

Securities Exchange Act Release No. 84528 (Nov. 2, 2018), 83 FR 58338 (Nov. 19, 2018) (“2018 Rule 606 Amendments Release”).

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

trading system (“ATS”), national securities exchange, or national securities association.

See

final 17 CFR 242.600(b)(55). “Exchange market maker” means any member of a national securities exchange that is registered as a specialist or market maker pursuant to the rules of such exchange.

See

final 17 CFR 242.600(b)(37). “OTC market makerrdquo; means any dealer that holds itself out as being willing to buy from and sell to its customers, or others, in the United States, an NMS stock for its own account on a regular or continuous basis otherwise than on a national securities exchange in amounts of less than a block size.

See

final 17 CFR 242.600(b)(75). “Alternative trading system” or “ATS” means any organization, association, person, group of persons, or system: (1) That constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange within the meaning of 17 CFR 240.3b-16; and (2) That does not: (i) Set rules governing the conduct of subscribers other than the conduct of such subscribers' trading on such organization, association, person, group of persons, or system; or (ii) Discipline subscribers other than by exclusion from trading.

See

17 CFR 242.300(a).

See also

final 17 CFR 242.600(b)(4) (stating that “alternative trading system” has the meaning provided in 17 CFR 242.300(a)). “National securities exchange” means any exchange registered pursuant to section 6 of the Exchange Act.

See

final 17 CFR 242.600(b)(63). “National securities associationrdquo; means any association of brokers and dealers registered pursuant to section 15A of the Exchange Act.

See

final 17 CFR 242.600(b)(62).

Prior to these amendments, a “covered order” was defined to include any market order or any limit order (including immediate-or-cancel orders) received by a market center during regular trading hours at a time when a national best bid and national best offer (“NBBO”) is being disseminated, and, if executed, is executed during regular trading hours, and did not include any orders for which the customer requests special handling, including, but not limited to, market on open and market on close orders, stop orders, all or none orders, and “not held” orders.

See

prior 17 CFR 242.600(b)(22). Generally, a “not held” order provides the broker-dealer with price and time discretion in handling the order, whereas a broker-dealer must attempt to execute a “held” order immediately.

See

2018 Rule 606 Amendments Release, 83 FR 58338 at 58340, n.19 (Nov. 19, 2018).

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

See

final 17 CFR 242.600(b)(65). An “NMS security” is defined as any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options.

See

final 17 CFR 242.600(b)(64).

See

prior 17 CFR 242.605. The procedures for market centers to make their execution quality data available to the public are set forth in the National Market System Plan Establishing Procedures Under Rule 605 of Regulation NMS (“Rule 605 NMS Plan”).

See

prior 17 CFR 242.605(a)(2) and Securities and Exchange Commission File No. 4-518 (Rule 605 NMS Plan).

See also

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

See

prior 17 CFR 242.605(a)(1); Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75423-25 (Dec. 1, 2000).

See

prior 17 CFR 242.605(a)(1). Prior to these amendments, “Categorized by order type” referred to categorization by whether an order is: (1) a market order, (2) a marketable limit order, (3) an inside-the-quote limit order, (4) an at-the-quote limit order, or (5) a near-the-quote limit order.

See

prior 17 CFR 242.600(b)(14).

See

prior 17 CFR 242.605(a)(1). Prior to these amendments, the size categories were: 100 to 499 shares; 500 to 1,999 shares; 2000 to 4,999 shares; and 5,000 or greater shares.

See

prior 17 CFR 242.600(b)(13). On June 22, 2001, the Commission granted exemptive relief to any order with a size of 10,000 shares or greater (“Large Order Exemptive Relief”), reasoning that the exclusion of very large orders would help assure greater comparability of statistics in the largest size category of 5,000 or greater shares.

See

letter from Annette L. Nazareth, Director, Division of Market Regulation to Darla C. Stuckey, Assistant Secretary, NYSE Group, Inc., dated June 22, 2001 (“Large Order Exemptive Letter”).

See

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

See

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

See

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

At the time the Commission adopted Rule 11Ac1-5, there was little publicly available information to enable investors to compare and evaluate execution quality among different market centers.

Rule 605, along with Rule 606 of Regulation NMS, was adopted in 2000, and together these rules required the public disclosure of execution quality and order routing practices.

The Commission intended Rule 11Ac1-5 to provide awareness 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.

The Commission reasoned that once investors could evaluate execution performance provided by various broker-dealers, competitive forces could then be brought to bear on broker-dealers both with respect to the explicit trading costs associated with brokerage commissions and the implicit trading costs associated with execution quality.

See

Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75416 (Dec. 1, 2000). For clarity, when this release discusses the adoption of Rule 605, it is referring to the Rule 11Ac1-5 Adopting Release,

supra

note 2.

See

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

See id.

at 75418. Data obtained from Rule 605 reports are used by the third parties including academics and the financial press to study a variety of topics related to execution quality, including liquidity measurement, exchange competition, zero commission trading, and broker-dealer execution quality.

See

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

See

Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75419 (Dec. 1, 2000). Although it is difficult to isolate the effects of Rule 605 given the evolution of the equity markets over time, one academic study examining the introduction of Rule 605 found that the routing of marketable order flow by broker-dealers became more sensitive to changes in execution quality across market centers after Rule 605 reports became available.

See

Ekkehart Boehmer et al.,

Public Disclosure and Private Decisions: Equity Market Execution Quality and Order Routing,

20 REV. FIN. STUD. 315 (2007) (“Boehmer et al.”). Another study attributed a significant decline in effective and quoted spreads following the implementation of Rule 605 to an increase in competition between market centers, who improved the execution quality that they offered in order to attract more order flow.

See

Xin Zhao & Kee H. Chung,

Information Disclosure and Market Quality: The Effect of SEC Rule 605 on Trading Costs,

42 J. FIN. QUANTITATIVE ANALYSIS, 657 (Sept. 2007) (“Zhao & Chung”).

The information disclosed under Rule 605 has provided significant insight into execution quality at different market centers.

However, Rule 605 has not been substantively updated since it was adopted in 2000. In the interim, equity market conditions have changed due in part to many technological advancements that have altered the speed and nature of trading. In addition, the participation of individual investors in the equity markets has increased.

Accordingly, the Commission is adopting amendments to Rule 605 to update and improve the disclosure of execution quality information by

expanding the scope of entities subject to Rule 605, modifying the information required, and making key execution quality metrics more accessible to investors.

See

Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594 at 3604, n.55 (Jan. 21, 2010) (“Concept Release on Equity Market Structure”).

See

Proposing Release, 88 FR 3786 at 3787-88 (Jan. 20, 2023). As used in this release, “individual investor” refers to natural persons that trade relatively infrequently for their own or closely related accounts.

A. Overview of Need for Rule Modernization

The U.S. equity markets have evolved significantly in the last couple of decades. For instance, the equities markets have become increasingly fragmented, as both the market shares of individual national securities exchanges have decreased and an increased percentage of order flow has moved off-exchange. In 2000, there were nine registered national securities exchanges and one registered national securities association.

A large proportion of the order flow in listed equity securities was routed to a few, mostly manual, trading centers,

and the primary listing exchanges maintained a high percentage of the order flow for exchange-listed equities.

See

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

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

See

Securities Exchange Act Release Nos. 78309 (July 13, 2016), 81 FR 49432 at 49436 (July 27, 2016) (“Rule 606 Amendments Proposing Release”); 42450 (Feb. 23, 2000), 65 FR 10577 at 10579-80 (Feb. 28, 2000) (“Fragmentation Release”).

See

Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75415 (Dec. 1, 2000) (stating that in Sep. 2000, for example, the New York Stock Exchange Inc. (“NYSE”) accounted for 83.3% of the share volume in NYSE equities and that the American Stock Exchange, LLC (“Amex”) accounted for 69.9% of share volume in Amex equities).

See also

Concept Release on Equity Market Structure, 75 FR 3594 at 3595 (Jan. 21, 2010) (stating that in Jan. 2005, NYSE executed approximately 79.1% of the consolidated share volume in its listed stocks, as compared to 25.1% in Oct. 2009). In addition, NYSE-listed stocks were traded primarily on the floor of the NYSE in a manual fashion until Oct. 2006, at which time NYSE began to offer fully automated access to its displayed quotations.

See id.

at 3594-95. However, stocks traded on the NASDAQ Stock Market LLC (“NASDAQ”), which in 2000 was owned and operated by a national securities association, were already trading in a highly automated fashion at many different trading centers.

See id.

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

See also

Proposing Release, 88 FR 3786 at 3791, n.76 (Jan. 20, 2023).

In contrast, trading in the U.S. equity markets today is highly automated and spread even more among different types of trading centers, allowing even more choices about where orders may be routed. The types of trading centers that currently trade NMS stocks are: (1) national securities exchanges operating self-regulatory organization (“SRO”) trading facilities;

(2) ATSs that trade NMS stocks (“NMS Stock ATSs”);

(3) exchange market makers; (4) wholesalers;

and (5) any other broker-dealer that executes orders internally by trading as principal or crossing orders as agent.

Some OTC market makers, such as wholesalers, operate single-dealer platforms (“SDPs”) through which they execute institutional orders in NMS stocks against their own inventory.

In the first quarter of 2023, NMS stocks were traded on 16 national securities exchanges, and off-exchange at 33 NMS Stock ATSs and at over 220 other Financial Industry Regulatory Authority (“FINRA”) members.

Approximately 56% of NMS share volume was executed on national securities exchanges.

The majority of off-exchange share volume was executed by wholesalers, who executed over one quarter of total share volume (26.9%) and about 61% of off-exchange share volume.

See final

17 CFR 242.600(b)(100) (defining “SRO trading facility” as, among other things, a facility operated by a national securities exchange that executes orders in a security).

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

The term “wholesaler” is not defined in Regulation NMS, but is commonly used to refer to an OTC market maker that seeks to attract orders from broker-dealers that service the accounts of a large number of individual investors. The primary business model of wholesalers is to trade internally as principal with individual investor orders. They do not publicly display or otherwise reveal the prices at which they are willing to trade internally as a means to attract individual investor orders from broker-dealers.

See

15 U.S.C. 78c(a)(4)(A) (defining “broker” generally as any person engaged in the business of effecting transactions in securities for the account of others); 15 U.S.C. 78c(a)(5)(A) (defining “dealer” generally as any person engaged in the business of buying and selling securities for such person's own account through a broker or otherwise). The term “broker-dealer” is used in this release to encompass all brokers, all dealers, and firms that are both brokers and dealers. See also final 17 CFR 242.600(b)(106) (defining “trading center”). Broker-dealers that primarily service the accounts of individual investors (referred to in this release as “retail brokers”) often route the marketable orders of individual investors in NMS stocks to wholesalers.

See

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

See infra

Table 6. See also Proposing Release, 88 FR 3786 at 3860, n.766 (Jan. 20, 2023) and accompanying text; and 3861 (Table 7).

See infra

Table 6.

See also

Proposing Release, 88 FR 3786 at 3860, n.767 (Jan. 20, 2023) and accompanying text; and 3861 (Table 7).

See infra

Table 6.

See also

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

In addition, developments in trading further point toward the utility of amending Rule 605. Average stock prices have continued to increase over time,

and odd-lots

and fractional shares

continue to trade with increasing frequency. In addition, odd-lot quotes in higher-priced stocks continue to offer prices that are frequently better than the round lot NBBO for these stocks,

and this better-

priced odd-lot liquidity is distributed across multiple price levels.

In addition, odd-lot rates

have increased among lower priced stocks.

Because Rule 605 size categories prior to these amendments excluded orders smaller than 100 shares, a significant proportion of market activity was excluded.

An analysis of Rule 605 data shows that Rule 605 coverage has declined in the decades since the initial adoption of Rule 605.

Further, because order size categories were tied to the number of shares, the categories may have grouped orders of very different notional values, which might have complicated comparisons of aggregate execution quality. Finally, the speed of trading in the market has increased exponentially since 2000,

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

See

Securities Exchange Act Release No. 90610 (Dec. 9, 2020), 86 FR 18596 at 18606-07 (Apr. 9, 2021) (“Market Data Infrastructure (“MDI”) Adopting Release”) (

citing

Securities Exchange Act Release No. 88216 (Feb. 14, 2020), 85 FR 16726 at 16739 (Mar. 24, 2020) (“MDI Proposing Release”)) (stating that “between 2004 and 2019, the average price of a stock in the Dow Jones Industrial Average nearly quadrupled”).

See also

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

See

MDI Adopting Release, 86 FR 18596 at 18616 (Apr. 9, 2021) (describing analyses included in the MDI Adopting Release confirming observations made in the MDI Proposing Release that a significant proportion of quotation and trading activity occurs in odd-lots, particularly for frequently traded, high-priced stocks); and Proposing Release, 88 FR 3786 at 3792, n.91 (Jan. 20, 2023) (describing analysis using the NYSE Trade and Quote database (obtained via Wharton Research Data Services (“WRDS”)) (“TAQ data” or “NYSE TAQ data”) that found that odd-lots increased from around 15% of trades in Jan. 2014 to more than 55% of trades in Mar. 2022). An analysis of data from the SEC's Market Information Data Analytics System (“MIDAS”) analytics tool available at

https://www.sec.gov/marketstructure/datavis.html#

.YoPskqjMKUk shows that, in Q1 2023, odd-lots made up 80.5% of on-exchange trades (37.3% of volume) for stocks in the highest price decile and 18.8% of on-exchange trades (1.2% of volume) for stocks in the lowest price decile.

See

dataset “Summary Metrics by Decile and Quartile”

available at https://www.sec.gov/marketstructure/downloads.html. See also

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

Analysis using Consolidated Audit Trail (“CAT”) data for executed orders in Aug. 2023 found that an estimated 67.4 million originating orders with a fractional share component were eventually executed on- or off-exchange. Orders with a fractional share component represented approximately 4% of all executed orders and 22% of executed orders from “individual” accounts. Generally, accounts classified as “individual” in CAT are attributed to natural persons.

See also

Proposing Release, 88 FR 3786 at 3792, n.92 (Jan. 20, 2023).

See

MDI Adopting Release, 86 FR 18596 at 18729 (Apr. 9, 2021) (describing analysis using data from May 2020 and finding that approximately 45% of all trades executed on exchange and approximately 10% of all volume executed on exchange in corporate stocks and exchange-traded funds (“ETFs”) (6,926 unique symbols) occurred in odd-lot sizes (

i.e.,

less than 100 shares) and 40% of those odd-lot transactions (representing approximately 35% of all odd-lot volume) occurred at a price better than the NBBO). In addition, a recent academic working paper shows that odd-lots offer better prices than the NBBO 18% of the time for bids and 16% of the time for offers. This percentage increases monotonically in the stock price, for example, for bid prices, increasing from 5% for the group of lowest-price stocks in their sample, to 42% for the group of highest-priced stocks.

See

Robert P. Bartlett, Justin McCrary, and Maureen O'Hara,

The Market Inside the Market: Odd-Lot Quotes

(working paper Feb. 1, 2022),

available at

SSRN:

https://ssrn.com/abstract=4027099

(retrieved from SSRN Elsevier database) (“Bartlett, et al.”).

See also

Elliot Banks, BMLL Technologies, Inside the SIP and the Microstructure of Odd-Lot Quotes (observing an upward trend in odd-lot trading inside the NBBO

from Jan. 2019 to Jan. 2022).

See also

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

See

MDI Adopting Release, 86 FR 18596 at 18613 n.202 (Apr. 9, 2021) (describing analysis included in the MDI Adopting Release that examined quotation data for the week of May 22-29, 2020 for stocks priced from $250.01 to $1000.00 and found that there is odd-lot interest priced better than the new round lot NBBO 28.49% of the time, and, in 48.49% of those cases, there are better priced odd-lots at multiple price levels).

See also

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

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

For example, odd-lot rates for corporate stock price deciles 1-3 (the lowest priced corporate stocks comprising 30% of all corporate stocks) have been higher on average in 2021, 2022, and Sep. 2023 (34%, 34%, 34%) as compared to 2019 and 2020 (23%, 27%). Similarly, exchange-traded products (“ETPs”) also exhibit higher average odd-lot rates in price quartiles 1 and 2 (the lowest priced ETPs comprising 50% of all ETPs) on average in 2021, 2022, and Sep. 2023 (26%, 28%, 28%) compared to 2019 and 2020 (19%, 22%). Analysis has been updated based on MIDAS,

available at https://www.sec.gov/opa/data/market-structure/marketstructuredownloadshtml-by_decile_and_quartile. See also

Proposing Release, 88 FR 3786 at 3792, n.95 (Jan. 20, 2023).

See

Proposing Release, 88 FR 3786 at 3792, n.91-92 (Jan. 20, 2023).

See also

Proposing Release, 88 FR 3786 at 3792, n.98 (Jan. 20, 2023).

Moreover, since the adoption of Rule 605, the Commission and its staff have continually assessed market events and their impact on market structure, with much of this effort aimed at achieving enhanced transparency for investors.

In 2010, the Commission issued a Concept Release on Equity Market Structure seeking public comment on, among other things, the metrics for assessing the performance of the current market structure and the effectiveness of tools such as Rule 605 reports to protect investor interests.

In 2015, the Commission formed the Equity Market Structure Advisory Committee (“EMSAC”), which considered issues related to Regulation NMS and equity market structure.

The EMSAC recommended that the Commission amend Rule 605 to modernize it and increase the usefulness of available execution quality disclosures.

In addition, one broker-dealer petitioned the Commission to amend Rule 605.

For example, since the adoption of Rule 605 in 2000, the Commission has periodically revised certain of its NMS rules, including the adoption of Regulation NMS in 2005.

See, e.g.,

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

See

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

The archives of these meetings are available at

https://www.sec.gov/spotlight/emsac/emsac-archives.htm.

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.

See

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

available at https://www.sec.gov/rules/petitions/2021/petn4-775.pdf.

In 2018, the Commission modified Rule 606, which requires broker-dealers to disclose the identity of market centers to which they route orders on behalf of customers.

Rule 606(a)(1), which focuses on held orders,

requires broker-dealers to produce quarterly public reports regarding their routing of non-directed orders

in NMS stocks that are submitted on a held basis and these reports include the identity of regularly used venues, the percentage of orders routed to each venue, and information about the broker-dealer's relationship with each venue.

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.

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.

The Commission also adopted Rule 606(b)(3) to require detailed, customer-specific order handling disclosures that can be requested by a customer that places, directly or indirectly, one or more orders in NMS stocks that are submitted on a not held basis.

The amendments to Rule 606 in 2018 (“2018 Rule 606 Amendments”) also modified Rule 605 to require that the public order execution quality reports be kept publicly available for a period of three years.

See

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

See supra

note 4 (discussing held and not held orders).

A “non-directed order” means any order from a customer other than a directed order.

See

final 17 CFR 242.600(b)(66). A “directed order” means an order from a customer that the customer specifically instructed the broker or dealer to route to a particular venue for execution. See final 17 CFR 242.600(b)(32).

See

17 CFR 242.606(a)(1). Held orders are typically used by individual investors.

See, e.g.,

2018 Rule 606 Amendments Release, 83 FR 58338 at 58372 (Nov. 19, 2018) (stating that retail investors' orders are typically submitted on a held basis and are typically smaller in size).

See

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

See id.

at 58373.

See

17 CFR 242.606(b)(3); 2018 Rule 606 Amendments Release, 83 FR 58338 at 58345 (Nov. 19, 2018) (stating that by using the not held order distinction, Rule 606(b)(3) as adopted will likely result in more Rule 606(b)(3) disclosures for order flow that is typically characteristic of institutional customers—not retail customers—and will likely cover all or nearly all of the institutional order flow).

At the time of the 2018 Rule 606 Amendments, the Commission considered suggestions from the EMSAC and other commenters that the Commission include more or different execution quality statistics in the required disclosures.

But the Commission stated that the enhancements to Rule 606(a) that it was adopting were appropriately designed to enable customers- and retail customers in particular-to better assess their broker-dealers' order routing performance and, in particular, potential conflicts of interest that their broker-dealers face when routing customer orders and how their broker-dealers manage those potential

conflicts.

The Commission further stated the limited modifications being adopted at that time were reasonably designed to further the goal of enhancing transparency regarding broker-dealers' order routing practices and customers' ability to assess the quality of those practices, and that the suggested execution quality statistics were not necessary to achieve that goal.

However, the Commission stated that its determination not to adopt the additional specific disclosures was not an indication that the Commission had formed a decision on the validity or usefulness of the suggested execution quality statistics.

See

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

See also

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

See

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

See id.

The Commission further stated that the amendments to Rule 606 provide an appropriate level of insight into the widespread financial arrangements between broker-dealers and execution venues that may affect broker-dealers' order routing decisions.

See id.

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

The duty of best execution requires broker-dealers to execute customers' trades at the most favorable terms reasonably available under the circumstances.

When adopting Rules 605 and 606, the Commission stated that these rules do not address and therefore do not change the existing legal standards that govern a broker-dealer's duty of best execution.

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.

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.

See, e.g.,

Regulation NMS Adopting Release, 70 FR 37496 at 37537 (June 29, 2005);

Newton

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

SEC

, 444 F.2d 399 (2d Cir. 1971);

Arleen Hughes

, 27 SEC 629, 636 (1948),

aff'd sub nom. Hughes

SEC

, 174 F.2d 969 (D.C. Cir. 1949)). In addition, the Commission has separately proposed a rule concerning broker-dealers' duty of best execution.

See

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

See also

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

See

Regulation NMS Adopting Release, 70 FR 37496 at 37538 (June 29, 2005) (referring to the best reasonably available price and citing

Newton

, 135 F.3d at 266, 269-70, 274).

Newton

also specified certain other factors relevant to best execution—order size, trading characteristics of the security, speed of execution, clearing costs, and the cost and difficulty of executing an order in a particular market.

See Newton

, 135 F.3d at 270, n.2.

See also

Proposing Release, 88 FR 3786 at 3791, n.70 (Jan. 20, 2023).

See

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

See id.

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 1097-1098 and accompanying text for discussion of an investment adviser's fiduciary duty, including the duty to seek best execution of a client's transactions where the investment adviser has the responsibility to select broker-dealers to execute client trades.

See also

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

B. Overview of the Proposal and Comments Received

In acknowledgment of the myriad changes to the securities markets since the adoption of Rule 605 more than two decades ago, the proposed amendments to Rule 605 sought to ensure the continued transparency and utility of the execution quality statistics required by Rule 605. The Commission proposed to amend Rule 605 by expanding the scope of reporting entities to include broker-dealers with a larger number of customers (“larger broker-dealers”).

The Commission also proposed to modify the set of required data to capture execution quality information for more order types and sizes, require time-based execution statistics to be at a more granular level, and enhance the utility of the statistics.

The Commission further proposed to require that reporting entities provide a report of summary execution quality statistics, in addition to the more detailed reports.

See

Proposing Release, 88 FR 3786 at 3796-3801 (Jan. 20, 2023). Throughout the release, the term “larger broker-dealer” refers to a broker-dealer that meets or exceeds the “customer account threshold,” as defined in final Rule 605(a)(7).

See also infra

section II.A.

See

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

See id.

at 3823-25.

The Commission received numerous comment letters in response to the Proposing Release, a large portion of which were from individual investors.

Many commenters supported updating the disclosures required by Rule 605.

Several commenters, including industry groups, broker-dealers, financial services firms,

and investor advocacy groups, suggested clarifications or changes to the scope of reporting entities and to certain proposed metrics included in the detailed report or summary report.

Other commenters broadly supported the more detailed recommendations of other commenters.

The Commission received comments from a wide range of market participants, including individual investors, broker-dealers, academics, securities industry groups, national securities exchanges, and investor advocacy groups. Comments received on the Proposing Release are available on the Commission's website,

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

See, e.g.,

letters from: Ellen Greene, Managing Director, Equity Options Market Structure, SIFMA (Mar. 31, 2023) (“SIFMA Letter II”) at 2; Stephen John Berger, Managing Director, Global Head of Government and Regulatory Policy, Citadel Securities (Mar. 31, 2023) (“Rule 605 Citadel Letter”) at 1; Stephen W. Hall, Legal Director and Securities Specialist, Better Markets, Inc. (Mar. 31, 2023) (“Better Markets Letter”) at 1-2.

As used in this release, “financial services firm” refers to an entity that includes multiple types of affiliated entities providing financial services, including broker-dealers, investment advisers, or banks.

See, e.g.,

SIFMA Letter II at 27-28; and letters from: Howard Meyerson, Managing Director, Financial Information Forum (Mar. 31, 2023) (“FIF Letter”) at 2-5; Tyler Gellasch, President and CEO, Healthy Markets Association (Mar. 31, 2023) (“Healthy Markets Letter”) at 16-18; Douglas A. Cifu, Chief Executive Officer, Virtu Financial, Inc. (Mar. 30, 2023) (“Virtu Letter II”) at 10-12. These and other comment letters discussing the scope of reporting entities and proposed metrics included in the detailed report or summary report are described infra throughout this release.

See, e.g.,

Rule 605 Citadel Letter at 5; and letters from: Ryan Kwiatkowski, Chairman of the Board, and James Toes, President & CEO, Security Traders Association (Apr. 3, 2023) (“STA Letter”) at 4-5; Derrick Chan, Head of Equities, Fidelity Capital Markets (Mar. 31, 2023) (“Fidelity Letter”) at 2, 8; Naureen Hassan, President, UBS Americas, Robert Karofsky, President, UBS Investment Bank, and Suni Harford, President, UBS Asset Management, UBS (Mar. 31, 2023) (“UBS Letter”) at 2; Tim Gately, Managing Director, Head of Equities Sales, Americas, Citigroup Global Markets Inc. (Mar. 31, 2023) (“CGMI Letter”) at 1-2, 3; Jason Clague, Managing Director, Head of Operations, The Charles Schwab Corporation (Mar. 31, 2023) (“Schwab Letter II”) at 2, 30, 33. These and other comment letters discussing the recommendations of other commenters are described infra throughout this release. Several individual investors stated that in Dec. 2022, FINRA and the Commission sent out risk alerts regarding a lack of compliance with reports pursuant to Rule 606 of Regulation NMS and that “one would suspect that brokers will be as non-compliant with the new 605 reports.” Letter Type D; Letter Type E; and Letter Type H at

https://www.sec.gov/comments/s7-29-22/s72922.htm.

The Commission will monitor the implementation of the amendments to Rule 605.

One industry group recommended that the Commission reissue the proposed rule after incorporating comments from it and other market participants “to ensure that the final rule achieves the Commission's intended purpose and allow market participants to identify additional enhancements.”

A broker-dealer

stated that the Commission should provide market participants the opportunity to review and comment on such a revised proposal prior to finalization.

The Commission does not agree with these commenters. Delaying the adoption of a final rule, and thereby delaying the benefits of Rule 605, is not warranted. The Commission has reviewed and carefully considered the extensive comment file,

which included input from a broad array of market participants, and as discussed below, has made certain changes in response to these comments.

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

Letter from Howard Meyerson, Managing Director, Financial Information Forum (June 22, 2023) (“FIF Letter II”) at 11.

See also

letter from Howard Meyerson, Managing Director, Financial

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

See

letter from Stephen John Berger, Managing Director, Global Head of Government & Regulatory Policy, Citadel Securities (Dec. 5, 2023) (“Equity Market Structure Citadel Letter II”) at 3.

The Commission voted to issue the Proposing Release on Dec. 14, 2022. The release was posted on the Commission's website that day, and comment letters were received beginning the same day. The comment period closed on Mar. 31, 2023. The Commission has considered comments received since Dec. 14, 2022.

In addition, as discussed above, the EMSAC and commenters responding to the Commission's Concept Release on Equity Market Structure and to the 2018 Rule 606 Amendments recommended that the Commission update Rule 605 and one broker-dealer petitioned the Commission to amend the Rule.

See supra

notes 40-44, 52, and accompanying text. The Commission considered these suggestions when proposing amendments to Rule 605.

See

Proposing Release, 88 FR 3786 at 3792-95 (Jan. 20, 2022).

Contemporaneously with the proposal to modify Rule 605, the Commission issued three other proposals related to separate aspects of equity market structure and Regulation NMS.

A number of commenters provided comments on all four proposals jointly.

Some commenters requested that the Commission publicly release anonymized subsets of CAT data used in connection with the tables and figures in the proposals' economic analyses.

See

Regulation Best Execution Proposing Release, 88 FR 5440 (Jan. 27, 2023) (proposing rule that would establish Commission rule-based best execution standards); and Securities Exchange Release Nos. 96494 (Dec. 14, 2022), 87 FR 80266 (Dec. 29, 2022) (“Minimum Pricing Increments Proposing Release”) (proposing amendments to Regulation NMS to reduce minimum pricing increments, add a minimum trading increment, reduce access fee caps, improve transparency of exchange fees and rebates, and enhance the transparency of market data infrastructure); 96495 (Dec. 14, 2022), 88 FR 128 (Jan. 3, 2023) (“Order Competition Rule Proposing Release”) (proposing rule that would enhance competition for the execution of marketable orders of individual investors).

See, e.g.,

SIFMA Letter II (Mar. 31, 2023); Equity Market Structure Citadel Letter II (Dec. 5, 2023); and letters from: Michael Blaugrund, Chief Operating Officer, NYSE Group, Inc., Jason Clague, Managing Director, Head of Operations, Charles Schwab & Co., and Joseph Mecane, Head of Execution Services, Citadel Securities (Mar. 6, 2023) (“NYSE, Schwab, and Citadel Letter”); Christopher A. Iacovella, President & Chief Executive Officer, American Securities Association (Mar. 31, 2023) (“American Securities Association Letter II”); Hope Jarkowski, General Counsel, NYSE Group, Inc. (Mar. 31, 2023) (“NYSE Letter”); Stephen John Berger, Managing Director, Global Head of Government & Regulatory Policy, Citadel Securities (Mar. 31, 2023) (“Equity Market Structure Citadel Letter”); Jason Clague, Managing Director, Head of Operations, The Charles Schwab Corporation (Mar. 22, 2023) (“Schwab Letter”); Kirsten Wegner, Chief Executive Officer, Modern Markets Initiative (Mar. 24, 2023) (“Modern Markets Initiative Letter”); Joanna Mallers, Secretary, FIA Principal Traders Group (Mar. 31, 2023) (“FIA PTG Letter II”); Peter D. Stutsman, Global Head of Equity Trading, and Timothy J. Stark, Head of Equity Markets and Transaction Research, The Capital Group Companies, Inc. (Mar. 31, 2023) (“Capital Group Letter”); Andrew Hartnett, NASAA President and Deputy Commissioner, Iowa Insurance Division, North American Securities Administrators Association, Inc. (Mar. 31, 2023) (“NASAA Letter”); David Howson, Executive Vice President, Global President, Cboe Global Markets, Nathaniel N. Evarts, Managing Director, Head of Trading, Americas, State Street Global Advisors, Kimberly Russell, Market Structure Specialist, Global SPDR Business, State Street Global Advisors, Mehmet Kinak, Global Head of Equity Trading, T. Rowe Price, Todd Lopez, Americas Head of Execution Services, UBS Securities LLC, and Douglas A. Cifu, Chief Executive Officer, Virtu Financial, Inc. (Mar. 24, 2023) (“Cboe, State Street, et al., Letter”); John A. Zecca, Executive Vice President, Global Chief Legal, Risk & Regulatory Officer, Nasdaq, Inc. (Mar. 30, 2023) (“Nasdaq Letter”); Jennifer W. Han, Executive Vice President, Chief Counsel & Head of Global Regulatory Affairs, Managed Funds Association (Mar. 30, 2023) (“Managed Funds Association Letter”); Jonathan Kanter, Assistant Attorney General, Antitrust Division, U.S. Department of Justice (Apr. 11, 2023) (“DOJ Letter”); Nathanial N. Evarts, Managing Director, Head of Trading, Americas, and Kimberly Russell, Market Structure Specialist, Global SPDR Business, State Street Global Advisors (Mar. 30, 2023) (“State Street Global Advisors Letter”); Michael Markunas, Deputy General Counsel, Chief Compliance Officer, B. Riley Securities, Inc. (Mar. 31, 2023) (“B. Riley Letter”).

See, e.g.,

Virtu Letter at 1; Equity Market Structure Citadel Letter at 16-17; Schwab Letter II at 3-4 (“there is a distinct absence of economic data to support many aspects of the Proposals and to support the Commission's analysis of costs versus benefits . . . CAT data is not publicly available and thus public commenters . . . do not have access to the very data on which the Commission relies”); and letters from: Ellen Greene, Managing Director, Equity & Options Market Structure, SIFMA (Feb. 8, 2023) (“SIFMA Letter”) at 3-4; Kristen Malinconico, Director, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce (Mar. 31, 2023) (“Chamber of Commerce Letter”) at 2-3. Some of these commenters also requested that the Commission identify the specific broker-dealers whose Rule 605 and Rule 606 reports, which are publicly available, were used in the proposals.

See, e.g.,

SIFMA Letter at 2; Virtu Letter at 1-2.

The Commission is not releasing anonymized subsets of CAT data used in connection with the proposals, including CAT data used in connection with data and figures in the Proposing Release. The CAT database contains highly sensitive and granular market information.

The Commission fully described in the Proposing Release and this Release the CAT data used, the methodology for analysis, and the results of its analyses. This provides notice of the Commission's use and analysis of CAT data in support of this rulemaking.

See, e.g.,

Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 at 56978 (Aug. 1, 2012) (stating that maintaining the confidentiality of customer and other information reported to CAT “is essential” and that “[w]ithout adequate protections, market participants would risk the exposure of highly-confidential information about their trading strategies and positions”); Securities Exchange Act Release No. 84696 (Nov. 15, 2016), 81 FR 84696 (Nov. 23, 2016) (stating that a security breach involving CAT data could, among other things, “leak highly-confidential information about trading strategies or positions, which could be deleterious for market participants' trading profits and client relationships” or “expose proprietary information about the existence of a significant business relationship with either a counterparty or a client, which could reduce business profits”).

In addition, the Commission declines to provide the identities of the specific broker-dealers whose Rule 606 reports were used in connection with the Proposing Release.

See supra

note 75. The reports themselves are publicly available and interested parties can analyze these reports using their own selection of broker-dealers. As with the CAT data, the Commission has fully described in the Proposing Release the Rule 606 data used, the methodology for analysis, and the results of its analyses. This information provides notice of the Commission's use and analysis of Rule 606 data used in support of this rulemaking.

Market participants, such as broker-dealers, may analyze their own order and transaction information as well as commercially available data and use this analysis to provide meaningful comment on the Proposing Release from their own perspectives.

The level of aggregation that would be required to protect market and proprietary information so that it cannot be used, either itself, or with other commercially or publicly available information, to reverse engineer or otherwise reveal market participants' identities, market

positions, or trading strategies would also mean that the dataset would be substantially dissimilar from the actual data used in the Commission's analysis.

For example, the SEC's MIDAS analytics tool collects and processes data from the consolidated tapes as well as from the separate proprietary feeds made individually available by each equity exchange.

See MIDAS: Market Information Data Analytics System,

SEC,

available at https://www.sec.gov/marketstructure/midas-system. See also

letter from John Ramsay, Chief Market Policy Officer, Investors Exchange LLC (“IEX”) (Oct. 13, 2023) (“IEX Letter”) at 3 (stating that there are “myriad sources of information that . . . market participants draw on to consider how orders are handled and how markets compete with and compare to each other,” including NYSE TAQ data, other exchange proprietary and consolidated market data, and FINRA's reports on off-exchange trading).

See also infra

section IX.C.1.d).

The proposed amendments to Rule 605, as well as the costs and benefits of the proposed amendments, were detailed in the Proposing Release and received substantial public comment. The proposed amendments to Rule 605 received broad support from many commenters. The Commission has considered the comments received, updated its data analysis where needed, and, in some instances, has modified the proposal in response to comments received.

C. Overview of Final Rule 605

After reviewing the comments received and considering the recommendations from commenters,

the Commission has determined to adopt the proposal with several modifications. In some cases, final amendments to Rule 605 add new data elements that provide additional context and information for both the detailed and summary execution quality reports. In adopting the final amendments to Rule 605, the Commission aims to provide individual investors, institutional customers, and broker-dealers with information that they can use to choose market centers or broker-dealers that align with their investment and execution objectives. Further, as with Rule 605 reports prior to these amendments,

the Commission anticipates that third parties, such as academics and journalists, will also utilize the reported execution quality data for comparison purposes and analysis of market conditions.

See, e.g.,

FIF Letter, SIFMA Letter II.

See, e.g., supra

note 16 (discussing studies by Boehmer et al. and Zhao & Chung).

As discussed in section II (Modifications to Reporting Entities) below, the Commission is adopting the amendments to the scope of reporting entities largely as proposed, with a few modifications. The Commission is retaining in the adopted amendments to Rule 605 the proposed requirements that brokers and dealers introducing or carrying 100,000 or more customer accounts prepare Rule 605 reports and that separate reports be prepared for a firm's broker-dealer activity and its market center activity. The Commission is also providing additional explanation of these requirements. The Commission has determined not to require market centers that operate a proposed qualified auction to prepare a separate report for covered orders received for execution in the qualified auction. The Commission is specifying that ATSs must prepare Rule 605 reports separately from their broker-dealer operators as proposed and is also retaining the proposed requirement that a broker-dealer that operates an SDP prepare a separate report for activity specific to the SDP, but with a modified description of what constitutes an SDP.

In addition, as discussed in section III (Modifications to Scope of Orders Covered and Required Information) below, the Commission is adopting amendments to the information required to be reported in the detailed report required by Rule 605(a)(1) with modifications from the proposal. The Commission is adopting amendments to

the scope of covered orders largely as proposed, with changes to the coverage of orders with stop prices. The Commission is also revising the categorization by order size from the proposal to incorporate notional size buckets and whether an order is for less than a share, is an odd-lot, or is a round lot. With respect to the categorization by order type, the Commission is adopting the categorization of executable NMLOs as proposed, but is modifying the categorization of NMLOs priced at or better than the midpoint and adding more categories of immediate-or-cancel orders and more categories related to orders submitted with stop prices. The Commission is also adopting a timestamp convention of at least a millisecond as proposed, but eliminating the proposed statistics for median and 99th percentile time to execution in favor of utilizing more granular time-to-execution buckets. Further, the Commission is adopting the other required statistics for inclusion in the detailed report with several changes from the proposal, including: (1) adding realized spread statistics for more time intervals; (2) calculating effective spread and effective spread divided by quoted spread for marketable order types and NMLOs priced more aggressively than the midpoint only; (3) utilizing spread-based weighting to calculate effective spread divided by quoted spread; (4) adding statistics for average quoted spread, average midpoint, and cumulative notional size; (5) measuring size improvement at time of order receipt rather than time of execution, adding an additional size improvement statistic focused on orders that can receive size improvement, and calculating these size improvement statistics for marketable order types and NMLOs priced more aggressively than the midpoint only; and (6) adding a relative fill rate statistic for NMLOs based on order executions occurring on national securities exchanges.

Further, as discussed in section IV (Summary Execution Quality Report) below, the Commission is adopting a requirement for a summary report pursuant to Rule 605(a)(2), with several changes from the proposal. The Commission is changing the weighting of certain statistics and grouping orders into notional size buckets. The Commission is modifying the required statistics related to average order size in shares; share-weighted average percentage price improvement; and effective spread divided by quoted spread. The Commission is including additional metrics in the summary report for share-weighted average midpoint; share-weighted average notional size; average percentage quoted spread; and average percentage realized spread as calculated at two time horizons. The Commission also is requiring that the summary report be provided in an alternative format.

Finally, as discussed in section V (Requirements for Making Rule 605 Reports Available to the Public) below, the Commission is adopting procedures for making the Rule 605 reports publicly available as proposed.

The Commission endeavors to ensure that investors are provided with timely and accurate information needed to make informed investment decisions, and the final amendments to Rule 605 reflect the Commission's ongoing commitment to enhance transparency for investors. Facilitating the ability of the public to compare and evaluate execution quality among different market centers, brokers, and dealers, is an effective means of reconciling the need to promote both vigorous price competition and fair competition among market centers and broker-dealers, to the benefit of individual investors. Section 11A of the Exchange Act

grants the Commission the authority to promulgate rules necessary or appropriate to assure the fairness and usefulness of information on securities transactions

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.

By requiring the uniform public disclosure of useful and accessible statistics, amended Rule 605 will better promote competition among market centers and broker-dealers on the basis of execution quality and ultimately improve the efficiency of securities transactions, consistent with the objectives of our national market system.

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

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

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

The national market system objectives of section 11A of the Exchange Act include the economically efficient executions of securities transactions; fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets; the availability of information on securities quotations and transactions; and the practicability of brokers executing investor orders in the best market.

See

15 U.S.C. 78k-1(a)(1)(C).

II. Modifications to Reporting Entities

A. Larger Broker-Dealers

1. Proposed Approach

Prior to the adopted amendments, Rule 605 of Regulation NMS required only market centers, such as national securities exchanges, OTC market makers, and ATSs, to produce publicly available, monthly execution quality reports. The Commission proposed to expand the scope of entities that must prepare Rule 605 reports to include larger broker-dealers that introduce or carry at least 100,000 customer

accounts. The Commission reasoned that the proposed expansion would “improve the usefulness of execution quality statistics, promote fair competition, and enhance transparency by providing investors with information that they could use to compare the execution quality provided by customer-facing broker-dealers.”

As discussed further below, the proposed minimum reporting threshold of 100,000 customers was intended to balance the benefits of having broker-dealers produce execution quality statistics with the costs of implementation and continued reporting.

“Customer” means any person that is not a broker or dealer.

See

final 17 CFR 242.600(b)(28).

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

See id.

at 3797.

To implement this proposed expansion, the Commission proposed to insert references to “brokers” and “dealers” where prior Rule 605 referred to “market centers.”

In addition, the Commission proposed to revise the definition of “covered order” in prior Rule 600(b)(22), which referred to any market order or any limit order (including immediate-or-cancel orders) “received by a market center,”

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

See id.

at 3796 (discussing amendments to Rule 605 in proposed Rule 605 introductory text, (a) heading, (a)(1) introductory text, (a)(1)(i)(D), and (a)(3), (4), (5), and (6)).

Prior 17 CFR 242.600(b)(22).

See

Proposing Release, 88 FR 3786 at 3796 (Jan. 20, 2023); proposed Rule 605(b)(30). The Commission also proposed to require all market centers and broker-dealers that would be subject to Rule 605's reporting requirements to produce summary reports with aggregated execution quality information.

See infra

section IV for further discussion of the summary report.

Proposed Rule 605(a)(7) stated that a broker or dealer that is not a market center shall not be subject to the requirements of Rule 605 unless that broker or dealer introduces or carries 100,000 or more customer accounts through which transactions are effected for the purchase or sale of NMS stocks (the “customer account threshold”).

As explained in the Proposing Release, the Commission analyzed available data to determine the proposed customer account threshold given the additional costs that broad expansion of the rule to

broker-dealers would entail.

Utilizing a 100,000 customer account threshold as proposed would allow the Rule 605 reporting requirements to capture those broker-dealers that introduce or carry the vast majority of customer accounts, while subjecting only a relatively small percentage of broker-dealers that accept customer orders for execution to the reporting obligation and excluding those broker-dealers that introduce or carry fewer customer accounts.

See

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

See id.

at 3797, 3886-87.

See id.

(discussing analysis of the estimated number of broker-dealers that would be subject to Rule 605 reporting requirements according to different definitions of the customer account threshold).

See infra

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

The proposed customer account threshold also required brokers-dealers to include in their calculations the public customer accounts that they introduce, as well as the customer accounts that they carry.

Because an introducing broker-dealer may use an omnibus clearing arrangement and not disclose certain information about its underlying customer accounts to the clearing firm, the Commission proposed that, for purposes of Rule 605, a broker or dealer that utilizes an omnibus clearing arrangement for any of its underlying customer accounts would be considered to carry such underlying customer accounts when calculating the number of customer accounts that it introduces or carries.

See

Proposing Release, 88 FR 3786 at 3797 (Jan. 20, 2023). 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 at 56978 (Dec. 2, 1992) (Net Capital Rule). Alternatively, some broker-dealers utilize an “omnibus clearing arrangement,” where the clearing firm maintains one account for all customer transactions of the introducing firm, rather than a “fully disclosed introducing relationship.” In an omnibus arrangement, the clearing firm does not know the identity of the customers of the introducing firm, whereas in a fully disclosed arrangement, the clearing/carrying firm knows the names, addresses, securities positions, and other relevant data as to each customer.

See id.

at 56978, n.16.

See

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

Proposed Rule 605(a)(7) stated that any broker or dealer that meets or exceeds the customer account threshold and is also a market center shall produce separate reports pertaining to each function.

100

Further, as proposed a broker-dealer is excluded from Rule 605's reporting requirements only with respect to its customer-facing broker-dealer function (as opposed to its market center function, if applicable) if the number of customer accounts that it introduces or carries is less than the customer account threshold.

101

However, under the proposal, a broker-dealer that meets or exceeds the customer account threshold for the first time has a grace period of three calendar months before being required to comply with Rule 605's reporting requirements.

102

100

See

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

101

See id.

at 3798-99. Proposed Rule 605(a)(7) stated that a broker or dealer that meets or exceeds the customer account threshold shall be required to produce reports pursuant to this section for at least three calendar months (“Reporting Period”).

See id.

at 3799. As proposed, the Reporting Period shall begin the first calendar day of the next calendar month after the broker or dealer met or exceeded the customer account threshold, unless it is the first time the broker-dealer had met or exceeded the customer account threshold.

See id.

Any time after a broker or dealer has been required to produce reports pursuant to this proposed section for at least a Reporting Period, if a broker or dealer falls below the customer account threshold, the broker or dealer shall not be required to produce a report pursuant to this paragraph for the next calendar month.

See id.

102

See id.

at 3799. The Commission also proposed that after the three-calendar month grace period, the Reporting Period shall begin on the first calendar day of the fourth calendar month after the broker or dealer has met or exceeded the customer account threshold.

See id.

As proposed, a broker-dealer that crosses the customer account threshold for the first time is required to comply with the reporting requirements of Rule 605 for at least a Reporting Period, even if that broker-dealer falls below the customer account threshold during the grace period.

See id.

Prior to the amendments, Rule 605 required that reporting entities calculate certain statistics based on the time of order receipt.

103

Moreover, Regulation NMS defined “time of order receipt” based on the time an order was received by a market center for execution.

104

In conjunction with the proposed expansion of Rule 605 to cover larger broker-dealers, the Commission proposed to modify the definition of “time of order receipt” to specify that, in the case of a broker or dealer that is not acting as a market center, the time of order receipt is the time that the order was received by the broker or dealer for execution.

105

103

See, e.g.,

prior 17 CFR 242.605(a)(1)(ii)(D) (measuring, for shares executed with price improvement, the share-weighted average period from the time of order receipt to the time of order execution).

104

See

prior 17 CFR 242.600(b)(92).

See also

Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75423 (Dec. 1, 2000) (“The definition [of `time of order receipt'] is intended to identify the time that an order reaches the control of the market center that is expected, at least initially, to execute the order.”).

105

See

Proposing Release, 88 FR 3786 at 3799-800 (Jan. 20, 2023); proposed Rule 600(b)(109). The time that the order is received by the market center for execution should be the same as the time that the order is received by the broker-dealer for execution when the broker-dealer also acts as a market center for that order.

2. Final Rule and Discussion

The Commission is adopting amendments to Rule 605 to include larger broker-dealers as proposed and addresses certain commenters' questions below. These amendments will provide enhanced transparency to investors, allowing them to compare and evaluate execution quality among different customer-facing larger broker-dealers and promoting competition among these broker-dealers. As discussed in section II.A.2.a), the Commission is adopting the customer account threshold as proposed. In addition, as discussed in section II.A.2.b), the Commission is adopting as proposed the requirement that larger broker-dealers that are also market centers produce separate reports pertaining to each function. Finally, as discussed in section II.A.2.c), the Commission is adopting as proposed the requirement that all reporting entities, including larger broker-dealers, measure certain statistics from the time of order receipt.

The Commission received comments from a variety of market participants on the proposed expansion to require larger broker-dealers to provide Rule 605 reports. Certain individual investors supported the proposed expansion of publicly available Rule 605 reports to include broker-dealers because this expansion would increase transparency and encourage competition among broker-dealers.

106

One such commenter stated that the proposal would: (1) require broker-dealers to provide more detailed information about the execution quality of their trades, including data on execution speeds, price improvements, and order routing practices, which would help retail investors “make more informed decisions about where to route our orders and which broker-dealers to work with”; (2) provide more data on execution quality that would “help level the playing field between individual investors and large institutional players who currently have an information advantage”; and (3) “encourage broker-dealers to compete on the quality of their executions, which would ultimately benefit all investors.”

107

Two other individual investors supported the inclusion of broker-dealers and the proposed rule overall, stating that it would “provide a more detailed and

comprehensive standard for broker-dealers to follow, resulting in consistently robust best execution practices.”

108

In addition, an academic and an individual investor suggested expanding the Rule 605 reporting requirement to include all broker-dealers, rather than just larger broker-dealers.

109

106

See, e.g.,

letters from: Dylan Hodges (Dec. 27, 2022); Edward Murray (Dec. 26, 2022); Dr. Paul Pritchard (Dec. 27, 2022); Cody Welch (Mar. 7, 2023) (“Welch Letter”); Abanes (Mar. 3, 2023) (“Abanes Letter”); Ryan Macarthur (Feb. 24, 2023) (“Macarthur Letter”); David Genco, Jr. (Feb. 24, 2023) (“Genco Letter”).

107

Letter from Caleb C. (Mar. 18, 2023).

108

Letters from Justin West (Mar. 19, 2023); Ankit (Mar. 19, 2023).

109

See

letter from Aswin Joy (Mar. 7, 2023) (“Joy Letter”); letter from James J. Angel, Georgetown University (Mar. 31, 2023) (“Angel Letter”) at 2-3.

See infra

section II.A.2.a) for additional discussion about the scope of the broker-dealer reporting requirement.

For reasons similar to those offered by individual investors, financial services firms, industry groups, and a group of academics supported the proposed expansion of Rule 605 reporting requirements to larger broker-dealers.

110

One financial services firm stated that the proposed expansion would “fill a gap in coverage that currently obscures the order handling practices of many broker-dealers” because many customer-facing broker-dealers do not meet the definition of a market center and thus do not produce Rule 605 reports.

111

This commenter stated that the customers of these broker-dealers are left without any “reliable way to evaluate and compare broker-dealer performance.”

112

A group of academics that authored an academic working paper concerning the execution quality of market orders received from various broker-dealers

113

also submitted a comment letter supporting the proposed expansion and cited the need for improved public transparency based on their research.

114

These commenters stated that, even if retail investors do not pay attention to broker-level disclosures about execution quality if the dollar cost to retail investors is low, such disclosures are likely to be scrutinized by brokers, leading to greater competition and ultimately better execution for retail investors.

115

A broker-dealer supported the proposed expansion to retail brokers, stating that it will make order execution quality, and the marketplace generally, more transparent to retail investors.

116

This commenter also stated that, given the “highly competitive state of the current retail brokerage market,” it is not certain that the proposed enhancements to Rule 605 would improve execution quality for individual investors because outcomes for such investors could be “asymmetric.”

117

However, this commenter stated that to the extent that there are opportunities to optimize execution quality for individual investors, “empowering investors to compare execution quality across retail brokers (and consequently to switch brokers based on this information) would be the most efficient and effective way to address these concerns.”

118

110

See

Fidelity Letter at 9 (stating that expanding Rule 605 reporting requirements to new entities will provide greater transparency into execution quality differences and increase the ability to measure retail order outcomes in a competitive environment); letter from Gregory Davis, Managing Director and Chief Investment Officer, and Matthew Benchener, Managing Director, Personal Investor, The Vanguard Group, Inc. (Mar. 31, 2023) (“Vanguard Letter”) at 3 (stating that the proposal will increase transparency by empowering investors to compare execution quality across broker-dealers and make more informed decisions about their choice of broker-dealer); Healthy Markets Letter at 16 (stating that Rule 605 reports should cover large brokers that route orders for investors); Better Markets Letter at 5 (stating that the proposed expansion of entities subject to Rule 605 disclosures will help the public compare and evaluate execution quality among different market centers and broker-dealers, and thereby increase transparency of order execution quality, increase information available to both retail and institutional investors, and help promote competition among market centers and broker-dealers); Professor Schwarz et al. Letter at 2; and letter from John L. Thornton, Co-Chair, Hal S. Scott, President, and R. Glenn Hubbard, Co-Chair, Committee on Capital Markets Regulation (Mar. 31, 2023) (“CCMR Letter”) at 14 (stating that the proposed expansion “will allow retail investors to determine the execution quality of their orders” and “would likely enhance competition among retail broker-dealers based on price improvement and overall execution quality”).

111

See

Vanguard Letter at 3.

112

Id.

at 3-4 (stating that requiring larger broker-dealers to make Rule 605 disclosures would address this coverage gap and give their customers a “direct line of sight into broker-dealer performance”).

See also

NASAA Letter at 5-6 (stating that the proposed expansion of reporting entities would “provide the public with a more comprehensive view of order execution quality across the national market system” and “allow brokerage customers to compare execution quality among different broker-dealers”).

113

See

Proposing Release, 88 FR 3786 at 3832, n.529 (Jan. 20, 2023) and accompanying text (

citing

Christopher Schwarz et al.,

The `Actual Retail Price' of Equity Trades

(Aug. 28, 2022)).

114

See

Professor Schwarz et al. Letter at 1-2 (strongly supporting the inclusion of large broker-dealers given their research study finding that shows economically and statistically significant price execution variation across brokers; the level of such differences was previously unknown to retail traders and a large portion of the financial industry). A group consisting of some of these academics submitted another comment letter in which they cited a more recent academic working paper regarding competition among wholesalers and stated that their results “emphasize the need for further price execution disclosure at the broker level.” Letter from Xing Huang, Philippe Jorion, and Christopher Schwarz (Dec. 12, 2023) (“Huang et al. Letter”) at 1 (attaching Xing Huang, Philippe Jorion, Jeongmin Lee & Christopher Schwarz,

Who Is Minding the Store? Order Routing and Competition in Retail Trade Execution

(Nov. 19, 2023)).

115

See

Professor Schwarz et al. Letter at 3.

See also

Better Markets Letter at 9-10 (stating that even though some retail investors may not read Rule 605 reports, these investors will benefit indirectly by virtue of enhanced disclosure that will “promote competition, improve regulatory oversight, and facilitate use by third-party researchers and academics” to expose problematic order routing and execution practices).

116

See

Virtu Letter II at 3.

117

See id.

at 9. This commenter stated that the proposal “may lead to changes in the equilibrium mix of customer types at each broker” because investors would migrate towards brokers that have better execution quality statistics.

See id.

at 9, n.24. This commenter explained that “order execution quality tends to be inversely related to the aggregate cost to provide liquidity to that broker's customers' orders because market makers are willing to provide more price improvement to orders that are less expensive to service.”

Id.

This commenter also stated that if the proposal “induces retail investors with more costly to service orders to move to brokers that previously had less costly to service orders, it could cause execution quality to worsen at the broker with previously less costly to service orders.”

Id.

118

Id.

at 9.

Some broker-dealers and financial services firms opposed the proposed expansion to include larger broker-dealers, citing costs and the risk of confusion, especially for individual investors.

119

One such broker-dealer stated that retail customers are not asking for or seeking information at the level of granularity required by the proposed rule, stating that the potential risk of investor confusion seems disproportionate to the defined transparency benefits it may provide.

120

Another commenter opposed the proposed expansion because the 605 reports are “overly complicated for the average investor” and may give a “false

sense of comfort” about order execution practices and quality.

121

119

See

Robinhood Letter at 41-42 (stating that adding the proposed expansion to include larger broker-dealers is not realistically going to get usable execution quality information in the hands of individual investors because the voluminous data are in a format proven not to be particularly useful for them and that the Commission underestimates the costs for a type of report not generally prepared by broker-dealers that are not also market centers); letter from Seth A. Miller, President Advocacy & Administration, Cambridge Investment Research, Inc. (Mar. 31, 2023) (“Cambridge Letter”) at 7 (stating in its capacity as a broker-dealer and investment adviser that the broad scope of the proposed inclusion of larger retail broker-dealers will impose significant costs and is “likely to lead to misaligned, misleading comparisons between totally different entities”); Schwab Letter II at 35 (stating that differences in certain execution statistics such as E/Q may be attributable to different business models across firms rather than actual differences in E/Q among comparable business models, and thus would create investor confusion rather than provide useful information); Tastytrade Letter at 4-5 (observing that the proposal will significantly increase the number of reported data points per ticker on approximately 10,000 NMS traded products, and expressing concern about the ability of customers to digest the additional “confusing and complicated” data points in Rule 605 reports).

120

See

Tastytrade Letter at 4 (“While we agree in general that greater transparency results in a level playing field for retail customers, it seems counterproductive to do so in a manner that risks confusion.”).

121

See

letter from Kelvin To, Founder and President, Data Boiler Technologies, LLC (Mar. 31, 2023) (“Data Boiler Letter”) at 27-28.

After considering the comments, the Commission is adopting the requirement for broker-dealers that meet the 100,000 customer account threshold to produce Rule 605 reports, as proposed. To implement this requirement, the Commission also is adopting the related amendments to Rules 600 and 605.

122

The Commission agrees with commenters who recognized the need for Rule 605 data pertaining to customer-facing larger broker-dealers. Larger broker-dealer reporting will be useful in increasing the transparency of larger broker-dealers' order execution quality so that investors have information available to compare and evaluate order execution quality and order routing practices among market centers and larger broker-dealers. As discussed further in section II.A.2.a) below, by limiting Rule 605 reporting requirements to larger-broker dealers that meet the customer account threshold only, Rule 605 will balance the benefits of broker-dealer reporting with the costs.

122

See

final 17 CFR 242.605(a)(7) (establishing the customer account threshold for larger broker-dealer reporting requirements, production of separate reports, and applicable Reporting Period).

See also

final 17 CFR 242.605 (inserting references to “brokers” and “dealers” in introductory text, heading for (a), (a)(1) introductory text, (a)(1)(i)(E), and (a)(3), (4), (5), and (6)).

See also

final 17 CFR 242.600(b)(27) (inserting references to orders received by a “broker” or “dealer” in definition of “covered order”) and final 17 CFR 242.600(b)(103) (specifying that the definition of “time of order receipt,” in the case of a broker or dealer that is not acting as a market center, is the time (at a minimum to the millisecond) that an order was received by the broker or dealer for execution). For further discussion of these amendments,

see

Proposing Release, 88 FR 3786 at 3796, 3798-99 (Jan. 20, 2023).

The Commission disagrees with commenters' concerns that larger broker-dealer reporting will be too confusing or misleading to investors, or will create a “false sense of comfort” about order execution practices and quality.

123

Individual investor commenters expressed interest in receiving access to execution quality statistics pertaining to larger broker-dealers because this increased transparency would allow individual investors to make more informed decisions and encourage competition among larger broker-dealers.

124

Due to the expansion of Rule 605 reporting requirements to larger broker-dealers, customers of these broker-dealers, including individual investors, and other market participants will no longer need to make inferences about these broker-dealers' execution quality based on a combination of broker-dealers' routing information contained in reports required by Rule 606 and market centers' Rule 605 reports. Instead, customers will be able to use execution quality information contained in larger broker-dealers' Rule 605 reports to make comparisons across these broker-dealers and select those broker-dealers that offer better execution quality. The availability of information about larger broker-dealers' execution quality also is expected to increase the extent to which these broker-dealers compete on the basis of execution quality when making their order routing decisions. Further, to the extent that broker-dealers increase the extent to which they route orders to the market centers offering better execution quality, increased liquidity at those venues may further improve execution quality, as a result of promoting the flow of orders to market centers that offer better execution quality.

123

See supra

notes 119-121 and accompanying text.

124

See supra

notes 106-108 and accompanying text.

The stock-by-stock order execution information that will be provided in the detailed report will allow market participants, including individual investors familiar with data analysis, to make their own determinations about how to group stocks or orders when comparing execution quality information across broker-dealers. However, the Commission is mindful that the detailed report will contain a larger volume of statistical data and many market participants, including individual investors, may not have the means to directly analyze the detailed report. As discussed further below, the Commission is adopting a requirement that every market center, broker, or dealer produce a summary execution quality report in addition to the more detailed report required by Rule 605(a)(1).

125

These summary reports will make available to market participants and other interested parties readily accessible, aggregated data that will allow them to compare some of the more significant aspects of the execution quality provided by specific market centers and larger broker-dealers. These summary reports will provide human-readable information that any investor, including individual investors, can assess without needing technical expertise or relying on an intermediary.

126

Moreover, even individual investors that do not read Rule 605 reports from larger broker-dealers will benefit from independent analysts, consultants, broker-dealers, the financial press, or market centers analyzing and producing more digestible information using Rule 605 data.

127

125

See infra

section IV.B.

126

See infra

section IV.B.2. For a discussion of comments regarding investor education or testing related to the summary reports,

see infra

section IV.B.3. As the new Rule 605 requirements, including the expansion of scope to include larger broker-dealers, are implemented, the Commission will consider whether there is a need for additional educational resources to assist investors.

127

See infra

notes 1075-1077 and accompanying text (discussing ways in which third parties have used Rule 605 reports to produce information that is meant for public consumption).

One industry group stated that it remains unclear whether broker-dealers' Rule 605 reports would increase competition.

128

This commenter stated its concern that producing Rule 605 statistics without accounting for different broker-dealer business models could lead investors to make incorrect decisions regarding broker-dealer selection.

129

This commenter further stated that differences in execution quality could be the result of a myriad of factors, including “the customers . . . different brokers serve and the equities the customers trade.”

130

In response to this commenter, the Commission agrees that, as a result of different business models, a particular broker-dealer's order flow may be made up of a different mixture of securities, order types, and order sizes, which may impact or constrain that broker-dealer's overall execution quality level.

131

However, under these amendments, larger broker-dealers will be required to categorize the execution quality information required by Rule 605 by individual security, different types of orders, and different order sizes. Giving market participants access to this information in Rule 605 reports will help ensure that they are able to control for these differences in order flow characteristics and make apples-to-apples comparisons when assessing and comparing execution quality information across broker-dealers.

132

128

See

SIFMA Letter II at 29.

129

See id.

at 30. This commenter also stated it does not understand on what basis the Commission believes that differences in business models are well-known by market participants, and particularly retail investors, for purposes of evaluating execution quality statistics.

See id.

(discussing Proposing Release, 88 FR 3786 at 3800 (Jan. 20, 2023)). However, the Commission's statement in the Proposing Release was made in specific reference to market participants' use of Rule 605 reports to compare a market center and a broker-dealer, rather than use of Rule 605 reports to compare broker-dealers with one another. The Commission agrees with the commenter that differences between broker-dealer business models may not be ex ante well-known to market participants. However, market participants, including individual investors, will be able to use the information in Rule 605 detailed reports and the Rule 605 summary reports to account for differences in broker-dealer order flow, and broker-dealers are not precluded from separately providing their customers with information that can be used to contextualize the information in the Rule 605 reports.

130

See id.

at 30 (stating that when pointing to potential shifts in order flow from one broker-dealer to another, the Commission does not account for any potential effects on execution quality caused by the shifting of the order flow itself or the potential for order flow to consolidate among a smaller number of firms, thereby reducing competition and ultimately hurting execution quality).

131

See

Proposing Release, 88 FR 3786 at 3831 (Jan. 20, 2023).

See also infra

note 984 for an

example of how differences in order flow characteristics may impact inferences about execution quality. For further discussion,

see infra

section IX.C.1.a).

132

That some of the information contained in the summary execution quality report will be useful for controlling for differences across differences in order flow characteristics of broker-dealer was supported by comment.

See, e.g.,

comments in support of including average notional order size and average realized spreads in the summary reports, discussed in

infra

section IV.B.1.b).

An industry group suggested that the Commission allow firms an opportunity to provide a statement in their Rule 605 reports explaining how to contextualize the report based on the nature of the firm's order flow.

133

In addition, a broker-dealer suggested that the Commission permit retail brokers to provide background and contextual information to explain how their obligations are different from those of wholesalers or other market centers that currently report under Rule 605.

134

The Commission is not adopting the suggestion to include a descriptive statement within the Rule 605 reports because it would be inconsistent with the structure of these reports, which are designed to be structured, standardized, machine-readable, quantitative disclosures.

135

As the Commission stated in the original adopting release for Rule 605, Rule 605 is intended to establish a baseline level of disclosure and facilitate cross-market comparisons of execution quality.

136

Similarly, the adopted amendments to Rule 605 provide a baseline level of disclosure that all market centers and larger broker-dealers must meet. Rule 605 does not preclude larger broker-dealers from disclosing additional information concerning their order execution practices that they believe would provide useful context concerning the quality of their services on their websites or through other means of communication.

137

133

See

SIFMA Letter II at 31.

134

See

Virtu Letter II at 3-4.

135

See

Rule 605 NMS Plan at 2 (providing that the detailed report must be in standard, pipe-delimited ASCII format); final 17 CFR 242.605(a)(2) (providing that the summary report must be made available using the most recent version of the schema for CSV format and the associated PDF renderer).

136

See

Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75419 (Dec. 1, 2000).

137

Any such statements will be subject to applicable securities laws and regulations.

A broker-dealer recommended that rather than expanding Rule 605 to include larger broker-dealers, the Commission should update Rule 606, which already applies to nonmarket center broker-dealers, to require additional information regarding execution quality.

138

In response to the commenter's suggestion, the Commission considers the inclusion of larger broker-dealers in Rule 605 as adopted to be the preferable option. Although providing Rule 605 data within an expanded version of the existing Rule 606 reports could result in lower compliance costs as a result of broker-dealers' existing experience with preparing and filing Rule 606 reports, many of the costs associated with the initial reporting of execution quality statistics would still be incurred by broker-dealers and therefore broker-dealers would not benefit from a significant reduction in compliance costs overall. Moreover, the format and frequency of the Rule 606 reports differs because the data are more aggregated and the reports are issued quarterly.

139

In contrast, Rule 605 reports are monthly and provide detailed, symbol-by-symbol data that will allow market participants and other users of the report to analyze the data and consider the execution quality that a broker-dealer provides for orders with specific characteristics. Further, while Rule 606 covers all brokers or dealers, subject to a

de minimis

exception, as described below, the customer account threshold will focus the Rule 605 reporting requirement on those larger broker-dealers for which the provision of Rule 605 data will include data for most of the customer accounts handled by broker-dealers and, therefore, will balance the benefits of broker-dealer reporting with the costs of reporting.

140

138

See

Robinhood Letter at 42 (“Instead of unnecessarily imposing additional costs on the industry to create new Rule 605 reports that may not have the desired result of empowering investors to analyze broker-dealers' execution quality, the SEC should require broker-dealers that already publish Rule 606 reports . . . to add execution quality statistics to their Rule 606 reports.”).

139

See supra

notes 45-51 and accompanying text (discussing Rule 606(a)(1) reports that provide quarterly information about order routing and payment arrangements).

140

See infra

section II.A.2.a) (discussing the Commission's analysis to support the adoption of the customer account threshold, which indicates that approximately 85 broker-dealers introduce or carry more than 100,000 customer accounts and these broker-dealers together handle over 98% of customer accounts).

See also infra

section IX.E.5.b) (discussing a reasonable alternative to expand Rule 606 reporting requirements).

(a) Customer Account Threshold

An investor advocacy group and a national securities exchange specifically supported the proposed customer account threshold that would include in scope a broker or dealer that introduces or carries 100,000 or more customer accounts.

141

An academic and an individual investor suggested that all broker-dealers should be required to submit Rule 605 reports.

142

In contrast, a broker-dealer stated that it is not clear why it is necessary to include such a broad scope of larger broker-dealers.

143

According to this commenter, the proposal would require larger retail broker-dealers to produce execution quality reporting and metrics that are identical to those required of securities exchanges and market makers, even if those broker-dealers do not direct client orders.

144

141

See

Healthy Markets Letter at 16, n.38; Nasdaq Letter at 43 (stating that the proposed customer account threshold “appears to balance the associated implementation costs on those broker-dealers that may provide the execution quality statistics with the greatest benefit”).

142

See

Joy Letter; Angel Letter at 2-3 (stating that all broker-dealers should be required to show execution quality information, and that CAT could easily produce Rule 605 reports at low incremental cost).

See also

Robinhood Letter at 44-45 (recommending that, if the Commission decides to proceed with the proposed rule, it should require all broker-dealers to report under Rule 605, because the number of large broker-dealers is relatively small (6.7% of all broker-dealers); the limited application of the rule would create an information gap about execution quality for investors that use smaller broker-dealers and new retail broker entrants). With respect to the commenter's suggestion that CAT data could be used to produce Rule 605 reports,

see infra

section V.B.2.b) for a discussion of the potential alternative to generate order execution quality reports using CAT data.

143

See

Cambridge Letter at 7 (“such breadth cannot be justified in light of the likely significant costs to be imposed on certain participants”).

144

See id.

After considering the comments, the Commission is adopting the 100,000 customer account threshold, as proposed. The Commission's analysis of available data on the number of broker-dealers that will meet the minimum reporting threshold of 100,000 customers confirmed that such threshold will balance the benefits of having broker-dealers produce execution quality statistics with the costs of implementation and continued reporting,

145

given the smaller amount

of benefits relative to costs that there would be if the Rule 605 reporting requirements extended to broker-dealers that introduce or carry a smaller number of customer accounts. Specifically, this analysis indicates that approximately 85 broker-dealers introduce or carry more than 100,000 customer accounts and these broker-dealers together handle over 98% of customer accounts.

146

The Commission is not subjecting all broker-dealers to Rule 605 reporting requirements, as suggested by certain commenters, because of the lower benefits relative to costs for broker-dealers with a smaller number of customer accounts.

147

Conversely, the Commission disagrees with the commenter that states that the scope of larger broker-dealers that will be required to provide Rule 605 reports is overbroad.

148

The relative market-wide benefit of having a broker-dealer prepare Rule 605 reports increases when the broker-dealer has more customers.

149

The Commission's updated analysis indicates that utilizing a lower customer account threshold, such as 10,000 customer accounts, would nearly triple both initial and ongoing costs for non-market center broker-dealers (which are not otherwise subject to Rule 605's reporting requirements) and yet would result in capturing only modestly more customer accounts than the 100,000 customer account threshold.

150

The Commission's updated analysis also indicates that utilizing a higher customer account threshold, such as 250,000 customer accounts, would lower costs but also decrease coverage of customer accounts and customer order originations.

151

Thus, utilizing 100,000 customer accounts as the adopted minimum reporting threshold will better balance the benefits of having broker-dealers produce execution quality statistics with the costs of implementation and reporting.

145

See infra

section IX.D.2.a)(1) for a discussion of the costs related to expanding the scope of Rule 605 reporting entities. As discussed further below, broker-dealers that were not previously required to publish Rule 605 reports will incur initial costs to prepare and post Rule 605 reports for the first time, which may include developing any policies and procedures that may be needed to do so, and all

broker-dealers will face ongoing costs to continue to prepare the reports each month.

See also infra

section IX.E.1.a) for a discussion about the estimated costs of utilizing a different number of customer accounts as the minimum reporting threshold.

146

Analysis from the Proposing Release was repeated regarding the estimated number of broker-dealers that will be subject to Rule 605 reporting requirements according to different definitions of the customer account threshold.

See

Proposing Release, 88 FR 3786 at 3886-87 (Jan. 20, 2023). For a description of how this analysis differs from the analysis in the Proposing Release,

see infra

note 1747. This updated analysis indicates that approximately 85 broker-dealers (or approximately 6.7% of customer-carrying broker-dealers) introduce or carry more than 100,000 customer accounts and these broker-dealers together handle over 98% of customer accounts.

See infra

Table 13 for a cost-benefit analysis of different customer account thresholds that could be used to define “larger broker-dealer” and accompanying text for methodology. For example, approximately 244 broker-dealers introduce or carry more than 10,000 customer accounts and these broker-dealers together handle over 99% of customer accounts. Further, approximately 1,245 broker-dealers introduce or carry at least 1 customer account.

147

See infra

section IX.E.1.a) (reducing the customer account threshold from 100,000 to 10,000 would almost triple both initial and ongoing costs);

See also infra

notes 1749-1751 (discussing why lowering the customer account threshold to include these customers might not be particularly beneficial).

151

See

Table 13 (demonstrating that raising the customer account threshold to 250,000 would lower estimated initial and ongoing compliance costs to about $2.4 million and $3.1 million, respectively, while decreasing the coverage of customer accounts by 1.1% and the coverage of customer order originations by 55.7%).

The customer account threshold will require brokers-dealers to include in their calculations the customer accounts that they introduce, as well as the customer accounts that they carry. Rule 605 reports that reflect orders received from customer accounts that a broker-dealer introduces or carries will provide useful information to market participants because both introducing and carrying broker-dealers make decisions about where to route those orders and it will be helpful for customers to be able to evaluate the execution quality received as a result of those decisions.

One industry group requested an exception from the Rule 605 reporting requirement for an introducing firm that routes all of its customer orders to its clearing firm, on a non-directed basis, where the clearing firm makes all routing decisions and the introducing firm does not receive payment for order flow (“PFOF”).

152

This commenter explained that its request would reduce the reporting burden for smaller introducing firms.

153

This commenter stated that, given its suggested conditions for the exception from reporting requirements that an introducing broker would be required to examine the clearing firm's Rule 605 report and not have reason to believe the clearing firm's report materially misrepresents the introducing broker's order flow, the quality of the disclosure should not be impacted.

154

A second industry group made a similar request for an exception from reporting for certain introducing broker-dealers, stating that when introducing broker-dealers send customer orders to a clearing broker that makes the routing decisions, the introducing broker may not be in the best position to generate Rule 605 reports.

155

152

See

FIF Letter at 6.

153

See

FIF Letter II at 2.

154

See id.

155

See

letter from William C. Thum, Managing Director and Assistant General Counsel, SIFMA AMG (Mar. 31, 2023) (“SIFMA AMG Letter”) at 6.

The Commission considered these commenters' suggestion that Rule 605 provide an exception for certain introducing broker-dealers, but is not adopting the suggested exception for the following reasons: (1) Rule 605 reports prepared by larger broker-dealers will provide market participants and other interested parties with information relevant to evaluating how relationships among broker-dealers may affect execution quality, and the payment of PFOF is not the only circumstance that leads to conflicted relationships between an introducing broker-dealer and its customers;

156

(2) an introducing firm would not be able to determine whether or not its clearing firm's Rule 605 report materially misrepresents the introducing firm's order flow without independently calculating its own execution quality statistics, and if the introducing firm needed to make these calculations to do this assessment, then any additional burden due to the requirement to prepare Rule 605 reports will be minimal; (3) different firms

could have differing interpretations of how much variation there could be in execution quality statistics between an introducing firm and its clearing firm before the clearing firm's Rule 605 report would “materially misrepresent” the introducing firm's order flow; and (4) even if an introducing firm determined that it has no reason to believe that its clearing firm's Rule 605 report materially misrepresents the introducing firm's order flow, the introducing firm's customers could consider certain differences between the execution quality statistics of the introducing firm and its clearing firm to be meaningful.

157

156

For instance, retail brokers potentially face conflicts of interest when making order routing decisions, including whether to route to a particular wholesaler.

See infra

section IX.C.4.a)(2). As an example, broker-dealers face conflicts of interest when making routing decisions due to their own affiliation with market centers (

e.g.,

if the broker-dealer operates its own ATS), from the presence of liquidity fees and rebates on some market centers, or from payments that some retail brokers receive from wholesalers to attract the order flow of their individual investor customers (

i.e.,

PFOF).

See infra

notes 1300-1304 and accompanying text.

157

In some instances, the same underlying order may be reflected on the Rule 605 reports provided by both an introducing firm and its clearing firm, but the separate reports will provide different views of execution quality specific to the group of orders handled by each broker-dealer.

See also

Proposing Release, 98 FR 3786 at 3798 (Jan. 20, 2023).

An industry group asked for clarification regarding how firms would calculate their number of customer accounts for purposes of the customer account threshold.

158

In response, the Commission is providing the following guidance. First, the introducing broker-dealer generally should only count the institutional top-level account when an introducing broker-dealer that is not a clearing broker-dealer establishes a top-level account for an institutional asset manager.

159

The Commission recognizes that in such instances the introducing broker-dealer often utilizes an omnibus clearing arrangement and thus does not have specific knowledge of how many underlying accounts a top-level account may represent.

160

Second, broker-dealers generally should count and only count the accounts for all of their customers that are authorized by their broker-dealers to trade NMS stocks, including non-U.S. customers. A focus on customers that are authorized to trade NMS stocks generally should align with the scope of Rule 605 reports because these reports relate to covered orders in NMS stocks.

161

Third, broker-dealers that provide routing services for other broker-dealers could have customer accounts for that portion of their business and the routing broker-dealer generally should consider whether a top-level account pertains to customer orders and count only those top-level accounts that the routing broker-dealer introduces or carries that are associated with customer orders. Fourth, broker-dealers generally should count only active customer accounts. Broker-dealers generally should consider customer accounts as active in the same manner as defined and reported in their Financial and Operational Combined Uniform Single (“FOCUS”) Reports on Form X-17A-5.

162

Consistent with their FOCUS reports, larger broker-dealers reporting under Rule 605 generally should count only active accounts that have a non-zero cash or securities balance at the end of the reporting period. Leveraging an existing classification of active accounts in these FOCUS reports generally should facilitate the identification of inactive accounts.

158

See

FIF Letter at 5-6 (requesting clarifications on how a firm would calculate its number of accounts to determine whether it meets the customer account threshold in the following circumstances: (1) an introducing firm that is not a clearing firm, where the introducing firm establishes a top-level trading account for an institutional asset manager and the asset manager allocates trade executions to sub-accounts; (2) a firm that has accounts for non-U.S. customers; (3) a firm that provides routing services for other broker-dealers; and (4) a firm that has authorized an account to trade NMS stocks but that account has never traded an NMS stock or has not traded an NMS stock for an extended period of time).

159

In this scenario as presented by the commenter, the asset manager submits orders using this top-level account and separately establishes multiple underlying accounts with the clearing broker-dealer to allocate trades post-execution.

See id.

at 5-6.

160

See supra

note 98 and accompanying text (discussing omnibus clearing arrangements in which the clearing firm does not know the identity of the customers of the introducing firm). Having an introducing broker-dealer count the top-level account through which trading occurs is consistent with the approach for reporting transactions to the CAT.

See

FINRA CAT FAQ M4,

available at https://catnmsplan.com/faq

(stating that in scenarios involving managed accounts where an order may be placed in a master account with subaccount allocations made at a later time, the identifier representing the master/top account should be reported to CAT for transaction events requiring such identifier).

161

See

final 17 CFR 242.605(a)(1); final 17 CFR 242.605(a)(7).

162

See

Instructions to FOCUS Report—Form X-17A-5 at 2.

(b) Production of Separate Reports

Two investor advocacy groups expressed their support for the proposed requirement that larger broker-dealers that are also market centers produce separate reports for each activity.

163

See

Healthy Markets Letter at 16 (“[B]rokers that are also market centers (including as OTC market makers) should be required to separately report their market center functions for all covered orders (

e.g.,

ATS or SDP operations).”); Better Markets Letter at 5, n.12.

After considering the comments, the Commission is adopting the requirement that larger broker-dealers that are also market centers produce separate reports pertaining to each function, as proposed. As explained in the Proposing Release, requiring a firm to produce separate reports pertaining to its market center function and its broker-dealer function will allow market participants and other interested parties to view the firm's execution quality from the perspective of how it operates in each of these separate roles.

164

See

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

An industry group stated that the proposed distinction between broker-dealer activity and market center activity in Rule 605 reports requires clarification and asked specific questions to clarify this distinction for purposes of grouping orders to prepare the separate reports.

165

In response, the Commission provides the following clarifications. First, a firm that is an OTC market maker and introduces or carries over 100,000 customer accounts (

i.e.,

meets the customer account threshold for larger broker-dealers) generally should include in its Rule 605 report pertaining to its broker-dealer function all covered orders in NMS stocks that the firm's broker-dealer received for execution as part of its customer-facing line of business. The firm generally should include in its Rule 605 report pertaining to its market center function all covered orders in NMS stock that the firm received for execution that are the type of order for which the firm serves as an OTC market maker. The set of orders pertaining to a firm's broker-dealer function may overlap with the set of orders pertaining to its market center function. The firm generally should include an order in both of its Rule 605 reports if its broker-dealer received the order from a customer and the firm also acts as a market center for that type of order.

165

See

SIFMA Letter II at 28 (asking the following questions as to how a firm should group different transactions for Rule 605 separate reports: (1) “If a firm is an OTC market maker and introduces or carries 100,000+ customer accounts, how should the firm determine which orders to report as broker-dealer trades versus those executed as a market center?”; (2) “If a firm engages in a mixed capacity trade involving both a portion executed as agent and a portion executed as principal, would this order need to be bifurcated between the two reports?”; (3) “If a firm trades in a riskless principal capacity, but the transaction was part of its internal broker-dealer business and not its OTC market making business, should the firm nonetheless attribute the riskless principal trade to its market center Rule 605 report? The Commission only discusses a market center engaging in riskless principal transactions, but it seems possible that a non-market center might transact on a riskless principal basis as well.”).

Second, a firm that engages in a mixed capacity trade (

i.e.,

a trade involving both a portion executed as agent and a portion executed as principal) generally should include in its Rule 605 report pertaining to its broker-dealer function the entire covered order that it received for execution as part of its customer-facing line of business and subsequently executed in a mixed capacity. Based on

the firm's execution of a portion of the order as principal, as a general matter, the firm acts as an OTC market maker for that type of order and, because an OTC market maker falls within the definition of a “market center,”

166

that portion of the order generally should be included in its report pertaining to its market center function. The firm's execution of a portion of the order as agent generally should not be determinative of whether the firm acts as an OTC market maker for that type of order. The firm also generally should include in its Rule 605 report pertaining to its market center function the portion of the covered order that it executed as agent if it received the order for execution as an OTC market maker.

167

Whether the firm received the entire covered order in its capacity as an OTC market maker (and thus as market center) or only a portion of the order in its capacity as an OTC market maker generally will depend on the types of orders for which it acts as an OTC market maker.

168

166

See

final 17 CFR 242.600(b)(55).

167

When a market center, broker, or dealer receives a covered order for execution, it may execute in part at the receiving market center, broker, or dealer and in part at an away venue, but the entire covered order will be included in the firm's Rule 605 report.

See

final 17 CFR 242.605(a)(1)(i)(E) (requiring a market center, broker, or dealer to report the cumulative number of shares of covered orders executed at the receiving market center, broker, or dealer, excluding shares executed on a riskless principal basis) and final 17 CFR 242.605(a)(1)(i)(F) (requiring a market center, broker, or dealer to report the cumulative number of shares of covered orders executed at any other venue).

168

The Commission agrees with the previous guidance provided by the staff that the Rule 605 reporting requirement for market centers generally should apply to broker-dealers insofar as they act as a market center with respect to orders received from other persons.

See

Proposing Release, 88 FR 3786 at 3798, n.180 (Jan. 20, 2023) (

citing

Division of Market Regulation: Staff Legal Bulletin No. 12R (Revised), Question 4 (June 22, 2001),

available at https://www.sec.gov/interps/legal/slbim12a.htm

). The Commission provides the following example to illustrate. Assume that Firm A generally acts as an OTC market maker for XYZ stock. If Firm A receives an order for 100 shares of XYZ stock, it may choose to execute as principal 50 shares of XYZ stock that it holds in inventory and execute as agent the 50 shares of XYZ stock necessary to fill the entire order. Firm A generally would have received the entire 100-share order in its capacity as an OTC market maker, notwithstanding its execution of a portion of the order as agent. In contrast, Firm B acts as an OTC market maker for XYZ stock but not ABC stock. If Firm B receives an order for 50 shares of XYZ stock and an order for 50 shares of ABC stock, Firm B generally would have received the order for 50 shares of XYZ stock in its capacity as an OTC market maker, regardless of whether it executed those shares as principal or as agent. In this scenario, Firm B generally would not have received the order for 50 shares of ABC stock in its capacity as an OTC market maker and therefore generally would have received this order in connection with its broker-dealer function only.

Third, a firm that trades in a riskless principal capacity with respect to a transaction handled by its non-market center, internal broker-dealer business rather than its OTC market making business generally should not need to include the transaction in its Rule 605 report pertaining to its market center function because this division of business lines suggests that the firm is acting in its capacity as a broker-dealer only. However, the firm generally should evaluate whether or not it acts as an OTC market maker in connection with its internal broker-dealer business, in which case that portion of the business may be a market center and thus be required to be reported as such.

A financial services firm requested clarification of whether a broker-dealer that principally facilitates the trading of fractional shares must publish a separate Rule 605 report as a market center.

169

In response, the Commission clarifies that under the adopted amendments to Rule 605 a reporting entity must produce a separate Rule 605 report as a market center if it meets the definition of an “OTC market maker” and receives “covered orders” for execution in such capacity.

170

As stated in the Proposing Release, as a general matter, a broker-dealer generally should categorize a customer's submitted order for an NMS stock, whether it be for a fractional share, whole shares, or whole shares with a fractional share component, as a “held” order (and thus a covered order) if the customer reasonably expects its broker-dealer to attempt to execute such order immediately.

171

169

See

Fidelity Letter at 9-10.

170

See supra

note 3 for the definition of “OTC market maker.” The term “covered order” is defined in final 17 CFR 242.600(b)(27). As discussed above, a firm may act as an OTC market maker for certain types of orders only. For example, Firm C acts as an OTC market maker for fractional shares only. If Firm C receives an order for 51.25 shares of XYZ stock, it may execute as principal 0.25 shares of XYZ stock and execute as agent 51 shares of XYZ stock. Firm B generally would have received only the fractional share component of the order (

i.e.,

0.25 shares) in its capacity as an OTC market maker and therefore only the fractional share component generally should be included in Firm C's Rule 605 report pertaining to its market center function.

171

See

Proposing Release, 88 FR 3786 at 3789, n.36 (Jan. 20, 2023).

One group of academics suggested that the Commission require separate disclosures for each account type at each broker-dealer to reflect the observation that execution quality differs across platforms with different commission and PFOF structures.

172

A group consisting of some of these academics also suggested that the Commission require separate disclosures of specific “broker-wholesaler pairs” consisting of a broker-dealer and each wholesaler to which the broker-dealer routes orders from retail investors.

173

A broker-dealer stated that execution quality metrics, including the proposed summary reports, would be more informative if Rule 605 reports differentiated between retail investors and professional customers because the nature of order flow and resulting execution quality may be quite different.

174

Another broker-dealer stated that “each firm's order flow is unique” and suggested that the Commission “consider the balance of this additional transparency of order flow” both: (1) “in the context of reporting fragmentation for trading venues that have built in segmentation (

i.e.,

ATS with multiple pools or an exchange that has a continuous order book and a retail price improvement order book)”; and (2) “in the context of retail brokers where experience may be materially different within a broker-dealer (

i.e.,

a retail broker chooses to offer retail customers different experiences within the same broker-dealer).”

172

See

Professor Schwarz et al. Letter at 5.

See also

Better Markets Letter at 5, n.14 (agreeing with this recommendation).

173

See

Huang et al. Letter at 1 (“[O]ur results suggest that disclosures for each broker-wholesaler pair should provide additional helpful information to monitor broker and wholesaler performance. This would allow within-broker comparisons of execution quality that are more meaningful than comparisons solely across brokers.”).

174

See

Rule 605 Citadel Letter at 8 (recommending that the Commission engage with market participants to appropriately define a retail order, such as by reference to an order or trade threshold and stating that forty trades per day would be inappropriately high).

The Commission is not adopting these commenters' suggestions that larger broker-dealers be required to produce multiple reports that differentiate between account types, business segments, or routing destinations. Requiring larger broker-dealers to split their orders amongst multiple Rule 605 reports pertaining to their broker-dealer function would create additional implementation costs and potentially undercut the goal of having standardized reports that are comparable across entities. For instance, differences among how firms structure different business lines would pose challenges in ensuring that each firm is capturing order flow with similar characteristics in the same way, which could impede the comparability of reports.

One investor advocacy group stated that broker-dealers should be required to calculate time of order receipt based on when that broker-dealer received the

order because, in the commenter's view, the use of the time the order was received would show if there are order-delays and thereby provide a useful metric for anyone examining order-routing latency across brokers.

175

An industry group and a financial services firm suggested instead of the proposed rule text that broker-dealers should be required to calculate time of order receipt based on the time that the broker-dealer first routes the order.

176

The industry group questioned whether execution metrics should be measured before or after the broker-dealer has applied risk controls and decided whether to reject the order.

177

This commenter stated that current order management systems may not generate a timestamp for when risk controls have been applied and it would be costly to generate such markers.

178

For this reason, this commenter suggested permitting a routing firm to use the time of its first route as the time of order receipt and stated that the time of first route would be consistent with the Staff frequently asked questions (FAQs) regarding Rule 606.

179

The financial services firm stated that Rule 605 reports for a non-market center should use the time of order routing, not the time of order receipt, because broker-dealers perform necessary review activities following receipt of the order but prior to routing the order.

180

175

See

Healthy Markets at 16-17.

176

See

FIF Letter at 18-19; Schwab Letter II at 33; letter from Jason Clague, Managing Director, Head of Operations, The Charles Schwab Corporation (Sep. 28, 2023) (“Schwab Letter III”) at 5.

177

See

FIF Letter at 19.

178

See id.

179

See id.

(

citing

Rule 606 Staff FAQs, FAQ 11.01). Rule 606 Staff FAQs are available at:

https://www.sec.gov/tm/faq-rule-606-regulation-nms

. Staff reports, Investor Bulletins, and other staff documents (included those cited herein) represent the views of Commission staff and are not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved the content of these staff documents and, like all staff documents, they have no legal force or effect, do not alter or amend the applicable law, and create no new or additional obligations for any person.

180

See

Schwab Letter II at 33; Schwab Letter III at 5 (“The use of order receipt time rather than route time would result in some execution quality statistics like execution speed not being fairly represented in the reports due to outliers caused by market access review activities.”).

After consideration of comments, the Commission is adopting the requirement that larger broker-dealers calculate time of order receipt based on the time that they received the initial order, as proposed.

181

Time of order receipt, rather than order route time, is more relevant to customers of a broker-dealer because it will show how the broker-dealer handled the order from the time of receipt by the broker-dealer. Time of order receipt will show any delays in executing the order, and any resulting consequences on the execution quality the broker-dealer obtained for that order, because the execution quality statistics will be measured based on the prevailing market prices at the time the order was received. In addition, counting time of order receipt from the time that a broker-dealer initially receives the order will allow broker-dealers to assign a time of order receipt in a prompt and uniform manner and thus help to ensure that the time of order receipt is assigned in a non-manipulatory manner.

182

181

See

final 17 CFR 242.600(b)(103).

182

See

Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75423 (Dec. 1, 2000) (discussing a commenter's concern that a market center might attempt to manipulate the time of receipt for its order flow by, for example, monitoring market movements before and/or after receipt of any order and assigning the NBBO that is most favorable to them during that brief option period).

A financial services firm that suggested the use of order route time stated that larger share orders are more likely to be sent to a review queue and could have a “disproportionate negative impact” on average execution speed.

183

This commenter further stated that, “[c]onsequently, using order receipt time could create a perverse incentive for firms to diminish time spent on necessary reviews in an effort to improve execution speed statistics.”

184

The Commission disagrees that broker-dealers will be incentivized to circumvent their risk controls because time-to-execution statistics take into account the period during which a broker-dealer is performing various reviews and before the broker-dealer routes an order. Broker-dealers have multiple reasons to implement risk controls upon the receipt of customer orders. For example, broker-dealers are subject to other regulatory requirements, including the Commission's market access rule, that will continue to apply.

185

The existence of such requirements means that broker-dealers will continue to utilize risk controls necessary to comply with these requirements, including risk controls implemented to comply with the market access rule, because the potential consequences of failing to comply with these requirements likely would counterbalance any perceived benefits of being able to report faster execution times. Broker-dealers also have reputational and business concerns that serve as additional incentives to continue to apply risk controls. Further, to the extent that larger orders received by broker-dealers may result in slower execution times due to the application of risk controls, measuring time to execution at the time of order receipt may motivate broker-dealers to make their risk controls more efficient. Moreover, time-to-execution statistics are only one aspect of execution quality statistics and price-based execution quality statistics will provide a different dimension of the reporting firms' execution quality.

183

See

Schwab Letter II at 33; Schwab Letter III at 5.

184

Schwab Letter II at 33; Schwab Letter III at 5.

185

See

17 CFR 240.15c3-5.

An industry group requested confirmation that orders rejected based on the application of risk and compliance controls would not count as having been received for purposes of Rule 605 reporting.

186

In response, the Commission confirms that a broker-dealer generally should not include orders rejected based on the application of risk and compliance controls within its Rule 605 reports. Including these rejected orders in Rule 605 reports would not provide data useful to understanding the execution quality provided by the reporting broker-dealer because these orders would not have been received by the firm in a form where execution was possible. Thus, these rejected orders generally should not be treated as “received” by the broker-dealer for Rule 605 reporting purposes.

186

See

FIF Letter at 19.

B. Qualified Auction Mechanisms

1. Proposed Approach

In today's equity markets, retail brokers often identify and route the marketable orders of individual investors in NMS stocks to wholesalers and the wholesalers often internalize these orders.

187

At the same time that the Commission proposed the amendments to Rule 605 discussed herein, the Commission separately proposed rules that generally would require that individual investor orders be exposed to order-by-order competition in fair and open auctions designed to obtain the best prices before such orders could be internalized by wholesalers or any other type of trading center that restricts order-by-order competition.

188

The proposal focused on the treatment of segmented orders, which the Commission proposed to define as an order for an NMS stock that

is for an account that is: (1) of a natural person or an account held in legal form on behalf of a natural person or group of related family members; and (2) in which the average daily number of trades executed in NMS stocks was less than 40 in each of the six preceding calendar months.

189

The intent of the proposed definition was to encompass the marketable orders of individual investors that retail brokers currently route to wholesalers for handling and execution.

190

Under those proposed rules, a “restricted competition trading center” would not be allowed to execute internally a segmented order for an NMS stock until after a broker or dealer has exposed such order to competition at a specified limit price in a “qualified auction” that met certain requirements and was operated by an “open competition trading center.”

191

187

This practice of separately identifying and routing the marketable orders of individual investors to wholesalers is a form of “segmentation.”

188

For a full description and discussion of the order competition rule proposal,

see

Order Competition Rule Proposing Release, 88 FR 128 (Jan. 3, 2023); proposed 17 CFR 242.615 (“Rule 615”).

189

See

Order Competition Rule Proposing Release, 88 FR 128 at 149 (Jan. 3, 2023); proposed Rule 600(b)(91) (defining “segmented order”).

190

See

Order Competition Rule Proposing Release, 88 FR 128 at 149 (Jan. 3, 2023).

191

See id.

at 243; proposed Rule 600(b)(87) (defining “restricted competition trading center”); proposed Rule 615(a) (describing the order competition requirement). An “open competition trading center” would be a national securities exchange or NMS Stock ATS that meets certain requirements, including being transparent and having a substantial trading volume in NMS stocks independent of qualified auctions.

See

Order Competition Rule Proposing Release, 88 FR 128 at 243 (Jan. 3, 2023); proposed Rule 600(b)(64) (defining “open competition trading center”). A “qualified auction” would be an auction operated by an open competition trading center pursuant to specified requirements that are designed to achieve competition.

See

Order Competition Rule Proposing Release, 88 FR 128 at 243 (Jan. 3, 2023); proposed Rule 600(b)(81) (defining “qualified auction”); proposed Rule 615(c) (setting forth requirements for operation of a qualified auction).

If the Commission adopts the order competition rule proposal, a national securities exchange or NMS Stock ATS that serves as an open competition trading center and is required to prepare execution quality reports under Rule 605 would be required to include covered orders that it received for execution in a qualified auction within its blended execution quality statistics. Because of concerns that differences in execution quality for orders executed within proposed qualified auctions as compared to orders executed outside of these qualified auctions would not be apparent in blended execution quality statistics, the Commission proposed to amend Rule 605(a)(1) to state that market centers that operate a qualified auction must prepare a separate report under Rule 605 pertaining only to covered orders that the market center receives for execution in a qualified auction.

192

See

Proposing Release, 88 FR 3786 at 3802 (Jan. 20, 2023).

2. Final Rule and Discussion

In this release, the Commission is not acting on the proposal to require separate Rule 605 reports for orders that a market center receives for execution from a qualified auction. The Commission received generally supportive comments from a variety of market participants, including individual investors, on this proposed amendment.

193

Some industry commenters suggested that Rule 605 reports should distinguish between segmented and non-segmented orders, as described in the Order Competition Rule Proposing Release.

194

193

See, e.g.,

Joy Letter; Pritchard Letter; and letters from Julio Cesar (Feb. 24, 2023) (“Cesar Letter”); Nevin Varghese (Dec. 26, 2022) (“Varghese Letter”).

194

See

FIF Letter at 13 (stating that segmented orders would likely need to be separate from non-segmented orders); Fidelity Letter at 9 (recommending that the Commission distinguish Rule 605 data by segmented and non-segmented order flow and display such orders separately in detailed reports and summary reports); SIFMA Letter II at 29 (stating that it is unclear why retail broker-dealers should have to report on segmented orders because execution quality will depend on the qualified auction rather than actions by the originating broker, and suggesting instead a single Rule 605 report that evaluates all qualified auctions).

The Commission is still considering the order competition rule proposal and the proposal to require separate Rule 605 reports for orders that a market center receives for execution in a qualified auction. Therefore, the qualified auctions contemplated by the Order Competition Rule Proposing Release do not exist as a place of execution at this time. Accordingly, in this release, the Commission is not acting on the proposed separate Rule 605 reporting requirement for orders a market center receives for execution in a qualified auction.

C. NMS Stock ATSs and SDPs

1. Proposed Approach

Under Rule 605 prior to the amendments, firms that operate two separate markets must prepare separate Rule 605 reports for each market center.

195

This requirement allows market participants to assess the execution quality of each market individually and prevents differences in the nature of each market from obscuring information about execution quality. The Commission proposed to specify in Rule 605(a)(1) that an NMS Stock ATS (as defined in Regulation ATS)

196

shall prepare reports separately from their broker-dealer operators to the extent such entities are required to prepare reports.

197

The Commission also proposed to require in Rule 605(a)(1) that any market center that provides a separate routing destination that allows persons to enter orders for execution against the bids and offers of a single dealer shall produce a separate report pertaining only to covered orders submitted to such routing destination.

198

This provision would have covered an SDP operated by a broker-dealer and required a separate report pertaining to those orders submitted to the SDP, allowing customers and other market participants to distinguish SDP activity from more traditional dealer activity.

199

195

See

prior 17 CFR 242.605(a)(1) (requiring “every” market center to produce a report).

See also

Rule 605 NMS Plan at n.1 (“An entity that acts as a market maker in different trading venues (

e.g.,

as a specialist on an exchange and as an OTC market maker) would be considered as a separate market center under the Rule for each of these trading venues. Consequently, the entity should arrange for a Designated Participant for each market center/trading venue (

e.g.,

an exchange for its specialist trading and an association for its OTC trading).”) For a description of “Designated Participant” as defined in the Rule 605 NMS Plan,

see infra

note 869.

196

17 CFR 242.300(k). “Regulation ATS” consists of 17 CFR 242.300 through 242.304 (Rules 300 through 304 under the Exchange Act).

197

See

Proposing Release, 88 FR 3786 at 3803 (Jan. 20, 2023).

198

See id.

To the extent that a reporting firm produces more than one Rule 605 report, the firm could label each report with the type of business reflected on the report.

199

See id.

2. Final Rule and Discussion

The Commission is specifying that NMS Stock ATSs must report separately from their broker-dealer operators, as proposed, and adopting a separate reporting requirement for SDPs largely as proposed. In each instance, separate reporting under Rule 605 will bring transparency to these segments of the OTC equity market.

The Commission received generally supportive comments from a variety of market participants regarding having firms produce separate Rule 605 reports for NMS Stock ATSs and for SDPs.

200

After considering the comments, and for the reasons discussed in the Proposing Release, the Commission is specifying

the separate reporting requirement for NMS Stock ATSs as proposed.

200

See, e.g.,

Healthy Markets Letter at 16 (“[B]rokers that are also market centers (including as OTC market makers) should be required to separately report their market center functions for all covered orders (

e.g.,

ATS or SDP operations).”); Better Markets Letter at 5, n.10 (“[R]equiring SDPs and ATSs to produce Rule 605 reports independently from their broker-dealers operations would increase transparency by allowing market participants to distinguish such activity from more traditional broker-dealer activity.”); Varghese Letter (“Expanding the scope of entities subject to Rule 605 to include . . . single dealer platforms will ensure that a wider range of market participants are held to the same standards of transparency and accountability.”).

Two commenters requested clarification and confirmation that order and execution management systems (“OEMSs”) will not need to register as ATSs under the Commission's proposal to amend the definition of “exchange” under 17 CFR 240.3b-16 (“Rule 3b-16”)

201

and thus need not comply with Rule 605's separate reporting requirement for NMS Stock ATSs.

202

The Commission is still considering whether to adopt the proposed changes to the definition of “exchange” discussed in the 2022 Regulation ATS/Definition of Exchange Proposing Release and 2023 Regulation ATS/Definition of Exchange Reopening Release. Any need to comply with Rule 605's separate reporting requirement under any future rulemaking is outside the scope of this rulemaking.

201

Securities Exchange Act Release No. 94062 (Jan. 26, 2022), 87 FR 15496 (Mar. 18, 2022) (“2022 Regulation ATS/Definition of Exchange Proposing Release”). The comment period was reopened on May 9, 2022, and ended on June 13, 2022: Securities Exchange Act Release No. 94868 (May 9, 2022), 87 FR 29059 (May 12, 2022). The Commission reopened the comment period for the 2022 Regulation ATS/Definition of Exchange Proposing Release again in the 2023.

See

Securities Exchange Act Release No. 97309 (Apr. 14, 2023), 88 FR 29448 (May 5, 2023) (“2023 Regulation ATS/Definition of Exchange Reopening Release”). The 2023 Regulation ATS/Definition of Exchange Reopening Release provided supplemental information and economic analysis regarding trading systems that trade crypto asset securities that would be newly included in the definition of “exchange” under the proposed rules.

See id.

202

See

letter from Hubert De Jesus, Managing Director, Global Head of Market Structure and Electronic Trading, Samantha DeZur, Managing Director, Global Public Policy Group, BlackRock, Inc. (Mar. 31, 2023) (“BlackRock Letter”) at 4-5 (“Unlike market centers, OEMSs only route orders based on explicit order handling direction provided by a user. . . . OEMSs would not have the necessary data—and are not structured in a manner—that would allow them to file Rule 605 reports.”); Managed Funds Association Letter at 5-6 (“[I]t would be inappropriate for [OEMSs] to fall within the communication protocol systems definition. . . . [OEMSs], which are essentially software systems that help to facilitate and manage trade executions, do not have (and should not be required to develop) the operational capabilities to gather and disseminate information required by Rule 605 reports . . . due to [their] limited role.”).

An industry group and a broker-dealer requested additional clarity around what constitutes an SDP.

203

The broker-dealer suggested that the Commission avoid an over-inclusive definition of SDPs by focusing on the order types used by non-retail investors to interact with SDPs, such as immediate-or-cancel (“IOC”) orders and fill-or-kill orders (“FOKs”), while also capturing substantially similar trading activities to ensure a level playing field.

204

This commenter stated that “the Commission should consider whether certain Rule 605 metrics may be unduly impacted by differences in SDP business models, rather than execution quality” (

e.g.,

“a SDP that sends indications of interest (“IOIs”) to customers may have materially higher fill rates than a SDP that solely receives blind IOCs”).

205

This commenter further suggested that the Commission “conduct a more holistic review of the Rule 605 reports already produced by ATSs in order to determine whether any additional revisions are warranted in order to accurately report execution quality for non-retail orders” (

e.g.,

“the definition of a ‘c

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