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 to 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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

In addition, several commenters suggested a sequencing of the equity market structure proposals, such that the Commission would implement the amendments to Rule 605 and evaluate the execution quality data from the updated reports, before undertaking further action on the remaining equity market structure proposals. One group of members of Congress recommended that no equity market structure rule “should be finalized or implemented” until the Commission “[c]onduct[s] a comprehensive cost-benefit analysis of the aggregate impact of [these rules] and seek[s] public comment on this analysis[,]” and proposes “a reasonable, workable, and staggered schedule for public comment on the adoption and implementation of the proposals, considering their overlapping nature, significant compliance and operational burdens, and if they may be insurmountable for smaller or emerging firms.” As discussed below in the economic analysis, the Commission uses as a baseline the world as it exists today, including adopted rules but not proposed rules. Comments on how the adoption of the Rule 605 amendments should affect the timing or sequence of the other equity market structure proposals will be considered if and when those rules are acted on. Similarly, because the effects of the final rule are measured against the existing regulatory baseline, which does not include rules that have not been adopted, the Commission does not agree that an additional analysis of the aggregate impact of the several equity market structure rules is necessary before the adoption of the Rule 605 amendments.

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.

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.

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.

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.”

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.

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.

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. 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. 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.

Prior to the amendments, Rule 605 required that reporting entities calculate certain statistics based on the time of order receipt. Moreover, Regulation NMS defined “time of order receipt” based on the time an order was received by a market center for execution. 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.

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. 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.” 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.” 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.

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. 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. This commenter stated that the customers of these broker-dealers are left without any “reliable way to evaluate and compare broker-dealer performance.” A group of academics that authored an academic working paper concerning the execution quality of market orders received from various broker-dealers also submitted a comment letter supporting the proposed expansion and cited the need for improved public transparency based on their research. 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. 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. 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.” 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.”

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. 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. 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.

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. 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.

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. 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. 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.

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). 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. 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.

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

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. 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. 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. 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. 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.

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. 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. 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.

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

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, 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. 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. 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. The relative market-wide benefit of having a broker-dealer prepare Rule 605 reports increases when the broker-dealer has more customers. 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. 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. Thus, utilizing 100,000 customer accounts as the adopted minimum reporting threshold will better balance the benefits of having broker-dealers produce execution quality statistics with the costs of implementation and reporting.

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

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

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; (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.

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

(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.

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.

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. 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.

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,” 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. 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.

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. 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. 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.

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. 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. 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. Another broker-dealer stated that “each firm's order flow is unique” and suggested that the Commission “consider the balance of this additional transparency of order flow” both: (1) “in the context of reporting fragmentation for trading venues that have built in segmentation ( i.e., ATS with multiple pools or an exchange that has a continuous order book and a retail price improvement order book)”; and (2) “in the context of retail brokers where experience may be materially different within a broker-dealer ( i.e., a retail broker chooses to offer retail customers different experiences within the same broker-dealer).”

The Commission is not adopting these commenters' suggestions that larger 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.

(c) Time of Order Receipt

One investor advocacy group stated that broker-dealers should be required to calculate time of order receipt based on when that broker-dealer received the order because, in the commenter's view, the use of the time the order was received would show if there are order-delays and thereby provide a useful metric for anyone examining order-routing latency across brokers. 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. 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. 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. 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. 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.

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. 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.

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. 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.” 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. 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.

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. 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.

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. 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. 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. 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. 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.”

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.

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. 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.

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

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. After considering the comments, and for the reasons discussed in the Proposing Release, the Commission is specifying the separate reporting requirement for NMS Stock ATSs as proposed.

Two commenters requested clarification and confirmation that order and execution management systems (“OEMSs”) will not need to register as ATSs under the Commission's proposal to amend the definition of “exchange” under 17 CFR 240.3b-16 (“Rule 3b-16”) and thus need not comply with Rule 605's separate reporting requirement for NMS Stock ATSs. The Commission is still considering whether to adopt the proposed changes to the definition of “exchange” discussed in the 2022 Regulation ATS/Definition of Exchange Proposing Release and 2023 Regulation ATS/Definition of Exchange Reopening Release. Any need to comply with Rule 605's separate reporting requirement under any future rulemaking is outside the scope of this rulemaking.

An industry group and a broker-dealer requested additional clarity around what constitutes an SDP. 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. 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”). 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 ‘covered order’ may need to be amended in order to ensure that the Rule 605 reports are sufficiently comprehensive for non-retail orders”). Another broker-dealer opposed the separate reporting requirement for SDPs, stating that it is “unnecessary to report these execution quality statistics separately, as users of SDPs are all sophisticated entities capable of carrying out their own execution quality measurements,” and thus the requirement “imposes an additional cost on SDPs without any clear benefit.”

After considering the comments, the Commission is adopting separate reporting for SDPs largely as proposed. The Commission acknowledges that SDPs have different business models and that SDPs that receive blind IOCs throughout the trading day (so-called “blind pinging”) would likely have execution quality statistics that differ significantly from the statistics of SDPs that send out IOIs. Although a commenter raised concerns about potential differential impacts on Rule 605 metrics for SDPs with different business models, in the Commission's experience SDPs largely receive institutional orders and therefore those market participants that send orders to SDPs generally are or represent sophisticated market participants that would likely be aware of and understand these differences in business models; thus these market participants can contextualize the Rule 605 reports appropriately. To the extent that OTC market makers operating SDPs think that additional context would help market participants understand their Rule 605 reports, these firms generally should consider whether to provide additional explanation on their websites about the nature of their order flow and how it affects the particular SDP's execution quality statistics.

In response to one commenter's statement that imposing a separate reporting requirement on SDPs lacks any clear benefit to justify the additional cost, these order flow differences highlight the transparency benefits that justify the costs of requiring OTC market makers operating SDPs to produce Rule 605 reports separate from their other trading activity. Otherwise, commingling SDP activity with other market center activity in Rule 605 reports may obscure differences in execution quality or distort the general execution quality metrics for the market center. Moreover, Rule 605's description of what constitutes SDP activity for purposes of the separate reporting requirement will help ensure that the SDP-specific Rule 605 reports reflect comparable activity.

In response to one commenter's suggestion that the Commission consider revisions to Rule 605 “in order to accurately report execution quality for non-retail orders,” no further changes to Rule 605 are necessary to accommodate reporting by SDPs. Prior to the amendments, market centers included non-retail orders in their Rule 605 reports, to the extent that such orders were held orders, and therefore the reporting requirement for SDPs will not represent the first time that market centers were required to report execution quality for non-retail orders. It is more appropriate in the context of Rule 605 to require the same metrics for all reporting entities. As discussed above, market participants that utilize SDPs generally understand nuances of different market centers. Further, the Commission is adopting a requirement that SDPs prepare Rule 605 reports separate from the Rule 605 reports of their associated broker-dealers so that their customers and market participants will be able to distinguish SDP activity from more traditional dealer activity and separately evaluate reporting firms' execution quality with respect to each type of activity. It is not necessary for the achievement of this goal to make adjustments to the scope of Rule 605 to include more non-retail orders because the amendments to Rule 605 address this separation of SDPs' execution quality statistics.

The Commission also agrees with the two commenters regarding the need for additional clarity around the scope of entities that are SDPs for purposes of Rule 605. After considering commenter suggestions, the Commission is replacing the proposed description of what type of broker-dealer activity constitutes SDP activity for purposes of the separate SDP reporting obligation. In its place, the Commission is adopting a modified description of SDP activity that states: “Any OTC market maker that provides a trading system for only a single dealer to solely buy and sell securities against all other persons entering orders in that system shall produce a separate report pertaining only to covered orders entered in such trading system.” Specifically, the Commission's modified SDP description contains two substantive changes to the proposed SDP description. First, the Commission is replacing the term “market center” with the term “OTC market maker” because the term “market center” would have been overbroad. “Market center” includes an ATS, national securities exchange, or national securities association, none of which can be a single dealer. Second, the Commission is replacing “separate routing destination” with “trading system” to focus on the activity that occurs on SDPs and adding “only” before “a single dealer” to clarify that the trading system offered will not be for multiple dealers and instead will be limited to one dealer.

A broker-dealer recommended that the Commission clarify: (i) the circumstances in which an SDP can be considered to be embedded within an ATS ( e.g., by constituting a separate tier within an ATS that can be specifically targeted by IOC or FOK orders), and (ii) whether SDP activity includes orders received from both the client (whether a broker-dealer or not) and from internal smart order routers. First, executions that occur on or through an NMS Stock ATS are attributable to that NMS Stock ATS and covered orders received for execution on or through an ATS must be included in the Rule 605 report pertaining to the ATS rather than on a separate Rule 605 report. Therefore Rule 605 reporting requirements are not dependent on whether “an SDP [could] be considered to be embedded within an ATS.” The Commission understands that certain NMS Stock ATSs offer counterparty selection and segmentation procedures that may allow the orders of a particular participant to interact with the orders of only a subset of participants, and in this respect trading activity that occurs on certain NMS Stock ATSs may resemble trading activity that occurs on SDPs. Providing separate Rule 605 reports for SDP-like activity on ATSs would not be practicable given the lack of uniformity among NMS Stock ATSs' operations, particularly their counterparty and segmentation procedures. Another factor that could decrease comparability across reports if they were divided, as suggested by the commenter, is that trading activity on an NMS Stock ATS occurs within the context of regulatory requirements specific to NMS Stock ATSs. In contrast, SDPs (as defined for purposes of Rule 605) operate as broker-dealer trading systems that are not ATSs and thus that are not subject to ATS regulatory requirements. Given the differences in operations and regulatory requirements between the types of trading systems, which affect order interaction and execution, the execution quality statistics for SDP-like trading activity occurring on ATSs could significantly vary in a manner that differs from the variation in execution quality statistics among SDPs, thereby reducing the utility of comparing execution quality statistics for trading activity occurring on SDPs. Second, SDP activity includes orders received from both a client (whether or not a broker-dealer) and internal smart order routers. Orders received from internal smart order routers are included in Rule 605 reports specific to SDPs because the determination that a trading system is an SDP for purposes of Rule 605 reporting requirements depends on the type of trading system that receives the orders and the single dealer counterparty that interacts with the orders that the system receives.

An industry group asked specific questions about how to distinguish between OTC market making and SDP activities in Rule 605 reports. The Commission provides the following responses. First, Rule 605(a), as adopted, defines the separate Rule 605 reporting obligation as applying to any OTC market maker that provides a separate trading system that meets specified criteria; therefore, as it pertains to Rule 605 reporting, any SDP required to prepare Rule 605 reports will be a type of OTC market maker and therefore a market center. Second, the Commission is not changing the definition of “OTC market maker” in Rule 600. Thus, any other rule that refers to an “OTC market maker” will utilize the same definition in Rule 600. Third, the Commission is not assuming that an SDP accepts only IOC orders. As such, an SDP is not limited to accepting or receiving a particular type of covered order for execution. Fourth, as described above, although a subscriber's activity on an NMS Stock ATS may resemble SDP activity, the trading activity occurs on the ATS and thus is attributable to the ATS for purposes of Rule 605 reporting requirements. Fifth, as described above, SDP activity includes orders received from both a client (whether or not a broker-dealer) and from internal smart order routers.

III. Modifications to Scope of Orders Covered and Required Information

The reports required by Rule 605(a)(1) prior to these amendments grouped orders by both order size and order type and included certain standardized execution quality metrics for all types of orders, as well as additional metrics for market orders and marketable limit orders. For all reporting entities, including larger broker-dealers, the Commission proposed to: (1) modify the order size and order type groupings; and (2) make changes to the required information for all types of orders, market and marketable limit order types, and non-marketable order types. The Commission is adopting the proposed changes to Rule 605 largely as proposed, with certain modifications discussed below. Section III.A. describes the ways in which the Commission is modifying its proposed definition of “covered order” in the adopted amendments. Section III.B. describes the modifications that the Commission is making to the information contained in the detailed execution quality reports required by Rule 605(a)(1), including how orders are categorized by size and type, the timestamp conventions, and which execution quality statistics are included.

A. Covered Order

The scope of Rule 605's reporting requirements is limited to covered orders. The Commission proposed expanding the definition of “covered order” to include: (1) certain orders received outside of regular trading hours; and (2) orders submitted with stop prices. The Commission also addressed whether non-exempt short sale orders would be covered orders when a price test restriction is in effect for the security.

1. Orders Submitted Pre-Opening/Post-Closing

(a) Proposed Approach

Prior to these amendments, Rule 605 reports were required to include only orders received during regular trading hours at a time when an NBBO is being disseminated. When the Commission adopted Rule 11Ac1-5, the Commission excluded orders submitted during the pre-opening or after the close, among other order types, from the scope of reporting because nearly all of Rule 605's statistical measures required the availability of the NBBO at the time of order receipt as a benchmark. Similarly, orders for which customers requested special handling, including orders to be executed at a market opening price, were excluded from Rule 605 reports because of a concern that their inclusion would skew the general statistics.

In the Proposing Release, the Commission proposed to: (1) expand the scope of Rule 605 reporting to include certain NMLOs submitted outside of regular trading hours if they become executable after the opening or reopening of trading during regular trading hours; (2) amend the definition of “marketable limit order” to specify that the marketability of an order received when the NBBO is not being disseminated would be determined using the NBBO that is first disseminated after the time of order receipt; and (3) exclude from Rule 605 reports market or limit orders received during regular trading hours at a time when an NBBO is being disseminated but prior to the dissemination of the primary listing market's first firm, uncrossed quotations for a trading day (“Opening Exemption”), thereby incorporating previously granted exemptive relief into the proposed definition of “covered order.” The Commission's proposed definition of “covered order” would have excluded market orders and marketable limit orders submitted prior to open or during a trading halt; therefore, any limit order received outside of regular trading hours or during a trading halt that is marketable based on the first disseminated NBBO during regular trading hours after the time of order receipt would not have been a covered order for purposes of Rule 605. Additionally, the Commission proposed amending Rule 605(a)(1) to require a market center, broker, or dealer to include in its monthly report, in addition to the covered orders in NMS stocks that it received for execution from any person, those covered orders in NMS stocks that it received for execution in a prior calendar month but which remained open.

(b) Final Rule and Discussion

The Commission is adopting as proposed an expansion to the scope of Rule 605 reporting to include NMLOs submitted outside of regular trading hours that become executable after the opening or reopening of trading during regular trading hours. The Commission is adopting the definition of “covered order” as it relates to orders submitted outside of regular trading hours largely as proposed, but with a modification to accept a commenter's recommendation as discussed below. The Commission is similarly modifying the proposed definitions of “executable,” “marketable limit order,” and “beyond-the-midpoint limit order” to accommodate this modification. Further, the Commission is adopting as proposed the requirement for a market center, broker, or dealer to include in its monthly report those covered orders in NMS stocks that it received for execution in a prior calendar month but which remained open.

Generally, individual investors supported including certain orders submitted outside of regular trading hours within the scope of covered orders. One individual investor who supported the proposed change stated that after-market and pre-market trades play a greater role today than ever before, with many of the price changes occurring during these times rather than during market hours.

A broker-dealer supported the inclusion of pre-market orders in Rule 605 reports, stating these orders (along with other included order types) would provide investors with a more complete picture of order execution quality across the marketplace. Another commenter stated that NMLOs entered outside of “normal hours” should not be included because “these will likely skew the statistics.” Specifically, this commenter stated that frequently the first quote after opening is wide and not representative of the quote when the primary exchange opens, and many orders deemed NMLOs by this benchmark would likely fill as soon as the primary exchange opens. Therefore, according to this commenter, “including these orders will skew the NMLO stats and lead to difficult comparisons between brokers.”

A national securities exchange supported inclusion of certain orders submitted outside of regular trading hours within the definition of “covered order.” An investor advocacy group recommended that Rule 605 run from primary market open to primary market close ( e.g., 9:30 a.m. to 4 p.m. eastern standard time).

An industry group stated that the proposed definition of “covered order,” in the context of NMLOs, does not address orders received during regular trading hours but prior to the primary listing market disseminating its first firm, uncrossed quotations in a security (referred to herein as the “interim opening period”). This commenter recommended that the demarcation point for whether an order should be treated as a pre-open (or post-close) order or an order received during regular trading hours should be the point at which the primary listing market disseminates its first firm, uncrossed quotations for the applicable security. To address orders received during the interim opening period, this commenter recommended that the Commission change each of the references to the “time when a national best bid and national best offer is being disseminated” in the proposed definitions of “marketable limit order” and “beyond-the-midpoint limit order” to reflect not only that a national best bid and national best offer has been disseminated but also that the primary market has disseminated its first firm, uncrossed quotations for the security.

After a review of the comments, for the reasons discussed in the Proposing Release and discussed below, the Commission is adopting the definition of “covered order,” along with other changes addressing the expansion of the scope of Rule 605 to include certain orders received outside of regular trading hours, largely as proposed. However, in response to comments, the Commission is making several modifications that address the treatment of orders received during the interim opening period. As discussed below, these changes help address the concerns of one of the commenters that the inclusion of NMLOs entered outside of normal hours in Rule 605 reports would skew the reported execution quality statistics.

When proposing to incorporate the exemptive relief contained in the Opening Exemption into the definition of “covered order” with respect to market or limit orders received during regular trading hours at a time when an NBBO is being disseminated, the Commission recognized that quotations disseminated prior to a primary listing market disseminating its first quotations in a security often reflect spreads that vary significantly from the norm and intended that the proposed changes to the definition would prevent such quotations from skewing execution quality statistics. In proposing to expand the scope of Rule 605 reporting requirements to include certain NMLOs submitted outside of regular trading hours if they become executable during the opening or reopening of trading during regular trading hours, the Commission intended to provide increased visibility into the execution quality for individual investor orders. The Commission agrees with the commenter who recommended additional changes to the definition of “covered order” (along with related changes to the definitions of “marketable limit order” and “beyond-the-midpoint limit order”) and stated that treating orders received during the interim opening period in the same manner as orders received outside of regular trading hours will be consistent with the Commission's stated objectives.

Accordingly, the Commission is adopting a definition of “covered order” that scopes in any NMLO (including an order submitted with a stop price) that is received by a market center, broker, or dealer at a time before the primary listing market has disseminated its first firm, uncrossed quotations in the security and that, if executed, is executed during regular trading hours. The “covered order” definition, as proposed and as the Commission is adopting, does not include within its scope those market orders and marketable order types received outside of regular trading hours. Keeping market and marketable limit orders received during the interim opening period outside the scope of covered orders is consistent with how these orders are treated when received outside of regular trading hours. The changes to the definition of “covered order,” together with the modifications to the definition of “executable” and “marketable limit order” discussed below, will help ensure that an order received or executed during the interim opening period will be treated in the same manner as any other order received or executed pre-open or post-close.

The Commission is also adopting a modified version of the proposed definition of “executable” that specifies that whether an NMLO is executable will be determined based on the order's limit price during regular trading hours and after the primary listing market has disseminated its first firm, uncrossed quotations in the security. Under the definition of “executable” as proposed, an NMLO (including an order submitted with a stop price) received during the interim opening period would have had the possibility of becoming executable before the primary listing market has disseminated its first firm uncrossed quotations in the security. During this interim opening period, quotations and execution prices may be less representative of the value of the security than during the rest of regular trading hours because, as stated above, quotations disseminated prior to a primary listing market disseminating its first quotations in a security often reflect spreads that vary significantly from the norm during regular trading hours. Therefore, a scenario in which an NMLO becomes executable (as defined in the proposal) during the interim opening period led to two potential ways in which including these orders could skew execution quality statistics. First, if the NMLO executed during the interim period (including at the opening of the primary listing market), that order would have been included in reports required pursuant to proposed Rule 605(a)(1) as an NMLO that became executable and executed during regular trading hours. Second, the benchmark that would have been used for those statistics to measure from the time that an order becomes executable would have been a quotation price from the interim opening period. The modification to the proposed definition of “executable” that the Commission is adopting addresses both concerns. Pursuant to the adopted rule, an NMLO (including an order submitted with a stop price) received during regular trading hours will not have the possibility of being considered executable until after the primary listing market has disseminated its first firm, uncrossed quotations in the security. Further, the benchmark used for those statistics that are measured from the time that an order becomes executable will be measured from a point in time that is after the primary listing market has disseminated its first firm, uncrossed quotations in the security. These changes to the final rule will help to prevent the potential skewing of execution quality statistics caused by reliance on quotations from the interim opening period, and thereby increase the comparability of Rule 605 reports.

In addition, the Commission is revising the proposed definition of “marketable limit order” so that, with respect to an order received at a time when the NBBO is being disseminated but before the primary listing market has disseminated its first firm, uncrossed quotations in the security ( i.e., during the interim opening period), whether the order is a marketable limit order will be determined from the time that the primary listing market disseminates its first firm, uncrossed quotations in the security. This change will move the determination of whether an order is a marketable limit order or a NMLO to a time when the NBBO is more representative of the security's price than may be the case during the interim opening period. The Commission is also modifying the definition of “midpoint-or-better limit order” from the proposed definition in a similar manner so that the price used to determine whether an order is a midpoint-or-better limit order will be more representative of the security's price. The definition that the Commission is adopting specifies that, for orders received when an NBBO is being disseminated and the primary listing market has disseminated its first firm, uncrossed quotations in the security ( i.e., after the interim opening period), whether the order is a midpoint or better limit order will be determined based on the time of order receipt. The adopted definition also specifies that, for orders received at a time when the NBBO is being disseminated but before the primary listing market has disseminated its first firm, uncrossed quotations in the security ( i.e., during the interim opening period), whether the order is a midpoint-or-better limit order will be determined from the time that the primary listing market disseminates its first firm, uncrossed quotations in the security. These changes also will help to prevent skewing of execution quality statistics and thereby increase the comparability of Rule 605 reports.

2. Stop Orders

(a) Proposed Approach

Orders submitted with stop prices were not included in Rule 605 reports prior to these amendments because the definition of “covered order” excluded orders with special handling instructions, including orders submitted with stop prices. The Commission proposed to remove this exclusion and measure the execution quality of orders submitted with stop prices from the time such orders become executable. As part of the proposed definition of “executable,” the Commission specified that executable means, for any buy order submitted with a stop price, that the stop price is equal to or greater than the national best bid during regular trading hours, and, for any sell order submitted with a stop price, that the stop price is equal to or less than the national best offer during regular trading hours. In addition, the Commission proposed to modify the definition of “categorized by order type” to add executable orders submitted with stop prices as a separate order type category.

(b) Final Rule and Discussion

The Commission is adopting the definition of “covered order” as proposed to include orders submitted with stop prices within the scope of Rule 605. However, the Commission is modifying the proposed definition of “executable” as it pertains to orders submitted with stop prices in response to recommendations from commenters. Additionally, the Commission is modifying the proposed definition of “categorized by order type” to include separate categories for executable market orders submitted with stop prices, executable marketable limit orders submitted with stop prices (“executable stop marketable limit orders”), and executable non-marketable limit orders submitted with stop prices (“executable stop non-marketable limit orders” or “executable stop NMLOs”), in response to comments. As part of adding these separate stop order categories, the Commission is also adding new definitions of “executable stop marketable limit order” and “executable stop non-marketable limit order.”

Individual investors generally supported including certain orders submitted with stop prices within the definition of “covered order.” A national securities exchange supported inclusion of orders submitted with stop prices within the definition of “covered order.” One broker-dealer supported the inclusion of executable stop orders as an order type.

Another broker-dealer supported including stop orders, but stated that there are many different types of stop orders. This commenter stated that, “rather than attempting to define what constitutes a trigger and its corresponding reference market for purposes of determining whether and how a stop order is included within Rule 605, it would be preferable to simply require that all stop orders that are triggered be included in Rule 605 reports to the extent that the resulting market or limit order is a covered order.” Another commenter stated that the definition of executable stop order “runs counter to how stop orders actually become executable.” According to this commenter, while FINRA Rule 5350 defines a stop order as “an order to buy (or sell) that becomes a market order to buy (or sell) when a transaction occurs at or above (below) the stop price,” broker-dealers may elect to trigger a stop order in a different fashion but are prevented from calling it a “stop order.”

An industry group suggested that the Commission and FINRA adopt consistent usage of the term “stop order” and other relevant terms because the proposed definition is inconsistent with the terminology in FINRA Rule 5350 in a number of respects. The commenter stated that stop orders should be reported separately from other types of orders, but suggested that the Commission modify the criteria for when to include stop orders in Rule 605(a)(1) reports and expand the order type categories related to stop orders. This commenter recommended that stop orders become reportable if the order is “triggered” or “activated” and that an alternate term along these lines be used instead of “executable.” According to this commenter, requiring reporting pursuant to Rule 605 “with respect to any time period prior to the triggering of a stop order would provide no value to market participants and would provide misleading information to the market” because there is no action that a firm can take to execute a stop order prior to the point when the order is triggered.

After review of the comments, the Commission is adopting a modified definition of “executable” as it pertains to orders submitted with stop prices. As adopted, “executable,” with respect to orders submitted with stop prices, means that the stop price has been triggered during regular trading hours and after the primary listing market has disseminated its first firm, uncrossed quotations in the security. As stated by commenters, orders may be submitted with stop prices that trigger or activate based on different conditions, such as a last sale price or a change in the NBBO. The definition of “executable” that the Commission is adopting will more broadly encompass the different conditions that may convert an order with a stop price into an order that may execute. Additionally, this change addresses a commenter's suggestion by preventing stop orders from being executable before they have been triggered.

A commenter suggested that Rule 605 reports should exclude stop orders to “avoid confusion” and allow firms to disclose the relevant details to their clients in a manner consistent with the clients' trading experience. However, such disclosures would not be an adequate substitute because they would not be required, might not be provided in a uniform format, and might not be available to market participants that are not clients of a particular firm, all of which would impede market participants' ability to compare statistics across firms.

An industry group recommended that: (1) once a stop order without a limit price has been triggered, the order should be reported as a stop market order; and (2) once a stop limit order has been triggered, the order should be reported in one of several new order type categories based on the status of the order at the time the order is triggered. This commenter further suggested that, for purposes of representing all of these order type categories, the Commission should add a column to Rule 605(a)(1) reports to indicate whether the applicable row pertains to stop orders. A commenter that recommended excluding stop orders from Rule 605 reports stated that “stop orders can have at least three distinct behaviors after they are triggered—market order, marketable limit order, and nonmarketable limit order” and suggested that a “more transparent way to include these orders would be to create three separate categories of stop orders reflecting these triggers.”

In consideration of these comments, the Commission is modifying Rule 605's treatment of stop orders from the proposal to split executable stop orders into three categories—executable market orders submitted with stop prices, executable stop marketable limit orders, and executable stop NMLOs—based on the stop orders' status at the time that they are triggered. Separating executable stop orders into these three categories will group orders with similar execution profiles. To implement these changes to the treatment of stop orders, the Commission is: (1) modifying the proposed definition of “categorized by order type” to replace the category for executable orders submitted with stop prices with categories for executable market orders submitted with stop prices, executable stop marketable limit orders, and executable stop non-marketable limit orders; (2) adding new defined terms of “executable stop marketable limit order” and “executable stop non-marketable limit order;” and (3) modifying the execution quality statistics required for stop orders to align the three categories of stop orders with the type of order they most resemble once triggered.

In response to comments received, the Commission conducted a supplemental analysis of the distribution of stop orders that fell into six existing order type categories once triggered using a sample of CAT data for 400 stocks for March 2023. The results are presented in Table 1 and show that the majority of orders submitted with a stop price that trigger are market orders when triggered (almost 86%). However, a significant percentage of orders submitted with a stop price that trigger are limit orders.

The Commission is adopting definitions for “executable stop marketable limit order” and “executable stop non-marketable limit order” to provide that the determination of which of these two categories a limit order submitted with a stop price falls into is made using the point in time that the order submitted with a stop price is triggered. Utilizing this determination point in time will help align the sub-grouping of limit orders submitted with stop prices with the characteristics of these orders once the stop price is triggered. Under the adopted definitions, an “executable stop marketable limit order” will be an order whose limit price is equal to or greater than the best offer (for a buy order) or equal to or less than the national best bid (for a sell order) at the time the stop price is triggered, i.e., when the limit order submitted with a stop price becomes executable. Similarly, an “executable stop non-marketable limit order” will be an order whose limit price is less than the best offer (for a buy order) or greater than the national best bid (for a sell order) at the time the order becomes executable.

As proposed, Rule 605 would have required that the execution quality statistics provided for executable orders submitted with stop prices include those execution quality statistics required for non-marketable order types. However, executable market orders submitted with stop prices and executable stop marketable limit orders (together, “marketable stop order types”) will behave like market and marketable limit orders once triggered rather than NMLOs. Therefore, the Commission is modifying the proposed execution quality statistics for marketable stop order types to provide that the same statistics required of other marketable order types ( e.g., price improvement statistics) be calculated for these types of stop orders. However, because executable stop NMLO orders will behave like other NMLOs once triggered, the Commission is requiring that the same statistics required of other non-marketable order types ( e.g., relative fill rate) be calculated for these stop orders.

The Commission is not adopting the commenter's recommendation to add an additional column to the Rule 605(a)(1) detailed report to denote whether a particular row pertains to stop orders. The additional order type categories in amended Rule 605 for executable market orders submitted with a stop price, executable stop marketable limit orders, and executable stop NMLOs partially align Rule 605 with this recommendation substantively because they will require firms to provide execution quality statistics for these types of stop orders that are grouped according to the characteristics of the orders once triggered. However, the commenter's recommendation would in effect have created a separate order type category for stop orders with characteristics of each of the other order types ( e.g., executable midpoint-or-better limit order with a stop condition, executable marketable IOC with a stop condition). The Commission does not believe the execution profiles for an order type category or categories for executable midpoint-or-better order types with a stop condition would vary significantly enough from other executable stop NMLOs to warrant additional order type categories. A significant portion of midpoint-or-better limit orders may have the expectation of executing immediately, for example, against hidden or odd-lot liquidity inside of the spread. Because these orders are likely to have different execution profiles than other types of NMLOs, the Commission is requiring separate order type categories for midpoint-or-better limit orders. In contrast, an order submitter placing a stop limit order likely does not have an expectation of executing immediately and does not know ex ante what the market conditions will be when the stop price is triggered, i.e., how aggressive the limit price will be when the order is converted into a limit order. Therefore, because executable midpoint-or-better order types with a stop condition are not likely to have significantly different execution profiles than other executable stop NMLOs, the Commission is not requiring the use of order type categories that would further sub-divide executable stop NMLOs. In addition, it is not likely that orders will have both an IOC instruction (which indicates an expectation of immediacy) and a stop condition (which indicates an intention to wait until market conditions change and trigger the stop condition). Even if such orders are utilized, they are not likely to have significantly different execution profiles than other stop orders that fall within the same order type categories. Thus, the Commission is not requiring the use of order type categories that would further sub-divide the categories for orders submitted with stop prices.

3. Non-Exempt Short Sale Orders

(a) Proposed Approach

Commission staff has taken the position that staff would view all short sale orders that are not marked “short exempt” (“non-exempt short sale orders”) as special handling orders and, in the staff's view, these orders may be excluded from the definition of “covered order.” Non-exempt short sale orders are subject to a price test under 17 CFR 242.201 (“Rule 201” of Regulation SHO (17 CFR 242.200 through 242.204)) that sets forth a short sale circuit breaker that is triggered in certain circumstances, after which time a price restriction will apply to short sale orders in that security for that day and the following day. The Commission proposed that non-exempt short sale orders would not be considered special handling orders unless a price test restriction is in effect for the security. As proposed, non-exempt short sale orders would fall within the definition of “covered order” and thus be subject to Rule 605 reporting, unless another exclusion applies. Conversely, during a short sale price test, a short sale order not marked “exempt” would continue to be subject to special handling and would be excluded from the definition of “covered order” and thus from Rule 605 reporting.

(b) Final Rule and Discussion

The Commission is adopting as proposed its position that non-exempt short sales orders will not be considered special handling orders unless a price test restriction is in effect for the security. The Commission received several comments on this aspect of the proposal. One national securities exchange supported the proposed treatment of non-exempt short sale orders. Another national securities exchange suggested that the Commission provide more detailed instructions relating to any order types that would be excluded from the definition of “covered order,” e.g., order types that are considered “special handling,” “to ensure that such orders are treated uniformly by respondents in their data disclosures.” Two broker-dealers supported the proposal, as did an individual investor who stated that non-exempt short sale orders are “a core component of the current market.” An industry association also supported this aspect of the proposal, but asked how the Commission intends to document the change, which is not reflected in any change to the definition of “covered order.”

After consideration of the comments, the Commission is adopting the position that non-exempt short sale orders will not be considered special handling orders unless a price test restriction is in effect for the security, as proposed. As discussed in the Proposing Release, when a non-exempt short sale order is subject to a price test restriction under Rule 201 of Regulation SHO, a trade may only take place at least one tick above the national bid or offer; however, non-exempt securities are infrequently subject to such a price test restriction. The inclusion of non-exempt short sale orders within the scope of Rule 605 when a short sale price test is not in effect will not skew execution quality statistics because non-exempt short sale orders are not tick-sensitive during this period. However, when a price test restriction under Rule 201 of Regulation SHO is in effect, any non-exempt short sale order ( i.e., an order that is tick-sensitive) will be an “order to be executed only on a particular type of tick or bid” which is one of the types of special handling orders specified as being excluded from the definition of “covered order.” Such orders will therefore be excluded from the definition of “covered order.” In addition, including non-exempt short sale orders for which a price test restriction is not in effect within the scope of Rule 605 reports will lead to a more complete picture of reporting entities' execution quality. As discussed further below, the prior staff statements that conflict with the Commission's adopted position will be rescinded.

B. Required Information

1. Categorization by Order Size

(a) Proposed Approach

Prior to the amendments, Rule 605 reports utilized order size categories based on the numbers of shares in the order ( e.g., 100-499 shares and 500-1,999 shares). Historically, round lots generally have been viewed as groups of 100 shares, and Rule 605 prior to these amendments reflected this: it did not require reporting of orders smaller than 100 shares, including odd-lot orders or fractional share orders ( i.e., orders for less than one share). Additionally, preexisting Rule 605 reports did not include orders with a size of 10,000 shares or greater, pursuant to exemptive relief provided by the Commission in 2001.

The Commission proposed to amend the definition of “categorized by order size” to designate the following categories for order sizes: (i) less than 1 share; (ii) odd-lot; (iii) 1 round lot to less than 5 round lots; (iv) 5 round lots to less than 20 round lots; (v) 20 round lots to less than 50 round lots; (vi) 50 round lots to less than 100 round lots; and (vii) 100 round lots or greater. The proposed modifications to the order size categories would have utilized the new definition of round lot adopted in the Market Data Infrastructure rule (the “MDI Rules”), and included odd-lots, fractional shares ( i.e., orders for less than one share), and larger order sizes.

(b) Final Rule and Discussion

In response to comments, the Commission is adopting a definition of “categorized by order size” that differs from the proposal's focus on round lot increments. Instead, as adopted, each order size category reflects a notional dollar value range, along with an indication that the category reflects orders that were for an odd-lot, a round lot, or less than a share. As adopted, this amendment will increase transparency regarding distribution of order sizes that a reporting entity handles, particularly for higher-priced stocks. The Commission also is adopting an execution quality statistic for cumulative notional order size of covered orders.

Individual investors generally supported the proposed order size categories. Some individual investors stated that these categories would help them achieve investor confidence or better executions. Another individual investor stated that reporting execution quality information across orders of different sizes would be “incredibly beneficial” to understanding the “degree of fairness in the market.” An investor advocacy group supported the proposed changes to the definition of categorized by order size. But one broker-dealer stated that “because the Commission has simultaneously submitted for proposal a new rule that would change tick sizes and round lot definitions” ( i.e., the Minimum Pricing Increments Proposing Release), the reporting requirements pertaining to categorization by order size “are subject to change which in turn could create customer confusion.”

Other commenters addressed specific elements of the proposed order size categories. An investor advocacy group supported basing the order size categories on round lots, stating that doing so not only would harmonize Rule 605 disclosure with the MDI Rules that established a price-based definition of “round lot” but also would better enable Rule 605 reports to group orders in a way that provides useful order execution information. However, a number of commenters suggested using notional dollar value categories instead of or in addition to the share-based categories.

Similarly, several commenters, including a broker-dealer and financial services firms, suggested using notional size categories rather than round lot-based size categories. One of the financial services firms stated that “the process for assigning the number of shares per round lot per security is not dynamic enough to make this a meaningful delineation.” In addition, according to this commenter, “after the size of an order has achieved round lot status, there is no intrinsic difference in the size of the order until it reaches 10,000 shares or $200,000,” and therefore “bucketing by round lots has no application to the broader market structure.” Another financial services firm stated that creating order size categories based on notional dollar amounts would provide investors with clearer views of the execution experiences associated with their orders. A broker-dealer stated that grouping orders by notional size would allow for a more accurate comparison of execution quality.

Two industry groups also recommended grouping orders based on their notional dollar values. One of these industry groups stated that in 2018 and 2019 it had recommended a set of notional size buckets for Rule 605 reporting. This commenter suggested that the Commission utilize CAT data to conduct an analysis similar to the one conducted by IHS Markit for Q1 2018 “to determine whether [those] notional value categories would still be appropriate or whether these notional value categories should be adjusted.” This commenter also specifically suggested that one of the thresholds separating notional value categories be $200,000. The other industry group supported revising Rule 605 to utilize notional buckets for the order size categorizations instead of, or in addition to, using the number of round lots as proposed. This commenter recommended that the Commission “calculate appropriately informative notional size buckets.”

A national securities exchange suggested using the following notional value buckets rather than share size categories: less than $10,000; $10,000 to less than $50,000; $50,000 to less than $100,000; $100,000 to less than $200,000; and $200,000 to $400,000. This commenter stated that this alternative would avoid the drawbacks of the current order size categories based on number of shares while ensuring coverage of most retail trades.

To address the Commission's concern that defining order size buckets according to notional dollar values would no longer produce a meaningful distinction between round lot and odd-lot orders, one industry group suggested adding a column to the Rule 605 report to signify whether the orders in the applicable row are round lot or odd-lot orders. This commenter also recommended that mixed lot orders be classified as round lot orders for purposes of Rule 605 reporting. Another industry group and a broker-dealer recommended distinguishing round lot and odd-lot orders using a separate flag.

Several individual investor commenters supported the proposed inclusion of odd-lot and fractional share orders in Rule 605 reports. A group of academics stated that odd-lots currently account for over 60% of trades and, under current disclosure requirements, retail traders are unable to evaluate market center execution quality for a majority of their trades. These commenters also stated that fractional share market orders receive widely different price improvement across broker-dealers and full share price improvement statistics are not informative for the execution quality of fractional trades. These commenters stated that these factors justify adding fractional and odd-lot trades to Rule 605 reports. A broker-dealer similarly supported the proposed new category for fractional share orders as well as a category for orders from one share to 99 shares. Another broker-dealer also supported including odd-lot orders in Rule 605 reports and stated this would particularly benefit retail investors seeking to accurately assess execution quality delivered by wholesale broker-dealers.

Explaining that when a round lot or odd-lot order has a fractional share component, the time to execution and execution price may be impacted, one industry group recommended that: (1) fractional share orders ( i.e., orders for less than one share) be reported separately from round lot and odd-lot orders; and (2) round lot and odd-lot orders be broken-out further to differentiate between those orders that have, and do not have, a fractional share component. However, another industry group suggested eliminating the requirement to include orders for fractional shares in Rule 605 reports, contending that “this information is of limited value to investors.” This commenter stated that “[t]here is also no clear way to execute fractional shares in a purely agency capacity” and, “[a]s a result, to the extent fractional share orders are required to be included in Rule 605 reports, any broker-dealer, even a small broker-dealer, that wanted to facilitate a fractional share order for its customer would be considered a market center for purposes of Rule 605.” Additionally, this commenter stated that “much of today's market infrastructure does not yet support fractional share trading” and the “costs to fully modify this infrastructure would be high compared to the minimal benefit of including fractional share reporting.”

With respect to the proposed inclusion of larger-sized orders, a commenter stated that a “natural breakpoint” between size categories exists at $200,000 and suggested establishing a size bucket of $200,000 and greater. Another commenter supported the proposed order size category for orders greater than 10,000 shares. An industry group recommended designating one of the thresholds for separating notional value categories at $200,000 because in the Order Competition Rule Proposing Release the Commission proposed to utilize a $200,000 threshold for an exception from the obligation to submit a segmented order to a qualified auction. A national securities exchange stated that the Commission should “consider increasing the current cap of $200,000 [the notional block size], as this benchmark has not changed with the market or inflation over time.” This commenter stated that increasing the cap may provide “information that is helpful for institutional buyers.”

Taking into consideration the comments received, the Commission is adopting a modified definition of “categorized by order size.” The Commission followed the suggestion that it use CAT data to examine which notional order size buckets would be appropriate. Based on this analysis (discussed below), the Commission is adopting order size categories that utilize the following notional dollar value ranges: (i) less than $250; (ii) $250 to less than $1,000; (iii) $1,000 to less than $5,000; (iv) $5,000 to less than $10,000; (v) $10,000 to less than $20,000; (vi) $20,000 to less than $50,000; (vii) $50,000 to less than $200,000; and (viii) $200,000 or more.

Each adopted order size category reflects one of these notional dollar value ranges, along with an indication that the orders were for an odd-lot, a round lot, or less than a share. Accordingly, as adopted, “categorized by order size” means dividing orders into separate categories for the following sizes:

• Less than $250 and less than a share;
• Less than $250 and odd-lot;
• Less than $250 and at least a round lot;
• $250 to less than $1,000 and less than a share;
• $250 to less than $1,000 and odd-lot;
• $250 to less than $1,000 and at least a round lot;
• $1,000 to less than $5,000 and less than a share;
• $1,000 to less than $5,000 and odd-lot;
• $1,000 to less than $5,000 and at least a round lot;
• $5,000 to less than $10,000 and less than a share;
• $5,000 to less than $10,000 and odd-lot;
• $5,000 to less than $10,000 and at least a round lot;
• $10,000 to less than $20,000 and less than a share;
• $10,000 to less than $20,000 and odd-lot;
• $10,000 to less than $20,000 and at least a round lot;
• $20,000 to less than $50,000 and less than a share;
• $20,000 to less than $50,000 and odd-lot;
• $20,000 to less than $50,000 and at least a round lot;
• $50,000 to less than $200,000 and less than a share;
• $50,000 to less than $200,000 and odd-lot;
• $50,000 to less than $200,000 and at least a round lot;
• $200,000 or more and less than a share;
• $200,000 or more and odd-lot; and

• $200,000 or more and at least a round lot.

As discussed further below, the adopted categories will facilitate market participants' ability to compare across orders of different sizes in higher-priced stocks, while controlling for potential differences in the treatment of larger-sized orders. Additionally, the adopted buckets better account for potential differences in the distribution of order sizes that reporting entities typically handle for a given stock when comparing execution quality metrics across reporting entities, facilitating apples-to-apples comparisons of execution quality across reporting entities.

For purposes of the order size categories, a mixed lot order ( i.e., an order for an amount of shares greater than a round lot that is not a multiple of such round lot) will be grouped in the “at least a round lot” category and an order for an odd-lot with a fractional share component or a round lot with a fractional share component will be grouped with other odd-lots or round lots, respectively. Reporting entities generally should calculate a limit order's notional value by multiplying the number of shares by the order's limit price. In addition, reporting entities generally should calculate a market order to buy's notional value by multiplying the number of shares by the national best offer at the time of order receipt and a market order to sell's notional value by multiplying the number of shares by the national best bid at the time of order receipt. Calculation of the notional value of a stop order generally should follow these principles based on whether the order once triggered is a limit order or a market order, except that the notional value of a stop market order should be based upon the national best bid or national best offer at the time the order is triggered rather than the time of order receipt.

The Commission used CAT data to examine the distribution of orders across a granular set of notional order size buckets to determine which breakpoints form the most appropriate notional order size buckets. Figure 1 presents the distribution of orders across the notional order size buckets and shows that orders tend to be clustered around certain round notional values ( e.g., $100, $1,000, $10,000, and $50,000).

When trying to determine the optimal cut-off points between notional order size buckets, the Commission considered how the order size buckets selected could meaningfully capture variations in order sizes across a variety of different factors, including stock prices, market centers, lot type and order share size categorization ( i.e., round lot, odd-lot, and fractional share orders). Based on its analysis, the Commission makes the following observations about the types of variations in order characteristics that will be captured by the adopted order size buckets. First, Figure 2 below presents the cumulative order flow (as a percentage of total orders) across notional order size buckets. These results show that, for stocks priced less than $5, 87.6% of orders are valued below $1,000 and 66.9% of orders are valued below $500. Given that nearly a quarter of stocks are priced below $5, including a set of smaller notional order size buckets ( i.e., less than $250; and $250 to less than $1,000) will help ensure that orders are meaningfully distributed across order size categories and not clustered within a single category. Additionally, odd-lot orders tend to be valued less than $1,000, so the smaller notional order size buckets are useful for capturing the distribution of odd-lot orders specifically.

Second, orders valued below $250 contain a higher percentage of individual investor orders than higher-valued orders. To proxy for small individual investor orders, the Commission analyzed the distribution of non-IOC orders that are valued less than $1,000 and that originate from Individual Customer accounts and are handled by wholesalers. The Commission found that 54.2% of these orders are valued less than $250. Furthermore, 99.7% of fractional orders for less than a share, the majority of which are originated from Individual Customer accounts, are valued less than $250. Figure 3 below shows the breakdown of orders originating from Individual and Institutional Customer account types and shows that nearly three-fourths of orders valued under $250 originate from Individual Customers. Therefore, a separate notional order size category for orders valued less than $250 will be particularly useful in allowing individual investors to compare the execution quality of their orders across reporting entities.

Third, for stocks priced less than $50 (which, again, represent 85% of all stocks ), 68.0% of orders are valued between $1,000 and $10,000. Two of the adopted notional order size buckets ($1,000 to less than $5,000; and $5,000 to less than $10,000) will capture some variation across the majority of orders for the majority of stocks.

Fourth, 69.6% of round lots have relatively higher notional order sizes of between $10,000 and $200,000. In addition, some market centers seem to specialize in larger orders. For example, 63.3% of order flow to ATSs is valued between $10,000 and $200,000. The remaining adopted notional order size buckets ($10,000 to less than $20,000; $20,000 to less than $50,000; and $50,000 to less than $200,000) capture the distributions of these larger notional value orders, and thus allow for measurement of execution quality at market centers that specialize in larger notional value order sizes.

Lastly, the additional notional order size category for orders for valued $200,000 or more will be useful because these orders typically warrant different treatment than smaller orders.

Designating order size categories based on notional order size buckets represents a shift in approach from the proposed order size categories based on round lot size ranges. In the Proposing Release, the Commission stated that modifying the order size categories to reflect the number of round lots would better allow Rule 605 reports to group orders with similar characteristics and notional values, and thereby provide more useful execution quality information. The Commission also stated its belief that notional buckets and caps would not be necessary because the definition of round lot, as modified by the MDI Rules, incorporates the current market price of the security. However, the Commission requested and, as described above, received, comments supporting the use of order size categories based on notional value. In the Proposing Release, the Commission recognized advantages to defining order size categories based on dollar value of the order, while also recognizing that this approach would no longer produce a meaningful distinction between round lot and odd-lot orders according to the new definitions under the MDI Rules and therefore it would not be possible to distinguish orders that may not be at the same price as quotes protected under 17 CFR 242.611 (“Rule 611”). Many commenters favored utilizing order size categories based on notional dollar value. Further, accepting commenters' suggestion to combine notional dollar value ranges with an indication of whether a category represents round-lot orders and odd-lot orders, and also indicating whether a category represents orders of less than a share, will preserve the ability to distinguish between such orders. Designating order size categories according to notional value and whether the order represents a round lot, an odd-lot, or an order smaller than a single share preserves the comparability of order execution quality statistics within an order size category and is responsive to comments.

In addition, in response to commenters' suggestions that the statistics in the summary report should be derivable from the detailed report, the Commission is adding a metric to the detailed report under Rule 605(a)(1) for the cumulative notional order size of all covered orders. Specifically, users of the detailed reports can use the cumulative notional order size metric to calculate average notional order size, which is a metric in the summary report, and thus either reconstruct a firm's calculations in its summary report or calculate the metric for different combinations of orders. Users of the detailed report also can use the cumulative notional order size metric to calculate the average share price for covered orders received by combining the metric with shares submitted. Further, the cumulative notional order size metric provides information to users of the detailed report regarding whether the orders that the reporting entity received are more heavily weighted towards the higher or the lower end of a notional order size range.

For the reasons discussed in the Proposing Release and as described below, the Commission continues to believe that fractional, odd-lot, and larger-sized orders of 10,000 or more shares represent important order flow segments. By incorporating these orders into the new order size categories, Rule 605 reports will contain information about some orders that were previously missing from Rule 605 reports. The Commission disagrees with the commenter that stated that execution quality information for fractional share orders is of limited value to investors and suggested not including such orders in Rule 605 reports. Fractional share orders have become increasingly popular with individual investors and the Commission continues to believe that it is important to provide standardized execution quality metrics for this segment of order flow. Analysis of CAT data from August 2023 found that executed orders with a fractional share component originated from almost five and a half million unique accounts. Further, orders for less than a single share represented a significant portion of fractional order executions. While fractional share orders continue to represent a small percentage (around 4.1%) of originating orders that eventually execute, they represent a significant percentage (21.6%) of order executions originating from individual accounts.

With respect to the commenter's statement that the cost of modifying market infrastructure to accommodate fractional share trading “would be high compared to the minimal benefit” of including fractional shares in Rule 605 reports, this commenter has not provided data to quantify the projected increased costs. Although this commenter provides as an example of potential infrastructure issues that FINRA “does not currently have a mechanism to report fractional share trades, because all of these trades are rounded up today,” these trades must still be reported to FINRA's trade reporting facility. Further, CAT accepts reports involving fractional shares. Only market centers or larger broker-dealers that accept orders with fractional shares for execution will need to include fractional shares in their Rule 605 reports, and those firms have the necessary systems to handle fractional shares. Therefore, the Commission does not agree that the cost to implement any modifications to infrastructure needed to provide for the inclusion of fractional shares in Rule 605 reports would be so high as to exceed the benefits of providing standardized execution quality metrics for this segment of order flow.

In addition, the Commission is not adopting the commenter's suggestion that Rule 605 reports also include separate reporting categories for round lot orders with a fractional share component and odd-lot orders with a fractional share component. The majority of orders that have a fractional share component are orders for less than one share and these orders will appear separately in Rule 605 reports in the designated order size category. The value of including an additional category of orders of larger than one share with a fractional share component is unclear. Such orders will be grouped with orders of the same notional size and according to whether the order based on overall share size is an odd-lot or a round lot, which should provide sufficient comparability for such orders.

2. Categorization by Order Type

Rule 605 reports include data for orders as categorized by order type. Prior to the amendments, Rule 605 defined “categorized by order type” to mean dividing orders into separate categories for market orders, marketable limit orders, inside-the-quote limit orders, at-the-quote limit orders, and near-the-quote limit orders. The Commission proposed to modify this definition: (1) to remove the order type categories for inside-the-quote limit orders, at-the-quote-limit orders, and near-the-quote limit orders; (2) to add order type categories for marketable immediate-or-cancel orders, beyond-the-midpoint limit orders, executable NMLOs (excluding beyond-the-midpoint limit orders and orders submitted with stop prices), and executable orders submitted with stop prices; and (3) to specify that the category for marketable limit orders will exclude immediate or cancel orders.

The Commission received comments supporting the overall changes to order type categories being proposed. Additionally, and as discussed in relevant subsections below, many commenters discussed specific aspects of the proposed changes to the order type categories. The Commission is adopting the amendments to the order type categories, with a few adjustments from the proposal. First, in connection with the proposed order type categories for NMLOs, the Commission is making certain modifications to the proposed definition of executable, as discussed in section III.B.2.a) below. Second, the Commission is retaining a separate order type category for executable beyond-the-midpoint limit orders largely as proposed, with a small expansion in scope and corresponding change to the name of the relevant defined term to refer to them as “midpoint-or-better limit orders,” as discussed in section III.B.2.b) below. Finally, the Commission is adopting the proposed order type category for marketable IOCs, while also adding order type categories for two other types of IOCs, as discussed in section III.B.2.c) below.

(a) NMLOs

(1) Proposed Approach

The Commission proposed to eliminate the three separate order type categories pertaining to NMLOs ( i.e. , inside-the-quote limit orders, at-the-quote limit orders, and near-the-quote limit orders) and to replace them with new categories for NMLOs that become executable (excluding orders submitted with stop prices and beyond-the-midpoint limit orders) and beyond-the-midpoint limit orders. The Commission recognized that more meaningful measures of execution quality for NMLOs, as well as orders submitted with stop prices, would assist investors in measuring execution quality, and stated that it was proposing to add the concept of “executable” to allow execution quality statistics to be measured from a point where an order could be executed. Specifically, the Commission proposed the following definition of “executable” for NMLOs (other than orders submitted with stop prices): for any non-marketable buy order (excluding orders submitted with stop prices), executable means that the limit price is equal to or greater than the national best bid during regular trading hours, and, for any non-marketable sell order (excluding orders submitted with stop prices), that the limit price is equal to or less than the national best offer during regular trading hours. The Commission stated that, as is the case for orders submitted with stop prices, incorporation of the “executable” concept would have two effects-NMLOs would only be reported as part of a Rule 605 report if they become executable during regular trading hours and the point that NMLOs first become executable would be used as an input for several execution quality metrics.

(2) Final Rule and Discussion

An individual investor supported the proposed modifications to reporting requirements for NMLOs, stating they would capture more relevant execution quality information for these orders. A broker-dealer supported replacing the current NMLO order categories with NMLOs that become executable and beyond-the-midpoint limit orders, and stated that “[a]dding these new categories should capture many more orders compared to current Rule 605 reports.” A national securities exchange asked for clarification regarding whether market centers would be permitted to use their own view of the NBBO, data from the securities information processors (“SIPs”), or data from competing consolidators (in the future, pursuant to the MDI Rules) when determining order marketability. Another national securities exchange supported replacing the three current categories for NMLOs with NMLOs that become executable, beyond-the-midpoint limit orders, and executable orders submitted with stop prices and stated that these changes would enhance execution quality information within Rule 605 reports and better group comparable orders. According to a group of academics, some broker-dealers convert their customers' order types and route most of them to the broker-dealer's ATS. These commenters recommended, to provide transparency on order types selected by customers, that Rule 605 statistics reflect the order type selected by customers rather than the routing broker-dealer.

After reviewing the comments, the Commission is eliminating the definition of “inside-the-quote limit order, at-the-quote limit order, and near-the-quote limit order,” as proposed and is adopting the order type category for executable NMLOs largely as proposed for the reasons stated in the Proposing Release. As a result, Rule 605 reports will capture more of those NMLOs that have an opportunity to execute, and execution quality statistics will be more useful for these types of NMLOs. However, as discussed above in section III.A.1.b), the Commission is modifying the definition of “executable” in response to a comment regarding the treatment of orders received during the interim opening period.

A national securities exchange stated that under the Limit-Up Limit-Down (“LULD”) Plan, certain NMLOs would not necessarily be “executable” and requested that the Commission modify the definition of “executable” to conform to the provisions of the LULD Plan. The Commission agrees with the commenter that an order generally should not fall within the definition of “executable” when the underlying security is in a Straddle State. The market for a security in a Straddle State can substantially differ from the market for that security outside of a Straddle State, as reflected in the fact that the primary listing exchange may declare a trading pause for an NMS Stock in a Straddle State. Even if the primary listing exchange has not declared a trading pause for a security in a Straddle State, the decision to not consider an order executable based on a whether the national best bid or national best offer reaches a specific price at a time when the underlying security is in a Straddle State is consistent with the Commission's decision to include within the scope of Rule 605 reports only those NMLOs that become executable during regular trading hours. The Commission stated that it was only including in Rule 605 reports those NMLOs that become executable during regular trading hours in order to provide a basis for more comparable execution quality measures because there are substantial differences in the nature of the market between regular trading hours and after-hours. Accordingly, for purposes of determining when an order first became executable, an order generally should not become executable during a time when the underlying security is in a Straddle State.

(b) Midpoint-or-Better Limit Orders

(1) Proposed Approach

Inside-the-quote limit orders were a separate order type category under Rule 605 before the amendments, and Rule 605 did not require price improvement statistics to be calculated for these orders because they are not a marketable order type ( i.e., they do not fully cross the spread). The Commission proposed to require execution quality statistics for limit orders priced more aggressively than the midpoint and to classify these types of orders as beyond-the-midpoint limit orders. Specifically, the Commission proposed to define a “beyond-the-midpoint limit order” as follows: with respect to an order received at a time when a NBBO is being disseminated, (i) any non-marketable buy order with a limit price that is higher than the midpoint of the national best bid and national best offer at the time of order receipt, or (ii) any non-marketable sell order with a limit price that is lower than the midpoint of the national best bid and national best offer at the time of order receipt; and, with respect to an order received at a time when a NBBO is not being disseminated, (i) any non-marketable buy order with a limit price that is higher than the midpoint of the national best bid and national best offer at the time that the national best bid and national best offer is first disseminated after the time of order receipt, or (ii) any non-marketable sell order with a limit price that is lower than the midpoint of the national best bid and national best offer at the time that the national best bid and national best offer is first disseminated after the time of order receipt.

Additionally, the Commission proposed to require that the execution quality statistics for beyond-the-midpoint limit orders include the additional information required of both marketable and non-marketable order types. The Commission also proposed to modify the time-to-execution statistics to state that, with respect to beyond-the-midpoint limit orders, these time-based statistics would have been measured from the time such orders become executable rather than from the time of order receipt.

(2) Final Rule and Discussion

A national securities exchange and a broker-dealer supported including beyond-the-midpoint orders among the new order type categories. The broker-dealer stated that adding beyond-the-midpoint limit orders, along with NMLOs that become executable, should capture many more orders. On the other hand, an industry group questioned whether the proposed inclusion of beyond-the-midpoint limit orders would be worthwhile given their current sparse usage (2.9% of NMLOs), which the commenter predicts would decrease if the minimum pricing increments proposed in the pending Minimum Pricing Increments Proposing Release are adopted. In addition, this commenter suggested clarifying that an order that is a beyond-the-midpoint limit order would not also be a NMLO.

After consideration of the comments, the Commission is adopting an order type for limit orders priced aggressively as compared to the midpoint, but with several modifications from the beyond-the-midpoint limit order that was proposed. The specific changes being made from the proposal are: (1) revising the definition of “beyond-the-midpoint limit order” to include limit orders priced at the midpoint and renaming this term “midpoint-or-better limit order”; and (2) making a modification to this definition to account for the interim opening period, as suggested by a commenter. In addition, the Commission is adopting as proposed the requirements that for this order type: (1) the Rule 605 report will include the execution quality statistics specific to both marketable order types and non-marketable order types; and (2) time-based statistics will be measured from the time such orders become executable.

The Commission is expanding the scope, as compared to the proposal, of the “midpoint-or-better” order types to include limit orders priced at the midpoint in response to a commenter's concern that a category for orders that are priced more aggressively than the midpoint may not be worthwhile because these types of NMLOs are sparsely used. The Commission conducted additional analysis of NMLOs priced in between the national best bid and national best offer and continues to believe that market participants would benefit from receiving execution quality information specific to NMLOs priced better than the midpoint, along with NMLOs priced at the midpoint, because they may have different execution quality statistics than other types of NMLOs. The Commission understands that some NMLOs priced inside the quote are submitted by traders with the intention of executing immediately against hidden or odd-lot liquidity that may be available. Scoping in limit orders priced at the midpoint will increase the size of this order type category, while including additional orders that have certain execution quality statistics that are similar to limit orders priced more aggressively than the midpoint. Midpoint-or-better limit orders may be treated more like marketable limit orders in certain contexts, and the Commission continues to believe that market participants will benefit from receiving price improvement statistics and effective spread statistics for these order types.

In response to a commenter's request for clarification that an order that falls within this order type would not also be a NMLO, the Commission confirms that midpoint-or-better limit orders will not fall within the order type category for NMLOs that become executable. Although midpoint-or-better limit orders are technically a subset of NMLOs, the definition of “categorized by order type” expressly excludes midpoint-or-better limit orders from the order type category for executable NMLOs. Accordingly, execution quality data for midpoint-or-better limit orders will be included within the statistics for only the order type categories for midpoint-or-better limit orders (excluding IOCs) or midpoint-or-better limit orders with an immediate-or-cancel instruction, and described in section III.B.2.c)(2) below.

(c) Marketable and Non-Marketable IOCs

(1) Proposed Approach

Prior to the amendments, Rule 605 reports grouped marketable IOCs together with other marketable orders. The Commission proposed to assign marketable IOCs their own separate order type category by adding a category for “marketable immediate-or-cancel orders” and indicating that the category for “marketable limit orders” excludes IOC orders. The Commission also proposed to require the same execution quality information for marketable IOCs as is required for other marketable order types.

(2) Final Rule and Discussion

A national securities exchange supported establishing a new order type category for marketable IOC orders. An industry group stated that, for each order type, the execution profile differs based on whether the orders are IOC or time-in-force orders and therefore recommended requiring broker-dealers and market centers to break out reporting of all order types (not just marketable order types, as proposed by the Commission) to distinguish between IOC and time-in-force orders.

A broker-dealer stated that it supported assigning IOCs to a separate order category so that they would no longer be commingled with retail orders. According to this commenter, many wholesale broker-dealers execute IOC orders for non-retail investors and currently “these IOC orders may be aggregated with retail orders for reporting purposes, even though the execution profile is very different and could negatively skew a wholesale broker-dealer's execution quality metrics.” This commenter also stated that although the Commission proposed to assign marketable IOCs as a separate order type category, similar treatment was not proposed for non-marketable IOCs. Thus, this commenter suggested that the Commission “include a flag for IOC orders that equally applies across both marketable and non-marketable orders” because of the commenter's view that including non-marketable IOCs within the same order type category as regular NMLOs would significantly skew reported data.

Following consideration of the comments, the Commission is adopting a separate order type category for marketable IOCs as propose Moreover, to address commenters' suggestions that there also be separate order type categories for non-marketable IOCs, the Commission is adopting, in addition to the categories that were proposed, order type categories for NMLOs that are immediate-or-cancel (“NMLO IOCs”) and midpoint-or-better limit orders that are immediate-or-cancel (“midpoint-or-better IOCs”). As is the case with other non-marketable order types, NMLO IOCs will be included in Rule 605 reports if they become executable. Additional Commission analysis demonstrates that IOCs represent a significant component of order flow for both marketable orders and non-marketable orders. Moreover, the Commission agrees with the commenter that commingling NMLO IOCs with NMLOs that are not immediate-or-cancel or midpoint-or-better IOCs with midpoint-or-better limit orders that are not immediate-or-cancel could distort execution quality statistics because the Commission's analysis demonstrates that IOCs tend to have shorter execution times and, with respect to orders received by wholesalers, lower fill rates.

However, the Commission is not fully adopting commenters' suggestion that the Commission differentiate between IOCs and orders that are not immediate-or-cancel for every order type category used in Rule 605. While the adopted amendments will add order type categories for marketable IOCs, executable NMLO IOCs, and midpoint-or-better IOCs, the adopted amendments will not include separate order type categories for IOCs that have characteristics of the other order types ( e.g., market order with an immediate or cancel instruction, executable stop marketable limit order with an immediate or cancel instruction). An order submitter placing a market order likely has an expectation of receiving an immediate execution because there is no limit price. IOC limit orders are also submitted with an expectation of executing immediately. Moreover, an order submitter placing a market order with an immediate or cancel instruction or a limit order with an immediate or cancel instruction can reasonably expect that, if the order receives an execution, it will be at the prevailing market price at the time of order receipt. Therefore, the Commission does not believe that the execution profile for market orders with an immediate or cancel instruction will vary significantly enough from other marketable IOCs to warrant an order type category for market orders with an immediate or cancel instruction that separates these orders from other marketable IOCs. In addition, as discussed above, the execution profiles for an order type category or categories for limit orders with a stop condition and an IOC instruction are not likely to have significantly different execution profiles than other stop orders that fall within the same order type categories based upon marketability, and thus the Commission is not requiring order type categories that would further sub-divide the categories for orders submitted with stop prices.

3. Timestamp Conventions and Time-to-Execution Statistics

(a) Proposed Approach

Prior to the amendments, Rule 605 required the reporting of information on the number of shares of covered orders executed within certain timeframes, as measured in seconds after the time of order receipt. Rule 605 also required the reporting of information on the average time to execution for marketable order types. In addition, the definitions “time of order execution” and “time of order receipt” in preexisting Rule 600 specified that time must be measured “to the second.”

The Commission proposed to update the timestamp conventions in the definitions of “time of order receipt” and “time of order execution” so that these definitions require that such times be measured in increments of a millisecond or finer. The Commission also proposed to specify that the average time-to-execution statistics that Rule 605 required for marketable order types should be expressed in increments of a millisecond or finer. Further, the Commission proposed to require that the share-weighted average time to execution be provided for non-marketable order types, as calculated from the time such orders become executable, and the proposed definition of “executable” provided that the time an order becomes executable shall be measured in increments of a millisecond or finer. Finally, the Commission proposed to eliminate the existing time-to-execution buckets and require the reporting of share-weighted median and 99th percentile time to execution for all order types.

(b) Final Rule and Discussion

As discussed below, after consideration of the comments, the Commission is adopting the use of timestamp conventions of a millisecond or finer for time-based execution quality statistics as proposed. The Commission is also requiring average time-to-execution statistics for all order types and specifying that for NMLOs these statistics will be measured from when the order becomes executable as proposed. However, the Commission is not adopting the proposed median and 99th percentile execution quality statistics for all order types. Instead, the Commission is retaining the time-to-execution buckets from Rule 605 prior to these amendments, which apply to all order types, but is modifying the associated time ranges to account for the overall increase in trading speeds since Rule 605 was adopted and as supported by certain commenters.

Several individual investors supported the proposal to require reporting of average time to execution, median time to execution, and 99th percentile time to execution in increments of a millisecond or finer. Another individual investor stated that measuring in milliseconds would be a “huge step forward” in understanding order execution. A national securities exchange supported eliminating time-to-execution categories in favor of average time to execution, median time to execution, and 99th percentile time to execution, each as measured in increments of a millisecond or finer and calculated on a share-weighted basis. This commenter stated that requiring average time to execution for all order types, as well as statistics regarding the distribution of execution times within each order type, “would offer more consequential information.” According to this commenter, “[t]hese statistics could be used to judge and compare the average time to execution for a particular order type and still provide information about the extent to which outlier values may skew the average.”

One industry group stated that the use of milliseconds is the best approach at this time. This commenter suggested that the Commission should engage in discussions with market centers to consider whether a requirement for market centers to report with increased granularity for CAT, Rule 605, and other required reporting would be appropriate. An investor advocacy group stated that requiring timestamp information in millisecond increments would allow for meaningful points of comparison between market centers and/or broker-dealers for data that uses timestamp information and time-to-execution statistics. Another investor advocacy group recommended that the Commission modify the required time-to-execution buckets for all order types to time buckets that can be adjusted over time, starting with the following buckets: less than 500 microseconds; 500 microseconds to 1 millisecond; 1 to 10 milliseconds; 10 to 100 milliseconds; 100 milliseconds to 1 second; 1 to 10 seconds; and greater than 10 seconds. This commenter stated that “[b]y creating buckets for timestamp, rather than average time to execution, the reports would provide much greater granularity while still allowing a user of the data to recreate average time to execution.” A broker-dealer supported the new statistics reporting times in increments of a millisecond or finer and stated that this will better reflect the speed at which orders are executed today.

The Commission is adopting the updates to the timestamp conventions to measure time-based statistics in increments of a millisecond or finer as proposed for the reasons discussed in the Proposing Release. Requiring that Rule 605 reports include timestamp information in millisecond increments will allow for meaningful points of comparison among market centers or broker-dealers.

A broker-dealer stated that although it supports transitioning time-to-execution metrics to smaller increments of time, it is concerned that more granular timestamps may lead to greater variation across firms because firms may have different practices around when to mark the same event, quotation information may vary materially due to geographic latency, and SIP data are likely to vary from proprietary feeds. This commenter stated that the Commission should address these potential issues with timestamps to ensure that execution quality statistics for brokers are not misleading, biased, or inconsistent. However, evidence suggests that geographic latencies, which may account for the majority of latency differences experienced by the SIP, are currently below a millisecond. Therefore, any distortions related to latencies are likely to be smaller than the timestamp granularity. Further, it is likely that distortions may be reduced by using finer timestamp conventions that more closely align to existing market practice, as the NBBO that is matched to a particular order is likely to be closer to the NBBO at the time of order receipt. Reporting firms generally should record the time of order receipt at the time that the firm first receives the order and the time of order execution at the time of execution as included on the trade confirmation.

One individual investor, who expressed concern related to the proposal, stated that focusing on the speed of execution only benefits high-frequency traders who can take advantage of small price discrepancies to make quick profits. This commenter stated that he is more concerned with getting a fair price for his trades than the speed of execution. The Commission is retaining time-to-execution statistics in Rule 605 reports for the reasons discussed herein. Different investors benefit from faster execution times for different reasons. With respect to individual investors in particular, delays in execution can lead to worse prices for market orders in an increasing (for buy orders) or decreasing (for sell orders) market and lower probabilities of execution for IOCs. However, amended Rule 605 does not focus on speed to the exclusion of other important aspects of execution quality, including fill rates and price improvement.

The Commission is adopting, as proposed, the requirement that average time-to-execution statistics be calculated for all order types, including non-marketable order types. The Commission is also adopting, as proposed, the requirement that average time to execution for non-marketable order types be measured from the point in time that orders become executable because this will provide a control for prevailing market conditions and benchmark orders from a point when such orders can reasonably be expected to execute.

An industry group raised concerns with reporting time to execution when the size of the customer's order exceeds the size of the opposite-side bid or offer and suggested that time-to-execution statistics for marketable orders should only consider the time to execution for shares executed by a reporting firm during the time period prior to the order first becoming unmarketable. This commenter stated that firms that receive marketable orders that are larger relative to the opposite-side displayed NBBO quantity would show a longer time to execution as compared with firms that receive marketable orders that are smaller relative to the opposite-side displayed NBBO quantity, and in this way reported performance would be impacted by factors that do not reflect a true comparison of the execution performance across firms. In addition, a broker-dealer stated that execution time statistics should be required only for market orders because marketable limit orders (including NMLOs that become marketable) may be partially executed or may exceed the consolidated quote size and it would be difficult to interpret this data without more context and information. Another commenter stated that the execution speed metric for marketable limit orders should be limited to size available at the best protected quote at the far touch because this will ensure that orders larger than the quoted size that take out the best price and are posted for the balance do not skew the statistics.

The Commission is not adopting these commenters' suggestions to limit the application of time-to-execution statistics to take into account concerns about marketable limit orders that exceed the available quantity at the opposite side bid or offer. The Commission disagrees with restricting time-to-execution statistics so that they apply to market orders only because time-to-execution statistics will provide meaningful information for all marketable and non-marketable order types and the time it takes to execute an initially marketable limit order that becomes non-marketable is still relevant. The Commission also disagrees with the suggestion that it is necessary to limit time-to-execution statistics to the time it takes to execute the size available at the opposite side quote or the time it takes to first exhaust available liquidity to avoid skewed statistics. If a covered order receives a partial execution, the share-weighted time-to-execution statistics will consider the execution time of each subset of shares that received an execution and will not consider any subset of shares that does not receive an execution, and this will help mitigate against partial executions distorting time-to-execution statistics. Similarly, if some shares of a covered order execute more quickly than others due to the availability of liquidity, the share-weighted time-to-execution statistics will take into account the time to execution for each subset of shares. Other available information will allow users of Rule 605 reports to control for these types of factors and facilitate their ability to interpret time-to-execution statistics for marketable limit orders. In particular, Rule 605 statistics will be categorized by order type and size and this categorization will provide useful context to understand time-to-execution statistics. For example, larger-sized orders may be more likely to exceed the consolidated quote size and the time-to-execution statistics for covered orders that fall within different size ranges will appear in separate rows.

Individual investors and a national securities exchange supported the proposed addition of median and 99th percentile time-to-execution statistics for all order types. However, an industry group recommended an alternative to the reporting of the median and 99th percentile statistics because of its view that market participants and other firms analyzing Rule 605 data would not be able to aggregate these statistics across symbols and order types. The commenter stated that “it is important that users of the report have the ability to aggregate this data . . . across different sub-categories of orders.” Specifically, this commenter recommended that firms report share-weighted average time to execution without adjusting for outliers and separately report share-weighted average time to execution with an adjustment for outliers. In addition, an investor advocacy group suggested that the Commission modify the required time-to-execution buckets for all order types to time buckets that can be adjusted over time rather than requiring average time-to-execution statistics.

The Commission agrees with the commenter that it would not be possible to aggregate median or 99th percentile time-to-execution statistics across symbols or order types. Although median or 99th percentile time-to-execution statistics may have provided useful information in each individual row ( i.e., representing a particular symbol, order type, and order size), users of the reports would have been unable to aggregate these statistics across multiple rows without the full underlying dataset because the median and 99th percentile values cannot be aggregated across different stocks or order types. The inability to aggregate these statistics would have made them less useful because the final rule amendments will result in more rows of information, and the median and 99th percentile time-to-execution statistics would only have provided information to compare more discrete subsets of Rule 605 data. Therefore, the Commission is not adopting its proposal to require the reporting of median and 99th percentile time-to-execution statistics for all order types.

The Commission is not adopting the commenter's suggestion that, instead of requiring median and 99th percentile time-to-execution statistics, the Commission should require the separate reporting of average time to execution with outliers and without outliers. The Commission does not agree that these alternative metrics would solve the identified problem because the method of identifying outliers, such as the longest 1% of orders, would also prevent aggregation across multiple rows. As is the case with median and 99th percentile statistics, any cut-off selected as the means to identify outliers would not be constant across different stocks or order types and thus interfere with aggregation.

As another means of providing such distribution information, and consistent with the alternative that the Commission considered in the Proposing Release and a commenter's suggestion, the Commission is retaining the time-to-execution buckets in place prior to the amendments and modifying these buckets to incorporate additional granularity. The Commission continues to believe that information about the distribution of order execution speeds is useful because orders may execute near instantaneously or over the course of several minutes and thus average time-to-execution statistics in some instances could be skewed by outlier values. The amended time-to-execution buckets that the Commission is adopting will provide information about the distribution of execution times at a more granular level. This information will allow market participants and other users of the data to assess how quickly a market center or broker-dealer is able to execute incoming orders and better understand whether and to what extent the average time to execution within a particular category may be affected by outlier values.

The adopted time-to-execution buckets differ from the time-to-execution buckets that existed in Rule 605 prior to the amendments in two respects. First, the Commission is utilizing new time ranges for the time-to-execution buckets to make the buckets more granular in recognition of increased execution speeds and consistent with comment. As adopted, the time-to-execution bucket ranges are: (1) less than 100 microseconds; (2) 100 microseconds to less than 1 millisecond; (3) 1 millisecond to less than 10 milliseconds; (4) 10 milliseconds to less than 1 second; (5) 1 second to less than 10 seconds; (6) 10 seconds to less than 30 seconds; (7) 30 seconds to less than 5 minutes; and (8) 5 minutes or more. The Commission is selecting these amended time-to-execution bucket ranges based on its analysis of the distribution of shares across various time-to-execution buckets. The Commission's analysis demonstrates that most market and marketable limit orders have execution times clustered in the faster buckets and most at-the-quote NMLOs have execution times in the slower buckets. The time-to-execution buckets that the Commission is adopting are designed to best capture variations in execution times across different order types.

Specifically, the Commission is including a time-to-execution bucket of less than 100 microseconds in order to provide visibility into differences in execution times for IOCs. Most IOCs execute in less than 100 microseconds and the distribution of some IOCs across slower time-to-execution buckets will allow market participants to use Rule 605 reports to identify IOCs that are outliers with respect to execution time. The Commission is also adopting a time-to-execution bucket of 100 microseconds to less-than-one millisecond that will capture an additional set of sub-millisecond orders. The inclusion of sub-millisecond orders in distinct time-to-execution buckets is consistent with the commenter's suggestion to utilize more granular time buckets for orders executed in less than 500 microseconds and for orders executed in between 500 microseconds and 1 millisecond. The two adopted time-to-execution buckets for orders executed from 1 millisecond to less than 1 second are similar to the commenter's recommendation for sub-second time buckets, but utilize two time-to-execution buckets instead of the suggested three based on the Commission's analysis of order distribution. The time-to-execution buckets for orders executed from 1 second to less than 10 seconds and from 10 seconds to less than 30 seconds are comparable to the two shortest time-to-execution buckets in the preexisting rule. The longest time-to-execution buckets being adopted are comparable to the longest time-to-execution buckets in the preexisting rule, but combine the second- and third-longest buckets based on the Commission's analysis of order distribution.

Under the amended rule, the Commission is adopting time-to-execution buckets at the sub-millisecond level while also adopting a timestamp convention that will not require the use of reporting increments finer than a millisecond. These two aspects of Rule 605 are not inconsistent because the time-to-execution buckets will not require reporting entities to record time in microseconds. Instead, reporting entities that record time at the millisecond-level only generally should bucket orders based on the difference between the recorded time of order receipt (or executability in the case of NMLOs) and the recorded time of execution. Accordingly, a reporting entity that records time in milliseconds generally should report in milliseconds and will not be able to identify orders as being completed in less than 100 microseconds; therefore, this time-to-execution bucket will remain empty.

Second, when calculating where an NMLO falls within a time-to-execution bucket, time to execution will be calculated from the time the order becomes executable. Prior to the amendments, Rule 605 reporting requirements included only those NMLOs that fell within limited order type categories ( i.e., inside-the-quote limit orders, at-the-quote limit orders, and near-the-quote limit orders) and the preexisting time-to-execution buckets contemplated that, for all orders, the relevant time period to be measured was from the time of order receipt to the time of order execution. Calculating where NMLOs fall within the time-to-execution buckets utilizing the time the order becomes executable rather than the time of order receipt is consistent with how the Commission proposed, and is adopting, to measure other time-based execution quality statistics for NMLOs.

4. Execution Quality Statistics

Preexisting Rule 605(a)(1) required market centers to include in their monthly reports columns of detailed execution quality information. For all order types, the required statistics included information on the number of orders; cumulative number of shares; cumulative number of shares cancelled prior to execution; cumulative number of shares executed at the receiving market center and at any other venue; and average realized spread. In addition, for market orders and marketable limit orders, the required statistics included information on the average effective spread; cumulative number of shares executed with price improvement, at the quote, and outside the quote; for shares executed with price improvement, the share-weighted average amount per share that prices were improved; and for shares executed outside the quote, the share-weighted average amount per share that prices were outside the quote.

As described further herein, the Commission proposed to modify the execution quality statistics required for all order types and marketable order types, and to add execution quality statistics specific to non-marketable order types. As proposed, the required statistics for all order types would have included information on the number of orders; cumulative number of shares; cumulative number of shares cancelled prior to execution; cumulative number of shares executed at the receiving market center, broker, or dealer, and at any other venue; cumulative number of shares of the full displayed size of the protected bid or offer at the time of execution; average realized spread and average percentage realized spread at two time intervals; average effective spread; average percentage effective spread; and average effective over quoted spread. In addition, the required statistics for marketable order types and beyond-the-midpoint limit orders would have included the cumulative number of shares for shares executed with price improvement, at the quote, and outside the quote; share-weighted average amount per share that prices were improved; share-weighted average amount per share that prices were outside the quote; and price improvement statistics relative to the best available displayed price. Finally, for non-marketable order types the required statistics would have included the number of orders that received a complete or partial fill, and cumulative number of shares executed regular way at prices that could have filled the order while the order was in force.

Several individual investors generally supported the proposal to add new execution quality statistics. One of these individual investors stated that the proposed enhancements to the required statistical measures of execution quality will provide valuable insights for investors. Another individual investor stated that the proposed modification to reporting requirements for NMLOs would capture more relevant execution quality information for these orders. However, an individual investor that expressed concerns about the proposal stated that the proposed amendments to execution quality statistics “do not address the fundamental of market fragmentation, where orders are routed to different venues depending on their likelihood of being executed quickly and cheaply.”

An industry group stated that the Commission does not appear to have considered the impact of variable tick sizes for securities, as contemplated by the proposed harmonization of quoting and trading increments discussed in the Minimum Price Increments Proposing Release, on market participants' ability to compare execution quality over several months. This commenter suggested that there should be some mechanism by which investors are informed of how to interpret Rule 605 reports in situations where the tick size is recalibrated and it impacts reported execution quality.

A group of academics stated that although some of the new disclosure requirements may be helpful for a subset of trades, they suggest limiting changes to the Rule 605 statistics to the new order size categories, including new categories for fractional shares and odd-lots, and E/Q statistics. These commenters stated that these adjustments would reduce implementation costs and speed up adoption. However, although limiting the changes to order size categories and E/Q statistics could potentially reduce costs and speed implementation, the other adopted modifications to the execution quality statistics described herein are designed to enhance the disclosures required by prior Rule 605. Even if the Commission were to limit the amendments to order sizes and E/Q statistics, preexisting market centers would still need to adjust their systems and processes to capture new information and new reporting entities would need to develop their systems and processes to capture the required execution quality statistics.

The Commission received many comments concerning specific execution quality statistics and discusses these comments below. Further, with respect to the proposed execution quality statistics in general, an academic suggested adding median data in addition to average data because, according to this commenter, “fat tails” can make average numbers “highly misleading.” This commenter also generally suggested that percentages should be included along with dollar amounts.

The Commission is adopting the proposed detailed execution quality statistics with several adjustments. In the subsections below, the Commission discusses the comments received and the execution quality statistics being adopted as they pertain to: (1) realized spread, (2) average effective spread, (3) percentage-based effective and realized spread, (4) effective over quoted spread, (5) size improvement, (6) riskless principal, (7) price improvement, and (8) relative fill rate. In response to the commenter's suggestion to add median data and percentages, as described herein, the Commission is adopting additional statistics that will provide modified time-to-execution buckets, percentage-based statistics that will complement certain dollar-based statistics, and an average midpoint statistic that will make it possible to calculate percentages relevant to other statistics.

(a) Realized Spread

(1) Proposed Approach

Prior to these amendments, Rule 605 required calculation of average realized spread for executions of all covered orders and this metric was calculated by comparing the execution price of an order and the midpoint of the NBBO as it stands 5 minutes after the time of order execution. The Commission proposed to shorten this time horizon and require that average realized spread be calculated 15 seconds and 1 minute after the time of execution in recognition of the increased speed of the contemporary market environment. The Commission proposed to require realized spreads to be calculated at both intervals in order to provide relevant information for symbols with different liquidity characteristics.

(2) Final Rule and Discussion

The Commission is adopting the proposed realized spread time horizons of 15 seconds and 1 minute for the realized spread statistics required for all order types. After considering comments received, the Commission is also adding shorter time horizons of 50 milliseconds and 1 second, and additionally retaining preexisting Rule 605's requirement to calculate realized spread 5 minutes after the time of order execution. In total, there will be five realized spread time horizons: 50 milliseconds, 1 second, 15 seconds, 1 minute, and 5 minutes.

A national securities exchange, an investor advocacy group, and an individual investor supported the proposed changes to realized spread. However, an industry group and two broker-dealers opposed the continued inclusion of realized spread statistics and recommended that the Commission remove these statistics from Rule 605's reporting requirements. The industry group stated that it was concerned that this data element is being misused as a proxy for certain firm profits. One of the broker-dealers stated that “the Commission's assertion that realized spread can serve as a proxy for liquidity provider profitability has been thoroughly discredited, including by academic research.” The other broker-dealer stated that realized spread statistics are not a measure of profitability because they ignore inputs that impact profitability, including inventory holding costs, fixed costs, and transaction rebates and fees. This commenter further stated that “there is a risk that such measurements are improperly used . . . as a proxy for liquidity providers' profitability.”

The Commission observes that commenters to the original Rule 11Ac1-5 proposal also questioned the usefulness of a realized spread statistic and recommended that it be eliminated. When adopting Rule 11Ac1-5, the Commission stated that average realized spread is an essential measure for evaluating a market center's order execution practices. Average realized spread remains an essential measure for evaluating execution quality because it measures the portion of the spread that liquidity providers earn in excess of adverse selection. Liquidity providers' adverse selection risk represents the risk that market prices will move against them before they can unwind their accumulated positions. A lower average realized spread can indicate that prices have moved in a direction more adverse to the liquidity provider after the order was executed. Thus, a low average realized spread can indicate that a liquidity provider was providing liquidity at a time when prices were moving against it. In addition, average realized spread can provide useful information about the type of order flow a larger broker-dealer receives because smaller (or even negative) realized spreads reflect that liquidity providers are earning less of the spread from their liquidity provisions, which is usually a reflection of order flow with greater adverse selection risk. Therefore, the Commission is retaining the metric, and is adopting the 15 second and 1 minute time horizons as proposed along with additional time horizons as discussed below, to make the metric more useful in relation to current market speeds.

The Commission stated in the Proposing Release that to the extent realized spreads capture adverse selection costs faced by liquidity providers, they provide a measure of the potential profitability of trading for liquidity providers. The Commission does not maintain that realized spread is a measure of a firm's overall profitability. Instead, realized spread statistics allow market participants to identify those market centers willing to supply liquidity during stressed markets or when prices are moving quickly, and to evaluate larger broker-dealers' order execution or routing practices, as well as to understand the type of order flow a particular broker-dealer may be handling. One commenter, in the context of summary reports, stated that realized spread can be used to calculate price impact (when combined with effective spread statistics), which “would provide better transparency regarding the distinct characteristics of order flow among brokers.” For both market centers and larger broker-dealers, realized spread can allow market participants to control for the extent to which orders submitted by persons with better information than is generally available in the market are routed to different market centers or received by different broker-dealers, as compared to orders submitted by persons without an information advantage. Orders submitted by persons with such an information advantage represent a substantial risk to liquidity providers that take the other side of the position.

Several commenters discussed the proposed time horizons for measuring realized spread. An investor advocacy group stated the 15 second and 1 minute time horizons “better capture the reality of today's fast-paced market transactions and align well with the available academic literature.” An industry group stated that the Commission has not provided a rational basis for its method of calibrating the realized spread timeframes and, in particular, has not appropriately analyzed inventory turnover, thereby making the proposed 15 second and 1 minute timeframes arbitrary with respect to inventory turnover. A broker-dealer stated that “[r]ealized spread assumes that liquidity providers exit each position in a costless manner at the end of a fixed period and is highly dependent on the time horizon used to make the calculation” and questioned the Commission's choice of 15 seconds and 1 minute. This commenter stated that “[w]hile mark-out metrics like realized spread might have limited use in comparing samples of otherwise substantially similar order flow, these metrics become largely useless when attempting to compare different types of order flow or market centers.” Another broker-dealer stated that it is unclear what the Commission's basis is for “bluntly” measuring realized spreads at 15 seconds and 1 minute. Another investor advocacy group recommended that to best identify adverse selection, realized spread should be calculated on even shorter time horizons, including 50 milliseconds and 100 milliseconds.

As discussed in the Proposing Release, requiring realized spread information at different time horizons will provide investors with relevant information for more liquid stocks and more thinly traded stocks. The Commission selected the 15 second and 1 minute time horizons for calculating realized spread based on its own analysis, which was supported by several commenters and aligned with existing academic literature. However, several commenters questioned the Commission's basis for measuring realized spreads at 15 seconds and 1 minute. In the Proposing Release, the Commission acknowledged that both shorter (50 millisecond, 100 millisecond) and longer (3 minute, 5 minute) time horizons would provide useful information for certain groups of stocks, but stated that each additional time horizon adds computational burden and increases the size and complexity of reports. Further, in the Proposing Release, the Commission analyzed the decline in realized spreads of increasing time horizons in order to determine when a significant percentage of the decline in realized spread had been captured.

The Commission replicated its realized spread analysis from the Proposing Release, using data from Q1 2023, and in both analyses the cumulative decline in realized spread captured at different time horizons varies by market capitalization. These results indicate that, consistent with the Commission's statement in the Proposing Release, both shorter and longer time horizons than those proposed will provide useful information for certain subsets of stocks.

After consideration of the comments and the Commission's original and updated analysis, the Commission is adopting two shorter time horizons (50 milliseconds and 1 second) and one longer time horizon (5 minutes, consistent with prior Rule 605) in addition to the two time horizons that were proposed (15 seconds and 1 minute). The time horizons of 50 milliseconds and 1 second are in line with the commenter's suggestion that the Commission include shorter time horizons to better capture adverse selection. Further, as discussed below, the 50 millisecond time horizon is appropriate for large capitalization stocks. The 1 second time horizon offers another point of comparison along the range of time horizons and aligns with a realized spread measure that industry analysts often use. The Commission is also adopting the requirements to calculate realized spread at 15 seconds and 1 minute, which were the time horizons proposed. Finally, the Commission is retaining the requirement in place prior to the amendments to calculate realized spread at 5 minutes. The results of the Commission's replicated realized spread analysis continue to show that a 5 minute time horizon is informative for illiquid stocks. Thus, requiring realized spread at five time horizons will better capture variation among different capitalization stocks with different liquidity profiles than the two proposed thresholds alone.

In response to commenters critical of the Commission's basis for its selection of realized spread time horizons, the Commission performed additional empirical analyses of optimal realized spread time horizons for robustness. The Commission examined the amount of noise in price impact measures to analyze the time horizon that incorporates the lowest amount of noise into measurements of price impact. For the largest stocks, the signal-to-noise ratio begins to decline immediately, even at very fast time horizons. This latter result supports including a very fast time horizon, such as 50 milliseconds, consistent with a comment received. However, the ratio starts to flatten out after the 1 minute horizon for smaller stocks and for medium to large stocks after 15 seconds. Further, for the two smaller stock groups, the results show a small but steady increase in the signal-to-noise ratio as the time horizon increases, implying that realized spread measures are becoming more informative as the noise in the price impact component decreases. This result supports including a longer time horizon, i.e. , 5 minutes, which maximizes the signal-to-noise ratio for these stocks. These additional empirical analyses also support a range of realized spread time horizons, consistent with the amended time horizons.

(b) Average Effective Spread

(1) Proposed Approach

Prior to these amendments, Rule 605 required firms to calculate average effective spread for market and marketable limit order types only. Preexisting Rule 600(b)(8) defined “average effective spread” as the share-weighted average of effective spreads for order executions calculated, for buy orders, as double the amount of difference between the execution price and the midpoint of the national best bid and national best offer at the time of order receipt and, for sell orders, as double the amount of difference between the midpoint of the national best bid and national best offer at the time of order receipt and the execution price.

The Commission proposed to expand effective spread reporting requirements to require that firms report average effective spread statistics for all covered orders, and to modify the methodology for calculating this metric for executable NMLOs, beyond-the-midpoint limit orders, and executable stop orders. Specifically, the Commission proposed to revise the definition of “average effective spread” to provide that, for order executions of NMLOs and orders submitted with stop prices, average effective spread be calculated from the time the order becomes executable.

(2) Final Rule and Discussion

The Commission is adopting a requirement to report effective spread statistics for marketable order types ( i.e., market orders, marketable limit orders, and marketable IOCs), marketable stop order types, and midpoint-or-better order types, but is not adopting the proposal to expand the effective spread reporting requirement to other non-marketable order types. For marketable stop order types and midpoint-or-better order types, average effective spread will be measured from the time that the order becomes executable.

One broker-dealer suggested that the Commission should reconsider whether to require firms to report effective spread statistics for NMLOs because “effective spread is not widely accepted as a meaningful measure of execution quality for NMLOs.” This commenter stated that the proposed effective spread metric for NMLOs does not measure a dimension of execution quality that is likely to differ across market centers or be affected much by where an order is routed. This commenter further stated that “[f]or orders submitted outside the NBBO, [effective spread] essentially amounts to negative one times the quoted spread at the moment the order becomes executable” and “shows better execution when the quoted spread is wider.”

After consideration of the comments, the Commission is adopting a modified version of the proposed amendments. The Commission is adopting amendments that will expand effective spread reporting requirements to include marketable stop order types and midpoint-or-better order types, in addition to market and marketable limit order types as required by the preexisting rule. However, the Commission is not adopting the proposed requirement to require average effective spread statistics for all covered orders, and thus is not requiring reporting for other non-marketable order types. The Commission is also revising the proposed definition of “average effective spread” to specify that, for order executions of marketable stop order and midpoint-or-better limit orders, average effective spread is calculated from the time the order becomes executable. In effect, the adopted amendments require average effective spread for all marketable order types ( i.e., market orders, marketable limit orders, and marketable IOCs), marketable stop orders, and midpoint-or-better order types.

The Commission acknowledged in the Proposing Release that average effective spread for NMLOs and orders submitted with stop prices would measure something different than the average effective spread for marketable order types. Generally, because these orders are less aggressively priced, average effective spread would not measure the price paid for immediacy of execution as it would for marketable order types. Instead it would provide a measure of the amount a liquidity provider could expect to earn for providing liquidity. As the commenter states, this amount would generally vary based on the width of spread, which is outside the control of the reporting entities that are receiving orders for execution. Therefore, average effective spread for NMLOs and stop NMLO orders may not provide a useful measure to distinguish between market centers or larger broker-dealers and thus the Commission has determined not to adopt this proposed metric. The exception is with respect to midpoint-or-better limit orders, which in some cases behave more like marketable orders. Similar to market and marketable limit orders, some inside-the-quote limit orders are submitted by traders with the intention of executing immediately, in this case against hidden or odd-lot inside-the-quote liquidity. Because midpoint-or-better order types are more aggressively priced, the average effective spread metric will also measure the price these orders could expect to pay for immediacy. Further, requiring average effective spread for midpoint-or-better order types is consistent with requiring the same statistics for this order type as are required for marketable order types (for example, price improvement statistics).

Finally, because marketable stop orders will be either market orders or marketable limit orders at the time they are triggered ( i.e., at the time they are executable), measuring effective spread from the point of executability will also measure the price these orders pay for immediacy once triggered. Therefore, as described in section III.A.2.b) above, the Commission is requiring the same statistics for marketable stop orders as for other marketable order types, including average effective spread.

(c) Percentage Spreads (Effective and Realized)

(1) Proposed Approach

Prior to these amendments, Rule 605 statistics included the average realized spread and average effective spread for executions of covered orders, and these statistics provide dollar-based spread data. The Commission proposed to add a requirement that effective spread and realized spread also be reported as percentages. The proposed definitions for “average percentage effective spread” and “average percentage realized spread” would have: (1) utilized the dollar-based effective and realized spread statistics for the numerator; (2) utilized the midpoint of the NBBO at either the time of order receipt (for marketable order types) or the time an order first becomes executable (for non-marketable order types) as the denominator; and (3) then the result would be averaged on a share-weighted basis for the month.

(2) Final Rule and Discussion

The Commission is adopting the proposed requirement to disclose percentage-based spread statistics for average realized spread and average effective spread. However, the Commission is modifying the proposed definitions of “average percentage effective spread” and “average percentage realized spread” to use a new defined term (“average midpoint”) in the denominator. Doing so will eliminate any ambiguity about how to calculate these statistics, as described in more detail below. In addition, the Commission is making the percentage effective spread statistic applicable to marketable order types, marketable stop order types, and midpoint-or-better limit order types only, rather than all order types as proposed. Further, the Commission is adding a requirement to include an average midpoint statistic, which serves as the denominator of percentage-based spread statistics, in the detailed reports required pursuant to Rule 605(a)(1).

An investor advocacy group stated that a percentage-based spread measure would provide additional information where there is a significant price change in a security during the month. In addition, an industry group stated its agreement with the approach proposed by the Commission for calculating average percentage effective spread. Specifically, this commenter described share-weighted average percentage spread as the sum of effective spread per share times shares executed divided by the sum of the midpoint times shares executed.

The Commission continues to believe including percentage-based statistics for effective spread and realized spread, in addition to the dollar-based statistics in the existing report, will account for differing underlying stock prices and better facilitate comparisons of spread statistics across different time periods and securities. In order to simplify the definitions and eliminate ambiguity about how to calculate percentage-based spread statistics, and because the Commission is requiring the separate disclosure of an average midpoint statistic as described below, the Commission is modifying the adopted definitions of “average percentage effective spread” and “average percentage realized spread” to use defined terms. As proposed, both percentage-based spread statistics would have been share-weighted and used as their denominator the midpoint of the national best bid and national best offer at the time of order receipt or, for non-marketable limit orders, beyond-the-midpoint limit orders, and orders submitted with stop prices, at the time such orders first become executable.

A commenter stated it interpreted the definition of share-weighted average percentage spread as the ratio of share-weighted effective spread divided by share-weighted midpoint. However, based on the commenter's interpretation, the Commission acknowledges that it is ambiguous whether the modifier “share-weighted” in the proposed amendment applied to: (1) the percentage calculation ( i.e. , calculating the percentage effective spread or percentage realized spread for each transaction and then share-weighting such percentage); or (2) each of the denominator and the numerator ( i.e., calculating the share-weighted average effective or realized spread and dividing that by the share-weighted midpoint). Therefore, in order to simplify these definitions and eliminate ambiguity as to how percentage-based spread statistics will be required to be calculated, and consistent with the commenter's interpretation of how to calculate this statistic, the Commission is modifying the definitions of “average percentage effective spread” and “average percentage realized spread” from the definitions proposed.

Specifically, “average percentage effective spread” will be defined as the average effective spread for order executions divided by the average midpoint for order executions. “Average percentage realized spread” will be defined as the average realized spread for order executions divided by the average midpoint for order executions. As proposed, the definitions of “average percentage effective spread” and “average percentage realized spread” used as their numerators the share-weighted effective spread and the share-weighted realized spread, respectively. However, because “average effective spread” and “average realized spread” are defined as share-weighted averages, the Commission is instead using the defined terms “average effective spread” and “average realized spread” as the numerator in order to simplify the adopted definitions of “average percentage effective spread” and “average percentage realized spread.” Instead of repeating the same definition of average midpoint in each of the percentage-based spread definitions as proposed, the Commission is adopting the defined term “average midpoint” and will use this term in the denominator ( i.e. , average midpoint for order executions). “Average midpoint” will be defined as the share-weighted average of the midpoint of the national best bid and national best offer at either the time of order receipt or, for non-marketable limit orders, midpoint-or-better limit orders, and orders submitted with stop prices, at the time such orders first become executable. The term “average midpoint” as applied to order executions will be substantively the same as the proposed denominator for the percentage-based spread statistics. Further, the Commission is adding an average midpoint statistic to the detailed report required by Rule 605(a)(1) so that certain statistics in the summary report—namely, average midpoint and the percentage-based statistics—will be derivable from the detailed report, as suggested by commenters. With the detailed report containing the information necessary to calculate the statistics in the summary report, market participants and other users of the reports will be able to recalculate the statistics in the summary report with different subsets of data.

Finally, the Commission is requiring average percentage effective spread only for marketable order types, marketable stop order types, and midpoint-or-better order types for the same reasons that the Commission is requiring average effective spread only for these order types.

(d) Effective over Quoted Spread (E/Q)

(1) Proposed Approach

Effective over quoted spread (“E/Q”) can be derived from Rule 605 reports required prior to these amendments, but the prior Rule did not require the reporting of E/Q or quoted spread. The Commission proposed to require, for executions of all covered orders, that reporting entities report the average E/Q, expressed as a percentage, for all marketable and non-marketable order types. The proposed definition “average effective over quoted spread” would have required the computation of a share-weighted average E/Q by dividing effective spread by quoted spread for each transaction and then averaging that over the month (weighted by number of shares). The quoted spread would have been the difference between the national best bid and the national best offer at either the time of order receipt (for marketable order types) or the time an order first becomes executable (for non-marketable order types).

(2) Final Rule and Discussion

The Commission is adopting a statistic for average E/Q, expressed as a percentage, but with a modified weighting methodology to utilize spread-based weighting rather than the proposed weighting methodology of share-weighting the E/Q for each transaction. In addition, the Commission is making the average E/Q statistic applicable to marketable order types, marketable stop order types, and midpoint-or-limit order types only, instead of all order types. Further, the Commission is adding a requirement to include average quoted spread, which is the denominator of average E/Q, in the detailed reports required pursuant to Rule 605(a)(1).

A financial services firm stated that E/Q is a “very common metric used within the industry to judge execution quality” and that it “does a good job of providing a normalized comparison of price improvement relative to the price improvement opportunity.” Another financial services firm stated that “E/Q directly quantifies how much of the spread the broker secures for its investor-client” and “[i]ncluding E/Q on Rule 605 reports will enable investors to make ‘apples to apples’ comparisons of execution quality.” In addition, an investor advocacy group stated that requiring a separate field in Rule 605 reports for E/Q allows market participants to compare price improvement statistics across securities and across market centers and broker-dealers.

However, several commenters recommended that the Commission require spread-based weighting, rather than share-based weighting, for the calculation of average E/Q and indicated that the industry uses spread-based weighting when calculating E/Q. One industry group stated that spread-based weighting “results in the same amount of E/Q being reported for the same aggregate dollar amount of E/Q being provided.” This commenter further stated that the method of weighting can influence the reported E/Q metrics and, using share-based or notional-based weighting, a firm that provides a lower aggregate dollar amount of price improvement relative to a second firm could result in the first firm reporting a lower E/Q than the second firm, even though this lower E/Q would not reflect that customers received better executions. Another industry group stated that a share-weighting formula would tend to weigh sub-dollar stocks more heavily and could allow a firm to manipulate its average E/Q by adjusting the type of stocks for which it provides better price improvement. This commenter also stated that using a spread-weighting formula would preserve the relationship between price improvement in dollars and E/Q and therefore the firm's E/Q would remain the same regardless of how the firm distributes its price improvement among different stocks.

Similarly, a financial services firm stated share-weighting detaches E/Q from the ability to understand it in the context of the opportunity for price improvement and this “opens the door for possible manipulation of results.” This commenter also stated that wholesalers' discretionary price improvement dollars are fungible and that share-weighting of E/Q would result in an incentive to provide more price improvement on narrow spread securities and less price improvement on wide spread securities. A broker-dealer stated that a share-weighted methodology may incentivize market participants to allocate price improvement to lower priced securities with narrower quote spreads. This commenter recommended the use of a spread-weighted average because a spread-weighted average would be tied to the total price improvement delivered in dollars and unaffected by how that price improvement is allocated among different symbols.

An industry group and a financial services firm suggested that Rule 605 reports not include E/Q and leave it to users of the report to calculate E/Q from other statistics that are currently included in the reports. The industry group further stated that the Commission was inconsistent when it proposed requiring the reporting of E/Q for non-marketable order types but not requiring the reporting of price improvement statistics for such order types. This commenter provided four alternative approaches to address this perceived inconsistency, but did not recommend two of the alternatives because they required the reporting of E/Q and did not recommend a third alternative because, according to the commenter, price improvement is only a relevant statistic for marketable orders.

After review of the comments, as stated above, the Commission is adopting a requirement that Rule 605 reports include a statistic for average E/Q, expressed as a percentage, but is adjusting the weighting methodology from the proposal. The Commission is adopting a spread-weighted average E/Q statistic, consistent with commenters' suggestions. In addition, the Commission is requiring average E/Q only for marketable order types, marketable stop order types, and midpoint-or-better order types, rather than all order types as proposed. Because spread-weighted average E/Q is the same as average effective spread divided by average quoted spread, in lieu of creating a separate definition for “average effective over quoted spread” as proposed, Rule 605 as adopted specifies that the required statistics for marketable order types, marketable stop order types, and midpoint-or-better order types include, for executions of covered orders, the average effective spread divided by the average quoted spread, expressed as a percentage. The Commission is also requiring that Rule 605 reports include a reported statistic for average quoted spread and is defining “average quoted spread” as the share-weighted average of the difference between the national best offer and the national best bid at the time of order receipt or, for order executions of non-marketable limit orders, the difference between the national best offer and the national best bid at the time such orders first become executable. Thus, Rule 605 as adopted also will specify that the required statistics for marketable order types, marketable stop order types, and midpoint-or-better order types include, for executions of covered orders, average quoted spread.

The Commission agrees with commenters that the use of a spread-weighting methodology will provide a consistent measure of E/Q that will not vary based on the specific symbols to which price improvement is allocated. The adopted methodology will avoid a potential incentive to allocate price improvement in a manner that would maximize the reported E/Q statistic without changing the total dollar value of the price improvement provided. Thus, the use of a spread-weighted average E/Q is consistent with the Commission's stated goal of facilitating the comparability price improvement statistics across symbols. In addition, the Commission acknowledges that the industry generally uses spread-weighting when calculating E/Q and thus, as stated by a commenter, will provide a “normalized comparison of price improvement relative to the price improvement opportunity” that is consistent with existing industry practice.

The adopted definition of “average quoted spread” is the same as the description of “total quoted spread” that was embedded in the proposed definition of “average effective over quoted spread,” with two modifications from the embedded definition as proposed. First, the Commission is specifying that average quoted spread is a share-weighted average. Second, the Commission is limiting the list of order types for which the average quoted spread will be required to be measured at the time the order first becomes executable to conform to the order types being adopted herein. The inclusion of an average quoted spread statistic in Rule 605 reports will provide an additional piece of information that market participants and other users of the reports can use to evaluate execution quality. Moreover, in response to the commenters who stated that E/Q could be calculated using the effective spread and quoted spread statistics and that the Commission should allow users to derive E/Q, as stated in the Proposing Release, E/Q is a relatively simple metric to capture contemporaneously with execution and requiring a separate field for E/Q will increase the ability of market participants to access and utilize E/Q to compare price improvement statistics across securities, and across market centers and broker-dealers.

In addition, because effective spread is a necessary input into E/Q, the Commission is not adopting the application of E/Q to non-marketable order types other than midpoint-or-better order types (and marketable stop order types, which are generally non-marketable orders upon receipt). Accordingly, the Commission will include E/Q within the statistics required for marketable order types, marketable stop order types, and midpoint-or-better order types only.

(e) Size Improvement

(1) Proposed Approach

Prior to the amendments, Rule 605 reports included price improvement metrics but did not include any statistics that directly measured whether orders received an execution of more than the displayed size at the quote. The Commission proposed adding a benchmark metric that would, in combination with information about shares executed, indicate the level of “size improvement,” i.e., the extent to which orders received an execution at prices at or better than the quote for share quantities greater than the displayed size at the quote. Specifically, the Commission proposed requiring the reporting of the cumulative number of shares of the full displayed size of the protected bid at the time of execution, in the case of a market or limit order to sell; and of the full displayed size of the protected offer at the time of execution, in the case of a market or limit order to buy. As proposed, for each order, the share count would have been capped at the order size if the full displayed size of the national best bid or national best offer is larger than the order. The Commission explained that the proposed size improvement benchmark metric could be combined with information about the number of shares executed at or above the quote to measure a market center or broker-dealer's ability to offer customers execution at the quote (or better), even when there is no depth available at that price.

(2) Final Rule and Discussion

The Commission is adopting a modified version of the proposed size improvement benchmark metric that measures the displayed size at the time of order receipt (or the time the order becomes executable for midpoint-or-better order types) instead of measuring the displayed size at the time of order execution as proposed. The Commission is also modifying the proposed size improvement benchmark metric by having it apply only to marketable order types, marketable stop order types, and midpoint-or-better order types rather than all order types, as proposed. Finally, based on comments received, the Commission is adopting an additional size improvement metric (as discussed below, “size improved outsized shares”) that was not part of the proposal and indicates the amount of size improvement in those instances in which an order could have received size improvement.

Several commenters supported adding a requirement that Rule 605 reports include the proposed size improvement benchmark metric. A broker-dealer stated that the proposed size improvement metric would provide market participants with important information about an additional dimension of execution quality that is not captured by current Rule 605 statistics. According to this commenter, this metric will be particularly beneficial for retail investors seeking to accurately assess execution quality delivered by wholesale broker-dealers. Another broker-dealer stated that size improvement is a “substantial benefit” offered by broker-dealers and market makers to retail orders and “its absence in Current Rule 605 reports means that execution quality is significantly undercounted.” This commenter requested an explanation of how fractional share orders should be addressed in certain statistics, for example size improvement statistics. Another commenter stated that it supported the addition of a size improvement metric because of its significant impact on transaction costs for retail investors.

An industry group stated that it agreed with the Commission on the value of including size improvement statistics, but opposed measuring size improvement based on the number of shares available at the time of execution. Instead, this commenter recommended measuring size improvement against the full displayed size at the opposite side of the NBBO as of the time of order receipt (for marketable group orders) or as of the time an order becomes executable (for non-marketable group orders). This commenter presented three scenarios to illustrate why it supports measuring size improvement against the full displayed size at the time of order receipt rather than at the time of execution. This commenter also stated that it assumes that where an order has multiple executions, the Commission would require adding the displayed size to the benchmark metric at the time of each execution, rather than counting the displayed size for only one execution.

Further, this commenter stated that a market could have protected bids and offers that are not represented in the NBBO but are at the same price as the NBBO, and these bids and offers are included in Level 1 market data. This commenter also stated that it understands that when the Commission refers to the cumulative number of shares of the full displayed size of the protected bid or offer, the Commission is including in this number shares of protected bids and offers that are not represented in the NBBO but are at the same price as the NBBO.

A broker-dealer stated that the proposal “falls well short of including the necessary statistics to reflect the benefits of size improvement.” This commenter stated that the proposed size improvement metric would be inadequate because it would include all orders in the calculation, even when there is no opportunity to provide size improvement, and thereby would dilute the amount and obfuscate the value of size improvement provided when the need for size improvement actually exists. This commenter suggested the following alternative metrics that, in its view, would more accurately reflect size improvement benefits obtained by each broker for its retail investor customers: (1) the number of orders for which the order size exceeded the available shares displayed on the relevant side of the NBBO (“outsized orders”); (2) the total number of shares executed as part of these outsized orders; and (3) the number (or percentage) of shares within the outsized orders that received size improvement ( i.e., were executed at or better than the NBBO price, in excess of the amount of aggregate displayed liquidity at the NBBO).

As discussed in the Proposing Release, this commenter also suggested in a petition for rulemaking to the Commission that Rule 605 should include an alternative metric, referred to as “real price improvement” (“RPI”), that combines price improvement with size improvement by using as its benchmark a price that reflects the equivalent size of shares-including depth of book quotes and odd-lot quotes. When the Commission described why it was not proposing to include an RPI benchmark or metric in the proposed rule, the Commission stated that although RPI may be a more informative measure of size improvement than a measure that can be calculated using the proposed size improvement benchmark metric, the RPI would require market centers and reporting broker-dealers to subscribe to all exchanges' proprietary depth-of-book data feeds and would entail a “significant cost” to reporting entities that did not already subscribe to these feeds. Therefore, the Commission preliminarily believed that the benefits to market participants of having an RPI metric were not justified by the potentially significant additional costs to reporting entities.

In commenting on this rulemaking, this commenter again suggested that the Commission add an RPI benchmark or metric to Rule 605 and responded to the Commission's statement that such measure could be too costly for market participants who would need to subscribe to exchanges' depth-of-book data feeds. According to this commenter, many brokers utilize vendors to produce Rule 605 reports and these vendors are capable of handling depth-of-book data. This commenter also stated that “if the Commission's proposed tick size reductions are adopted, there would be less liquidity at the NBBO, and investors who currently use SIP data would have less visibility into market liquidity and would need to access the exchanges' depth-of-book data feeds anyway.” Another commenter suggested that the Commission undertake a more detailed analysis of the costs and benefits of requiring RPI statistics in Rule 605 reports and that the Commission should require the reporting of RPI information if this analysis “indicates that the benefits . . . outweigh the costs.” According to this commenter, the Commission did not quantify either the costs of requiring reporting entities to have access to a full set of consolidated depth information or the benefits of providing this additional information about size improvement to market participants. Finally, one commenter stated that “[p]rice improvement should be measured relative to the displayed book, not the NBBO. Odd lots are ignored in the calculation of the NBBO.”

An investor advocacy group recommended eliminating the proposed size improvement metric until such a time when the public data feed contains more information regarding the depth of quotations. According to this commenter, accurately identifying size improvement would require proprietary depth of book feeds, and if the size improvement statistic relied solely on the SIP it would be misleading because it would not reflect the top of book across public quotes or hidden or mid-point priced orders. A group of academics stated that some of the proposed disclosure requirements, such as size improvement, may be helpful for a subset of trades, but recommended limiting changes to Rule 605 to a more limited set of statistics to reduce implementation costs and speed up adoption.

The Commission considered the comments and, in response to commenter feedback, is modifying the proposed size improvement benchmark metric and adding an additional size improvement metric. Further, the Commission is requiring the disclosure of both size improvement metrics only for marketable order types, marketable stop order types, and midpoint-or-better order types, rather than for all order types as proposed. To implement these changes, the Commission is adopting a defined term for the size improvement benchmark metric—the “order size benchmark.” As adopted, “order size benchmark” means the number of shares of the full displayed size of all protected bids at the same price as the national best bid at the time of order receipt, in the case of a market or limit order to sell, or the full displayed size of all protected offers at the same price as the national best offer at the time of order receipt, in the case of a market or limit order to buy. For marketable stop order types and midpoint-or-better order types, the full displayed size is measured at the time the order becomes executable rather than the time of order receipt. For each order, the share count is capped at the order size. The Commission is also modifying the proposed Rule 605(a)(1) metrics to require the reporting of, for executions of covered orders, the cumulative number of shares of the order size benchmark. The term “order size benchmark” is the same as the proposed size improvement benchmark metric, except in the following two respects.

First, in response to the commenter who recommended the size improvement benchmark be captured at the time of order receipt, the Commission is modifying the time at which the order size benchmark measures the available displayed size on the opposite side of the NBBO. Instead of measuring the displayed size at the time of execution as proposed, the order size benchmark in the final rule measures displayed size at the time of order receipt, for market and marketable limit orders, and at the time an order becomes executable, for marketable stop order types and midpoint-or-better order types. Capturing the displayed size of the opposite side quote at the time of order receipt (or the time of executability for marketable stop order types and midpoint-or-better order types) provides a view of the available size at the time an order could first reasonably be expected to execute and therefore provides users of the Rule 605 data information relating to which market centers and broker-dealers are more likely to be able to fill orders in a size larger than what may be readily available. Using the time of order receipt (or time the order becomes executable) as in the final rule will simplify calculation of the order size benchmark because there will be one relevant time for each order, even if that order results in multiple executions. In contrast, if the Commission required calculation of the order size benchmark at the time of execution as proposed, an order with multiple executions would have different times of execution for different portions of the order. The Commission also agrees with the commenter that measuring the displayed size at the time of execution could result in a less accurate picture of size improvement in some instances, particularly if some shares priced at the opposite side of the NBBO are displayed at the time of order receipt and then lifted before the time of execution.

Second, the Commission is adopting a modification to make clear that the order size benchmark measures the full displayed size of all shares at the same price as the protected bid or offer (as applicable). The Commission agrees with the commenter that the share count should be required to include not just those shares that are represented in the NBBO but also shares of protected bids and offers that are not represented in the NBBO but are at the same price as the NBBO. Reporting entities will be able to capture information about these shares without relying on proprietary depth-of-book feeds because the SIP includes all protected bids and offers.

The Commission considered commenter's suggestions for alternative size improvement metrics. In response to the commenter's recommendation to include the number of shares executed as part of outsized orders, the Commission observes that, using the Rule 605 statistics as adopted, it is possible to calculate the number of shares eligible for size improvement (“outsized share count”) for any row of Rule 605 data by taking the cumulative number of shares of covered orders received and subtracting the cumulative number of shares of the order size benchmark. Although the outsized share count that can be calculated using Rule 605 statistics as adopted differs slightly from the commenter's recommended metric, it similarly addresses commenter's criticism that the order size benchmark includes orders in which the reporting entity does not have the opportunity to provide size improvement because the order size is equal to or less than the available shares at the NBBO. The Commission is not adopting the commenter's suggestion to include the number of outsized orders in the Rule 605 statistics because the number of outsized orders alone is less meaningful when this information is aggregated across orders. Instead, the outsized share count, which will be derivable from the Rule 605 statistics as adopted, will provide a metric that is more useful for comparison purposes when aggregated.

The Commission agrees with the commenter that it would provide useful information to add a size improvement metric that will measure the level of size improvement in those instances in which the order presents an opportunity for size improvement. Therefore, the Commission is adopting an additional Rule 605 statistic that will require reporting of the sum of, for each execution of a covered order, the greater of: the total number of shares executed with price improvement plus the total number of shares executed at the quote minus the order size benchmark; or zero (the “size improved outsized shares”). For each execution of a covered order, the total number of shares executed with price improvement plus the total number of shares executed at the quote represents the number of shares executed at or better than the opposite side of the NBBO at the time of order receipt (or executability). Subtracting the order size benchmark from that sum represents the extent to which the reporting entity provided such executions at a size greater than the displayed size at the quote. The resulting number can be negative if a reporting entity does not provide an execution at or better than the NBBO for the full number of displayed shares at the opposite side of the NBBO ( i.e., there is “size dis-improvement”). However, the size improved outsized shares metric is designed to capture the extent to which the reporting entity achieves size improvement when an order presents an opportunity for size improvement and as such will never be negative. Instead, for each execution of a covered order, the size improved outsized shares metric will be the greater of the described calculation and zero. As an example, assume the protected NBBO for a security is $5.00-$5.05. If a market center receives a 400-share market order to sell and executes all 400 shares at $5.00, and there were 300 shares displayed at the national best bid at the time of order receipt, the order size benchmark will be 300 shares. To continue this example, the size improved outsized shares will be the greater of 100 shares ( i.e., 400 shares minus 300 shares) and zero shares, and thus the size improved outsized shares will be 100 shares. As a second example, assume the protected NBBO for a security is $10.00-$10.10. If a market center receives a 300-share market order to buy but only executes 100 shares at $10.10 and there were 200 shares displayed at the national best offer for $10.10 at the time of order receipt, the order size benchmark will be 200 shares. To continue this example, the size improved outsized shares will be the greater of −100 shares ( i.e., 100 shares minus 200 shares) and zero shares, and thus the size improved outsized shares will be zero shares.

Where the size improved outsized shares will differ from information derivable from other execution quality statistics in final Rule 605 is in cases where there is size dis-improvement, which may occur when some shares execute at prices worse than the quote or do not execute even though a sufficient number of shares are displayed at the quote. With respect to the information that can be derived from other Rule 605 statistics, as discussed in the Proposing Release, the order size benchmark can be compared to the number of shares executed at or better than the quote to calculate whether the reporting entity filled any portion of the customer order at the opposite side of the NBBO (or better), even when insufficient depth was available at that price (“net size improvement”). Unlike the size improved outsized shares, the net size improvement will take into account instances of size dis-improvement and, in such instances, will take into account negative values. To continue the second example above, where the market center is able to fill 100 shares at $10.10 but the depth available at the protected offer is 200 shares, the net size improvement will be −100 shares ( i.e., 100 shares minus 200 shares).

The ability to compare size improved outsized shares and net size improvement will contain useful information for market participants as well. For example, market participants will be able to use this variable to tell the difference between a market center that has a net size improvement value of zero because it does not offer size improvement, or because it offers a mix of size improvement and size dis-improvement. This will be informative for market participants that are concerned about the risk of receiving size dis-improvement. Market participants and other users of Rule 605 reports will be able to divide the size improved outsized shares by the net size improvement to obtain a ratio that informs about the extent to which a reporting entity is executing orders with size dis-improvement. The higher the ratio ( i.e., the higher it is above 1), the more size dis-improvement occurred. For example, assume a market participant compares two market centers for a particular order type, size, and security and calculates that Market Center 1 has net size improvement of 2,500 and size improved outsized shares of 4,000; and Market Center 2 has net size improvement of 5,000 and size improved outsized shares of 6,000. To continue this example, Market Center 1 would have a ratio of 8/5 ( i.e., 4,000/2,500) and Market Center 2 would have a ratio of 6/5 ( i.e., 6,000/5,000), indicating that orders received size dis-improvement more frequently on Market Center 1 than on Market Center 2. In addition, market participants can standardize the size improved outsized shares by dividing this metric by the outsized share count.

Finally, the Commission is limiting the application of the size improvement metrics to marketable order types, marketable stop order types, and midpoint-or-better order types, rather than to all order types as proposed. The order size benchmark is more useful in conjunction with information about the number of shares executed at, better than, or worse than the NBBO, and these statistics are available only for marketable order types, marketable stop order types, and midpoint-or-better order types in Rule 605 as amended. Further, the size improved outsized shares metric is more informative when it can be compared to net size improvement and providing information about size improved outsized shares without a view of net size improvement could be misleading. In addition, NMLOs generally do not have an expectation of execution at the price of the protected quote at the time of order receipt and therefore providing information about the size available at that price is less informative. Therefore, the Commission is not requiring the order size benchmark or the size improved outsized shares metric for non-marketable order types other than midpoint-or-better order types.

The Commission is not adopting a metric based on RPI. As the Commission stated in the Proposing Release, RPI would require market centers and reporting broker-dealers to subscribe to all exchanges' proprietary depth-of-book feeds and these subscriptions would entail a significant cost for those reporting entities that do not already subscribe to the feeds. Although a commenter states that many broker-dealers use vendors to prepare Rule 605 reports that can handle depth-of-book data, Rule 605 does not require use of a vendor and the Commission does not assume that all reporting entities will choose to use a vendor. Moreover, if vendors need to subscribe to all exchanges' proprietary depth-of-book feeds for purposes of preparing Rule 605 reports, these vendors may pass on these costs to the reporting entities.

In response to the commenter's suggestion that the Commission should not adopt Rule 605 metrics concerning size improvement, among others, because of concerns about implementation costs and adoption speed, reporting entities will have the underlying raw data necessary to calculate the order size benchmark and the new size improved outsized shares metric because they are already capturing this information for trade confirmations or internal purposes or will be easily able to obtain this information from publicly available data sources. Therefore, the inclusion of these metrics in Rule 605 reports will not make a significant difference in the costs or amount of time needed to implement the changes to Rule 605 being adopted.

(f) Riskless Principal

(1) Proposed Approach

In effecting riskless principal transactions, a market center or broker-dealer submits a principal order to an away market center in order to fulfill a customer order. Upon execution at the away market center, the market center or broker-dealer that initially received the customer order ( i.e., the receiving market center or broker-dealer) executes the customer transaction on the same terms as the principal execution. Prior to these amendments, a market center that executed the riskless principal leg of the trade ( i.e., the receiving market center's execution of the customer order on the same terms as the principal transaction) generally should have reported those orders in its Rule 605 statistics as part of the cumulative number of shares of covered orders that were executed at the receiving market center under Rule 605(a)(1)(i)(D), rather than as a part of the cumulative number of shares of covered orders executed at any other venue under Rule 605(a)(1)(i)(E). The Commission proposed to carve riskless principal orders out from Rule 605(a)(1)(i)(D) by providing that the number of shares of covered orders executed at the receiving market center, broker, or dealer excludes shares that the market center, broker, or dealer executes on a riskless principal basis. As a result, the market center that executes the riskless principal order would have included these shares as part of the cumulative number of shares executed away from that venue under Rule 605(a)(1)(i)(E), and only the market center that executes the corresponding principal order would have included those shares as part of the cumulative number of shares executed at the receiving market center under proposed Rule 605(a)(1)(i)(D).

(2) Final Rule and Discussion

The Commission is adopting the requirement that the calculation of the number of shares of covered orders executed at the receiving market center, broker, or dealer will exclude shares executed on a riskless principal basis as proposed, for the reasons described in the Proposing Release. Therefore, a receiving market center, broker, or dealer will reflect the execution of the principal order as executed at any other venue. For example, Market Center 1 receives a customer order for 100 shares that it executes on a riskless principal basis. Market Center 1 sends a corresponding principal order of 100 shares to Market Center 2, where it executes in full. Prior to these amendments, Market Center 1 generally would have counted 100 shares as executed at the market center (rather than away). Because Market Center 2 was the execution venue for the corresponding principal order, it also would have counted 100 shares executed at the market center ( i.e., at Market Center 2). Under the amendments, Market Center 1 will instead count 100 shares executed away and Market Center 2 will count 100 shares executed at the market center.

A broker-dealer requested clarification regarding the Commission's proposed changes to the treatment of riskless principal orders. This commenter stated that the “Proposal's suggestion” that the proposed change would make execution statistics more informative to market participants “is misleading.” According to this commenter, execution quality metrics reported under current Rule 605 “correctly take into account all orders routed to a wholesale broker-dealer (irrespective of where execution occurs) in order to provide a comprehensive view of the market center's overall execution quality” and “[t]his would not change under the Proposal.”

The Commission agrees with the commenter that the execution quality statistics for these shares are already reported as part of Rule 605 reports ( i.e., regardless of whether such shares are executed at a market center or away, market centers must include the statistics for such orders). However, modifying whether riskless principal orders are required to be classified as shares executed at a market center, broker, or dealer will make the Rule 605 statistics more informative. If both the market center that executes the riskless principal order and the away market center that executes the corresponding principal order count their legs of the transaction as part of their shares executed at the receiving market center, it could obscure information about how often a market center internalizes an order. As applied to wholesalers, it will be useful for investors to be able to observe what percentage of orders a wholesaler internalizes because internalized orders are not exposed to competition on an order-by-order basis, whereas the principal order associated with a riskless principal transaction may be exposed to trading interest from other market participants. In response to the commenter's request for clarification, the Commission observes that it was referring to only proposed Rule 605(a)(1)(i)(D) and (E) ( i.e., the statistics concerning the cumulative number of shares of covered orders executed at the receiving market center, broker, or dealer and executed at any other venue) when it stated in the Proposing Release that Rule 605's execution quality statistics would be more informative if riskless principal orders were reported as executed at another venue.

(g) Price Improvement

(1) Proposed Approach

Preexisting Rule 605 required the reporting, for marketable order types, of: (1) the cumulative number of shares of covered orders (a) executed with price improvement, (b) executed at the quote, and (c) executed outside the quote; (2) for shares executed with price improvement, the share-weighted average amount per share that prices were improved; and (3) for shares executed outside the quote, the share-weighted average amount per share that prices were outside the quote. Under these preexisting requirements, an order executed at a price better than the NBBO would have been an order executed with price improvement. The MDI Rules expanded the data that will be made available for dissemination within the national market system (“NMS data”) and included certain odd-lot information in NMS data. While this odd-lot information will include pricing information for odd-lots priced inside the NBBO, using the Rule 605's price improvement statistics prior to the amendments, there is no way for market participants to evaluate the performance of broker-dealers and market centers relative to such better-priced orders.

The Commission proposed to add a definition for “best available displayed price,” which would include the best priced odd-lot if that price is inside the NBBO and to provide additional price improvement statistics related to the best available displayed price. Specifically, the Commission proposed to define “best available displayed price” as, with respect to an order to buy, the lower of (i) the national best offer at the time of order receipt or (ii) the price of the best odd-lot order to sell at the time of order receipt as disseminated pursuant to an effective transaction reporting plan or effective national market system plan; and, with respect to an order to sell, the higher of (i) the national best bid at the time of order receipt or (ii) the price of the best odd-lot order to buy at the time of order receipt as disseminated pursuant to an effective transaction reporting plan or effective national market system plan. The Commission also proposed to specify that, for beyond-the-midpoint limit orders, the best available displayed price shall be determined at the time such order becomes executable instead of the time of order receipt.

The Commission further proposed to add two defined terms—”executed outside the best available displayed price” and “executed with price improvement relative to the best available displayed price”—to classify order executions based on their execution price relative to the best available displayed price. Finally, the Commission proposed to require the reporting, for marketable order types, of (1) the cumulative number of shares of covered orders (a) executed with price improvement relative to the best available displayed price, (b) executed at the best available displayed price, and (c) executed outside the best available displayed price; (2) for shares executed with price improvement relative to the best available displayed price, the share-weighted average amount per share that prices were improved as compared to the best available displayed price; and (3) for shares executed outside the best available displayed price, the share-weighted average amount per share that prices were outside the best available displayed price.

(2) Final Rule and Discussion

The Commission is adopting the definition of “best available displayed price” as proposed. Further, the Commission is requiring price improvement statistics relative to the best available displayed price, in addition to price improvement statistics relative to the NBBO, for marketable order types and midpoint-or-better order types as proposed.

An investor advocacy group agreed with the Commission that additional price improvement statistics specifically related to the best available displayed price would allow market participants to evaluate how well market centers and broker-dealers perform in executing covered orders relative to the best available displayed price. In addition, an academic stated in support of the proposal that it “is ludicrous to measure price improvement while ignoring visible odd lot liquidity” and that price improvement should be measured relative to the effective best bid or offer for the dollar amount of the order.

However, several commenters disagreed with the proposed price improvement statistics based on the best available displayed price because, according to these commenters, these statistics could be “misleading.” An industry group stated that metrics that measure price improvement utilizing a comparison to the best odd-lot price would “yield misleading information because it ignores the size of the order as compared to the size available at the odd-lot price.” A financial services firm suggested that the detailed report should exclude best available displayed price because this metric is only relevant in the commenter's view in a small number of occasions and would add “misleading” information to the report. This commenter stated that while the Commission cited a recent academic working paper showing that odd-lots offer better prices than the NBBO 16-18% of the time, the percent of the time that the best available price differs from the NBBO will be smaller when the MDI Rule's new round lot definitions take effect. According to this commenter, if the best available displayed price is relevant only for a small part of the time and absent context regarding how many shares are included in the price or how many shares the order was for, the best available displayed price metrics would “border on meaningless and add unnecessary complexity to the report.”

Another broker-dealer suggested that the Commission reconsider the use of execution quality statistics based on best available displayed price because the use of two sets of execution quality statistics with differing reference points would be “confusing to retail investors.” This commenter also stated that using the best displayed odd-lot price as a reference point presents a number of difficulties or opportunities to be misleading because, for example, these quotes could “be flickering quotes that are generally not accessible” or for a “size substantially smaller than the order size.” Another broker-dealer stated that measuring price improvement against odd-lot prices would “yield unhelpful and misleading information” because the size associated with odd-lot prices “will vary greatly.” One commenter added that “{c}ompilation of protected quotes is complicated. An odd-lot NBBO creates ambiguity.” An industry group and a financial services firm stated that any data related to the best available displayed price should not be included in the report format until the best odd-lot order to buy and best odd-lot order to sell have been included in the SIP.

After consideration of the comments, the Commission is adopting the definition of “best available displayed price” and the addition of price improvement statistics based on this price for marketable order types and midpoint-or-better order types as proposed. As discussed in the Proposing Release, requiring price improvement statistics relative to the best available displayed price in the market, whether that is the NBBO or the best odd-lot order to buy or sell, will enhance the ability of market participants to evaluate the performance of market centers and broker-dealers. The Commission continues to hold this view. Odd-lots often reflect pricing that is superior to the NBBO. 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. Although the round lot definition in the MDI Rules will result in fewer odd-lot orders in stocks with prices greater than $250, most stocks will not be affected by the new round lot definition. In addition, a substantial amount of odd-lot transaction volume in stocks greater than $250 will not be included in the MDI round lot definition. The changes in the MDI Rules may also result in a higher number of odd-lot trades, as the inclusion of odd-lot quotes that may be priced better than the current NBBO in consolidated market data may attract more trading interest from market participants that did not have access to this information prior to the MDI Rules. Therefore, even though implementation of MDI Rules may result in changes to the number of odd-lot orders, price improvement statistics relative to the best available displayed price will continue to enhance the ability of market participants to evaluate order performance after implementation of the MDI Rules' round lot definition.

Under the MDI Rules, odd-lot information will include pricing information about odd-lots priced better than the NBBO and competing consolidators will be able to offer a product that contains information on the best priced odd-lot on each exchange. Once this odd-lot information is available, reporting entities will be able to calculate the best available displayed price by using the information to identify the best-priced odd-lot order to buy (order to sell) available in the market and comparing it to the national best bid (offer). The MDI Rules have been approved but have not yet been implemented. As discussed further in section VII below, Rule 605's price improvement statistics that are relative to the best available displayed price will not be required to be reported until six months after odd-lot order information needed to calculate the best available displayed price is made available pursuant to an effective national market system plan.

The Commission disagrees with commenters' concerns that price improvement statistics relative to the best available displayed price will be misleading or confusing. The price improvement statistics relative to the NBBO contained in preexisting Rule 605 will still be available to market participants and other users of Rule 605 reports and therefore the price improvement statistics relative to the best available displayed price will be a supplement to, rather than a replacement for, price improvement statistics relative to the NBBO. While an odd-lot price that is better than the NBBO may not reflect sufficient quantity to execute certain orders, particularly larger-sized orders, the NBBO similarly may not reflect the best price at which certain orders can be filled using readily available liquidity. Statistics on price improvement relative to the best available displayed price will provide an additional data point for market participants to consider in the detailed Rule 605(a)(1) reports. Further, Rule 605's price improvement statistics will be presented within order size categories, including order size categories for orders of less than one share and odd-lot orders. Thus, to the extent that price improvement relative to the best available displayed price may be more informative for smaller-sized orders than larger-sized orders, the Rule 605 reports will present the price improvement statistics related to best available displayed price in a format that will make it possible to focus on those smaller-sized orders.

(h) Relative Fill Rate

(1) Proposed Approach

Prior to these amendments Rule 605 did not contain any execution quality metrics specific to non-marketable order types. Recognizing the need for more meaningful measures of execution quality for NMLOs and orders submitted with stop prices, the Commission proposed requiring additional information for executable NMLOs, executable stop orders, and beyond-the-midpoint limit orders. Specifically, the Commission proposed to require the reporting of the number of orders that received either a complete or partial fill. The Commission also proposed to require the reporting of the cumulative number of shares executed regular way at prices that could have filled the order while the order was in force, as reported pursuant to an effective transaction reporting plan or effective national market system plan. As proposed, the share count for each order would be capped at the order size.

(2) Final Rule and Discussion

The Commission did not receive comment on the proposal to report the number of orders that received either a complete or partial fill. For the reasons discussed in the Proposing Release, the Commission is adopting Rule 605(a)(1)(iii)(A) as proposed, with one correction to the rule text. Specifically, the Commission is adding the word “covered” to keep the language of Rule 605(a)(1)(iii)(A) consistent with other parts of Rule 605 as amended and avoid creating any ambiguity in the language of Rule 605. The Commission also is adopting the relative fill rate metric as proposed, and, in response to comments received, is adopting an additional relative fill rate metric that measures only on-exchange executions.

With respect to the proposed metric based on the cumulative number of shares executed regular way at prices that could have filled the order while it was in force, an industry group stated that it would be fairer to measure a firm's execution rate against on-exchange executions because exchanges are fair-access venues, while ATS and dealer trades may not represent liquidity accessible to all market participants. This commenter recommended that the Commission also require firms to report the cumulative number of shares executed “regular way” on any exchange at prices that could have filled the order while the order was in force. Further, a broker-dealer stated that it may be useful to receive data on the number of shares that traded on all market centers for NMLOs as compared to an individual market center because being able to compare relative fill rates would potentially allow market participants to choose venues they perceive as being more likely to execute their NMLOs or assess if changes to the venues they route these orders to produce better fill rates.

After consideration of the comments, the Commission is adopting the requirement for reporting of the cumulative number of shares executed regular way at prices that could have filled the order while the order was in force as proposed, for the reasons discussed in the Proposing Release. In response to commenters' concerns about being able to compare the relative fill rate for orders executed on venues accessible to all market participants, the Commission is adopting an additional requirement for the reporting of the cumulative number of shares executed regular way on any national securities exchange at prices that could have filled the order while the order was in force, as reported pursuant to an effective transaction reporting plan or effective national market system plan. Similar to the other relative fill rate metric that the Commission is adopting as proposed, for each order the share count will be capped at order size to prevent relatively small orders from skewing the metric. The Commission agrees with commenters that the general metric that will measure the cumulative number of shares executed regular way anywhere in the market may include liquidity that was not accessible to the reporting firm. Under the Exchange Act, national securities exchanges must provide fair access to displayed quotations. Therefore, the additional metric concerning the relative fill rate on national securities exchanges will provide a comparative metric based on displayed quotations that all firms will have had the ability to access.

IV. Summary Execution Quality Report

Prior to the amendments, Rule 605 required market centers to produce detailed execution quality statistics and make this data available via large electronic data files, as required by the Rule 605 NMS Plan. This detailed report was in machine-readable, rather than human-readable, format. The required format made the detailed report more suitable for further processing and analysis than for ready use by market participants and other interested parties. The Commission proposed in Rule 605(a)(2) that all market centers and larger broker-dealers required to produce the detailed report pursuant to Rule 605(a)(1) must also produce a summary execution quality report. After consideration of the comments, the Commission is adopting Rule 605(a)(2), with modifications from the proposal, as described further below.

A. Proposed Approach

Proposed Rule 605(a)(2) would have required every market center, broker, or dealer to make publicly available for each calendar month a report providing summary statistics on all executions of covered orders that are market orders and marketable limit orders that it received for execution from any person. The proposed summary report included a section for NMS stocks that are included in the S&P 500 Index as of the first day of the month and a section for other NMS stocks, and within each section, each symbol would have been equally weighted based on share volume. The Commission proposed that each section of the report required by Rule 605(a)(2) contain the following summary statistics: (i) the average order size; (ii) the percentage of shares executed at the quote or better; (iii) the percentage of shares that received price improvement; (iv) the average percentage price improvement per order; (v) the average percentage effective spread; (vi) the average effective over quoted spread, expressed as a percentage; and (vii) the average execution speed, in milliseconds.

The Commission proposed that the summary report be made available using the most recent version of the XML schema and the associated PDF renderer published on the Commission's website. The proposed schema would have been a set of custom XML tags and XML restrictions designed by the Commission to reflect the disclosures in proposed Rule 605(a)(2).

B. Final Rule and Discussion

The Commission is adopting Rule 605(a)(2), with modifications from the proposal, to require 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). The summary report will enable market participants and other interested parties to have ready access to focused 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. Moreover, by requiring market centers, brokers, and dealers to produce a summary report in addition to, rather than instead of, the more voluminous data called for by Rule 605(a)(1), those market participants or other observers that would like to perform more comprehensive or specific analyses of execution quality remain able to download the more granular underlying data files and perform such analyses.

Several commenters supported the proposal to produce a summary report on the basis that investors would benefit from the greater access to execution quality data. A financial services firm stated that although some broker-dealers voluntarily publish summary-level execution quality reports on their websites, “these ad hoc disclosures are not universal, and, in any event, generally feature statistics brokers prefer to ‘showcase’ that may not reflect the most meaningful measures of execution quality.” According to this commenter, the proposal would address this “coverage gap” by requiring larger broker-dealers to make Rule 605 disclosures and giving customers of these larger broker-dealers “a direct line of sight into broker-dealer performance.” This commenter added that a “standardized summary report will provide retail investors with a comprehensible overview of the thousands of rows and dozens of columns that appear on Rule 605 reports today.” Another financial services firm stated that a summary report “will help investors more effectively evaluate competing broker offerings” and that compliance and technology costs associated with enhanced Rule 605 reporting “are outweighed by the significant benefits to retail investors,” including “greater competition among firms to provide customers with strong execution quality.”

In contrast, other commenters, including broker-dealers, stated that a summary report could mislead investors, especially if the metrics required by Rule 605(a)(2) do not adequately account for differences in broker-dealer business models and customer bases. One broker-dealer stated that using the summary report to compare execution quality across broker-dealers “without normalizing for different order activity ignores differences in the flow of orders handled by these brokers and other aspects of the services that brokers provide or offer, including fees, interest rates, commissions, ease of use, customer service, accessibility, tools, and educational resources, and therefore could be potentially misleading to individual investors.” A financial services firm stated that the summary report “needs additional descriptive statistics showing order flow attributes that can affect the comparability of execution quality statistics to enable a more accurate and useful measure of execution quality.” This commenter also stated that “retail brokers have vastly different client bases reflected in vastly different order flow characteristics, which affects execution quality” and “[t]hese differences need to be reflected in the Summary Report so that the individual investor has sufficient data to make an educated assessment of execution quality performance between different brokers.” To address these concerns, this commenter suggested that the Commission add several metrics to the summary report “to enable investors to accurately compare execution quality between different brokers”—specifically, average notional order size, percentage realized spread, and percentage quoted spread.

The Commission acknowledges that differences in execution quality can be driven by differences between reporting entities other than differences in their skills at handling and/or executing orders, such as differences in the characteristics of their order flow. Any particular market center or broker-dealer's order flow may be made up of a different mixture of securities, order types, and order sizes, which may impact that market center or broker-dealer's execution quality statistics The Commission recognizes that it is important to strike a balance between sufficient aggregation of orders to produce statistics that are meaningful and sufficient differentiation of orders to facilitate fair comparisons of execution quality across reporting entities. After reviewing the comments received, the Commission is modifying the calculation of several proposed metrics and is also adding several new metrics to the final summary report. For example, the Commission agrees with a commenter's suggestion to add certain metrics—average notional order size, percentage realized spread, and percentage quoted spread—to the final summary report.

Although a commenter suggested that the summary reports be “normalized across brokers” in order to reflect differences in order flow that may impact a broker's execution quality, including “the difficulty of order flow the broker is handling,” the commenter did not explain how the summary reports should be normalized. The changes to the proposed summary report will provide more information about a broker-dealer's order flow characteristics than originally proposed and will therefore enable users of the summary reports to better compare the execution quality metrics of broker-dealer firms with similar order flow characteristics and identify when different order flow characteristics may be contributing to differences in execution quality. Further, while the Rule 605(a)(2) summary report presents only one particular set of metrics related to execution quality, customers and other interested parties may also take into consideration other aspects of broker-dealer service, including but not limited to, fees, commissions, and educational resources, when comparing broker-dealers. In section IV.B.1.b) below the Commission discusses the specific execution quality statistics in detail.

Another broker-dealer stated that the detailed Rule 605 reports are often difficult for retail investors to analyze. However, this commenter stated that the proposed solution—creating a high-level summary report—“could lead to retail investor confusion if the summary report does not adequately capture or explain the differences in order flow that are present across different market centers and broker-dealers.” This commenter stated that it may make sense for the Commission to first implement the revisions to Rule 605(a)(1) and evaluate the detailed reports before working with FINRA, retail brokers, and retail investors to determine how best to produce a summary report that contains “digestible and accurate execution quality information.” The Commission does not agree with the commenter's approach. The Commission described the proposed summary report in detail in the Proposing Release, has considered comments related to the summary report, and is making changes in response to comments. The adopted summary report will improve the ability of investors and the public to view some of the more significant aspects of the execution quality provided by specific market centers and larger broker-dealers. Denying investors the opportunity to view a summary report until after the detailed reports are fully implemented would entail unnecessary delay of the benefits the summary report is designed to provide.

Finally, according to an individual investor, the information contained in the proposed summary report is not useful to investors, and “[m]ost retail investors lack the knowledge and expertise to interpret these reports and use them to make informed trading decisions.” In contrast, an investor advocacy group states it “does not agree with those who would argue that the proposed changes to disclosure of order execution will not benefit retail investors, who are unlikely to read the Rule 605 reports.” This commenter stated that “even though a certain percentage of retail investors may not read the Rule 605 reports, they will still benefit indirectly as the enhanced disclosure will promote competition, improve regulatory oversight, and facilitate use by third-party researchers and academics, who in turn can extract information from the reports and use it to expose issues and problems with today's order routing and execution practices.” The Commission agrees with the investor advocacy group commenter and continues to view the summary report as a useful means to provide individual investors and other market participants with an overview of execution quality data. The summary report will aid investors by providing information in a more easily digestible format than the detailed Rule 605(a)(1) reports.

Moreover, the changes that the Commission is making to the summary report in response to commenters, including breaking out the statistics into notional size categories and adding average percentage realized and quoted spreads, will provide more information about the type of order flow received by the reporting entity. The increased amount of data required by final Rule 605(a)(2) will add some complexity to the adopted summary report as compared to the proposed summary report, however, based on such information, users of the report will be able to identify reporting entities with more comparable order flow and have greater context to understand the differences in execution quality statistics across market centers or broker-dealers with less comparable order flow.

The summary report contains a selection of execution quality metrics for interested parties to assess, rather than imposing a single metric that might require a subjective judgment or obscure meaningful differences in execution quality among broker-dealers or market centers. Despite being an abbreviated overview of the more detailed Rule 605(a)(1) report, as with the detailed report, independent analysts, consultants, broker-dealers, the financial press, and market centers likely will respond to the needs of investors by analyzing the disclosures and producing even more digestible information using data from the summary report, so that the broader public, including those that may not read the summary report, will benefit. As with the Rule 605(a)(1) detailed report, if a market center or broker-dealer believes that the statistics do not fully reflect its order flow and execution practices, it is encouraged to make any additional information publicly available, outside of the summary report, that it believes will be helpful to investors and other market participants.

1. Required Information

The Commission received comments discussing the calculation and utility of individual proposed statistics in the proposed summary report, along with comments recommending the addition of new statistics or requesting clarification or confirmation of how proposed statistics should be calculated, as described further below.

After review of the comments, the Commission is adopting the statistics in Rule 605(a)(2) largely as proposed, with modifications to the computation of certain statistics. The Commission is also adding new execution quality statistics to the summary report. For the reasons described in section IV.B.1.a) below, the Commission is not requiring that the summary report be equally weighted by symbol based on share volume. Section IV.B.1.b) below discusses each of the execution quality statistics in the summary report, including, where appropriate, how these statistics will be weighted. As described in section IV.B.1.b), the summary report will divide each of market and marketable limit orders into separate categories based on eight notional order size buckets plus an aggregated category for all orders with a notional value of less than $200,000.

The Commission agrees with one industry group that stated it is “important to ensure that the summary report provides the necessary information to allow for a fair comparison across reporting firms.” The final summary report will provide statistics that are relevant to evaluating what type of pricing orders received, how quickly orders were executed, and what type of order flow the market center or broker-dealer received. As discussed further in section IV.B.1.b) below, the Commission is including several execution quality statistics beyond those included in the proposal to help ensure that the summary report provides sufficient information for a meaningful comparison across firms.

Some commenters stated that any statistic included in the summary report or necessary to calculate a statistic in the summary report should also be included in the Rule 605(a)(1) report, so that the statistics in the summary report may be derived from the detailed Rule 605(a)(1) report. The Commission agrees and, as discussed further below, is making conforming changes so that the Rule 605(a)(1) detailed report will contain all information necessary to be able to reconstruct the Rule 605(a)(2) summary report. In addition, market participants will be able to use the data contained in the Rule 605(a)(1) reports to create their own summary-level report with any adjustments that they find useful for comparison with and evaluation of a reporting entity's published summary report.

A broker-dealer suggested that the summary report may be more informative if it differentiated between retail investors and professional customers because the nature of each order flow is different and segmentation would allow retail investors to obtain execution quality statistics for similar types of orders. A financial services firm stated that the Commission “should distinguish Rule 605 data by [s]egmented [o]rder and non-[s]egmented [o]rder flow and display this information separately in both the detailed Rule 605 reports and the proposed Summary Reports.” The Commission has decided not to revise the summary report to divide the report between retail investors and professionals or between segmented and non-segmented orders, as suggested by the commenters, for the same reasons that the Commission is not making corresponding changes to the reports required by Rule 605(a)(1).

Another commenter argued that the summary report should limit the orders in the report to those with a notional value of less than $200,000. This commenter argued that the Commission in its economic analysis of the Order Competition Rule Proposing Release and the Proposing Release had limited the scope of retail order flow to orders of less than $200,000, to “normalize order flow variables for analysis in order to meaningfully compare broker-dealers' execution quality.” The commenter stated its belief that the summary report should likewise limit the report to orders of a notional value less than $200,000, “which is a natural breakpoint between size categories.” In response to this commenter's suggestion, as described in more detail in section IV.B.1.b) below, while the Commission is not establishing such a limit for the summary report as a whole, the Commission is adding execution quality information as divided by notional order size buckets, along with a row of execution quality information that aggregates all orders in a particular category, excluding orders with a notional value of $200,000 or more. This aggregated information will provide users of the summary report a means to compare among market centers' or broker-dealers' execution quality for orders less than $200,000.

(a) Weighting Method

The Commission proposed that within each section of the summary report, each symbol would have been equally weighted based on share volume. The Commission stated in the Proposing Release that equal weighting of each symbol would facilitate the comparability of execution quality statistics among market centers or broker-dealers that receive for execution different mixes of stocks and prevent the nature of the stocks traded from making it more difficult to determine how the reporting entity performed with respect to execution quality for the particular mix of orders that it received for execution.

One industry group, however, stated that the summary report statistics should not be equally weighted by symbol based on share volume because this approach would result in misleading data being provided to customers. This commenter agreed with the Commission that the mix of symbols traded by a firm could impact its reported execution quality statistics, but was concerned that symbol-based weighting would create distortions that “would significantly outweigh any potential benefits.” The commenter recommended as an alternative that the Commission require each market center and broker-dealer producing a summary report to include its weighted average execution price as a separate reportable item on the summary report. The commenter stated that its recommended approach would avoid the “misleading data that would result from symbol-based weighting” and “customers can take a broker's weighted average execution price into account when reviewing the summary report data.” This commenter further recommended that the same approach be used for weighting within and across symbols and, as described further below, that the Commission require the use of spread-based weighting for E/Q and share-based weighting for certain other statistics.

After considering the comments, the Commission is not requiring that the summary report be equally weighted by symbol based on share volume as proposed. The Commission is persuaded that symbol-based weighting could cause distortions in cases where a reporting entity receives a significantly different volume of orders in one symbol as compared to another symbol, and these distortions potentially might not justify any potential benefit of utilizing this weighting method. As discussed further below, the Commission is not adding the share-weighted notional average execution price to the summary report as recommended by the commenter, but the Commission is adding average midpoint for order executions. Similar to the commenter's recommendation, this metric will provide information about whether a reporting entity's order flow was more heavily weighted towards lower-priced stocks or higher-priced stocks. The summary report statistics will also utilize share-based weighting, instead of equally weighting by symbol based on share volume, except as discussed specifically below.

(b) Statistics Included

The summary report required by final Rule 605(a)(2) includes sections for NMS stocks in the S&P 500 Index and for all other NMS stocks. Within each section, the final rule requires that the summary report divide market and marketable limit orders into categories based on eight notional order size buckets and an aggregated bucket for orders with a notional value less than $200,000 (as described below). The Commission is requiring that the summary report include the following statistics as proposed, as described below: (i) percentage of shares executed at the quote or better; (ii) percentage of shares that received price improvement; (iii) average percentage effective spread; and (iv) average execution speed, in milliseconds. The Commission is also requiring that the summary report include the following statistics with modifications from the proposal, as described below: (i) average order size in shares; (ii) share-weighted average percentage price improvement; and (iii) average effective spread divided by the average quoted spread, expressed as a percentage. Finally, the Commission is requiring that the summary report include the following additional statistics that were not part of the proposal, as described below: (i) average notional order size; (ii) average midpoint; (iii) average percentage quoted spread; (iv) average percentage realized spread as calculated 15 seconds after the time of execution; and (v) average percentage realized spread as calculated 1 minute after the time of execution.

Average order size. The Commission proposed to include in the summary report a metric for average order size. As described below, the Commission is adopting this metric largely as proposed and adding a break-out of execution quality metrics by notional size bucket and an additional order size metric in response to comments.

One industry group recommended that “average order size in shares for the summary report be calculated (for the covered orders that must be reported in the summary report) by dividing the aggregate number of shares of covered orders by the number of orders.” This commenter further recommended adding “average order size in notional value” to the summary report, which “can be calculated by a reporting firm (for the covered orders that must be reported in the summary report) by dividing the aggregate notional value of covered orders by the number of orders.” A couple of financial services firms also recommended presenting order-size categories in the summary report by average notional order size instead of lot size. One of these commenters stated that order notional sizes provide investors a clearer view of the execution experience associated with their order, are more easily compared over time, are more representative of the cost to implement different types of trades, and are more consistent with increased market use of fractional/notional trading. Similarly, the other commenter stated its belief that including “average notional order size” in the summary report alongside average order size in shares would allow a user of the summary report to calculate another metric, “average price per share,” by dividing “average notional order size” by “average share order size.”

After reviewing the comments, the Commission is retaining the “average order size” metric in the summary report largely as proposed with a modification to state that average order size will be reported in number of shares because the proposed rule was ambiguous about whether average order size would have been measured in number of shares or notional value. The average order size in shares is relevant to understanding the relative size of the orders that the reporting market center, broker, or dealer received for execution.

However, the Commission also agrees with commenters that the average order size in notional value is relevant to understanding relative order size. For example, one broker-dealer stated that certain orders may be harder to execute, “for example, when market liquidity is scarce or when the customers have difficult ( e.g., large-sized) orders to execute.” The Commission agrees with commenters that differences in a firm's execution quality metrics may correspond to differences in order flow. In particular, smaller orders may receive different execution quality than larger orders because, among other things, available liquidity in a particular security at a particular price is more likely to be sufficient to fill a smaller order. Therefore, the Commission is modifying the proposed summary report to: (1) add a metric for average notional order size; and (2) require categorization of the data by notional order size. Dividing execution quality statistics in the summary reports according to notional order size buckets provides investors with a more nuanced means to differentiate between firms and allows for comparison of execution quality statistics for more similar orders. Moreover, the average notional order size metric provides important context for where a firm's orders tend to fall within the range of a particular notional order size bucket.

With respect to the categorization of the data by notional order size, the statistical information in the summary reports for market orders and marketable limit orders is divided into eight notional order size ranges: less than $250; $250 to less than $1,000; $1,000 to less than $5,000; $5,000 to less than $10,000; $10,000 to less than $20,000; $20,000 to less than $50,000; $50,000 to less than $200,000; and $200,000 or more. These notional order size ranges correspond with the notional order size ranges that are used in the detailed reports required pursuant to Rule 605(a)(1). As discussed in section III.B.1.b) above, the Commission selected these notional order size ranges based on its analysis of CAT data and comments received. Moreover, using the same notional order size ranges for the detailed reports and summary reports allows the statistics in the summary reports to be derived from the detailed reports as suggested by commenters.

As an additional measure of categorization by notional order size, the summary report also includes overall statistics for non-block size market and marketable limit orders— i.e., the statistics in this row are not divided by notional order size range but only include orders smaller than $200,000 in notional value. Capping these overall statistics at $200,000 will prevent extremely large, block size orders from skewing the averages. It will also provide an accessible snapshot of information for investors. Providing overall execution quality statistics will balance providing more detailed execution quality data to market participants with providing an overview of a market center's or broker-dealer's execution quality in a more readily digestible form for investors, other market participants, or interested parties.

Finally, because average order size in both shares and notional value are the average order size received rather than executed, the Commission is modifying the first sentence of Rule 605(a)(2) to remove the words “executions of” in the clause referring to summary report “providing summary statistics on all executions of covered orders that are market and marketable limit orders.” Instead, to avoid any ambiguity about how each of the statistics are calculated, the Commission is specifying where individual data elements apply to executions of covered orders, as described below.

Percentage of shares executed at the quote or better and percentage of shares that received price improvement. The Commission proposed to include in the summary report metrics for the percentage of shares executed at the quote or better and percentage of shares that received price improvement and is adopting these metrics as proposed. One industry group stated that there is no need to reference “equal weighting by share volume,” or any other weighting methodology with respect to the “percentage of shares executed at the quote or better” or “percentage of shares that received price improvement” metrics, because the weighting is clearly understood from the data element itself. The Commission agrees that these metrics are weighted based on the number of shares executed and that reporting entities will understand this based on the metric as proposed. The Commission is adopting these statistics as proposed, while clarifying in the rule text that the statistics apply to executions of covered orders. These statistics will provide useful information for evaluating what type of pricing orders received.

Share-weighted average percentage price improvement. The Commission proposed to include a metric in the summary report for share-weighted average percentage price improvement per order. As described below, the Commission is adopting this metric largely as proposed and adding a related metric to the detailed report. One industry group stated that it will assume that the proposed metric “average percentage price improvement per order” is intended to report price improvement as a percentage of the midpoint (as of the time of order receipt) and further recommended that average price improvement be share-weighted. In addition, for clarity, this commenter recommended that the metric be labeled as “share-weighted average percentage price improvement” and the words “per order” be removed from the text of proposed Rule 605(a)(2)(iv).

Average percentage price improvement will be measured as a percentage of the midpoint of the national best bid and national best offer at the time of order receipt. In other words, average percentage price improvement is the share-weighted average price improvement for orders executed divided by the share-weighted average midpoint at the time of order receipt for those orders. The Commission agrees with the commenter that further clarity in this regard would be useful. Therefore the Commission is renaming this metric from the proposal to refer to the “share-weighted average percentage price improvement,” as suggested by the commenter, so that the use of share-based weighting is explicit, clarifying in the rule text that the share-weighted average percentage price improvement applies to executions of covered orders, and specifying that this statistic is calculated as the cumulative amount that prices were improved less the cumulative amount that prices were executed outside the quote divided by sum of the average midpoint times the number of shares executed. In addition, as suggested by the commenter, the Commission is requiring that the Rule 605(a)(1) detailed report include an additional column setting forth the average midpoint for executions of covered orders. The new defined term for “average midpoint” refers to the share-weighted average of the midpoint of the NBB or NBO at the time of order receipt (or, for non-marketable limit orders, beyond-the midpoint limit orders, and orders submitted with stop prices, at the time such orders first become executable). The inclusion of average midpoint for executions of covered orders in the Rule 605(a)(1) detailed report will enable users to derive the share-weighted average percentage price improvement.

Average percentage effective spread. The Commission proposed to include in the summary report a metric for the average percentage effective spread. The Commission is adopting the metric largely as proposed. One industry group stated in connection with the summary report that it agrees with the approach proposed by the Commission for calculating average percentage effective spread. As discussed above, the Commission is modifying the definition of “average percentage effective spread” from the definition of such term in the proposal to make use of other defined terms. Although the adopted metric in the summary report utilizes the new definition of “average percentage effective spread,” the metric itself is unchanged and the Commission is clarifying in the rule text that the metric applies to executions of covered orders.

Average effective spread divided by average quoted spread (E/Q). The Commission proposed to include a metric in the summary report for average effective spread over average quoted spread, expressed as a percentage. As discussed below, the Commission is adopting this metric largely as proposed and adding a metric for average quoted spread. As discussed above, several commenters stated that the Commission should require firms to calculate average E/Q utilizing spread-based, rather than share-based, weighting. One industry group recommended that the summary report include the share-weighted average percentage quoted spread, in addition to the share-weighted average effective spread. This commenter stated that with these statistics any person could derive effective over quoted spread and so it would not be necessary to include E/Q in the summary report. A financial services firm also suggested that the summary report include “percentage quoted spread,” to be calculated by dividing the quoted spread by the midpoint of the NBB and NBO at the time of order entry. This commenter stated that “[i]n addition to providing transparency into the mix of each broker's order flow, including this metric will allow users to confirm the E/Q calculation on the Summary Report by dividing Percentage Effective Spread by Percentage Quoted Spread.” This commenter also suggested that the summary report show effective spread and quoted spread and then allow individuals to compute their own E/Q from those two numbers.

After reviewing the comments, the Commission is: (1) adopting average E/Q as a metric on the summary report largely as proposed, while adjusting the weighting methodology from share-based weighting to spread-based weighting as suggested by commenters; and (2) adding average percentage quoted spread as a metric in the summary report, also as suggested by commenters. The Commission is also stating in the rule text for clarity that these metrics apply to executions of covered orders. As discussed above, requiring spread-based weighting for the E/Q statistics will provide a consistent measure of E/Q that will not vary based on the specific symbols to which price improvement is allocated and thereby will facilitate the comparability of price improvement statistics. Further, even though market participants and other interested parties could calculate E/Q on their own if the summary report includes average effective spread and average quoted spread, there is additional utility in having the average E/Q readily accessible on the summary report, particularly because market participants often use E/Q as a measure of execution quality. The inclusion of average quoted spread on the summary report will provide another metric that users of the summary report may use to understand the nature of the reporting firm's order flow.

Average execution speed in milliseconds. The Commission proposed to include a metric in the summary report for average execution speed in milliseconds and is adopting this metric largely as proposed. An industry group stated its understanding that the calculation of “average execution speed in milliseconds” would proceed as follows: first, for each individual execution multiply the shares executed by the time to execution; second, sum the results; and finally, divide that sum by the total shares executed. The Commission confirms that reporting entities will calculate the metric as stated by the commenter and to add clarity to the rule text is specifying that this metric applies to executions of covered orders and is a share-weighted average. The proposed metric is relevant to evaluating how quickly orders were executed, and the Commission therefore has decided to adopt the metric as proposed.

Additional statistics in the summary report. In the Proposing Release, the Commission solicited comment on whether any additional execution quality statistics required under proposed Rule 605(a)(1) should be included as an aggregated statistic in the summary report. As described below, in consideration of these comments, the Commission is adding to the summary report metrics for average realized spread as calculated at 15 seconds and 1 minute from time of execution, and a metric for the average midpoint.

An industry group stated that order flow characteristics such as the amount of “informed” order flow received by a broker-dealer and the size of an order relative to the average daily volume of a stock are factors outside of the control of order-handling parties but can impact the amount of price improvement received. This commenter further stated that the impact of these order flow characteristics could be measured in part through statistics such as realized spread and price impact and thus recommended that the Commission require firms to include in the summary report the weighted-average realized spread at 15 seconds and at 1 minute after the time of execution. A financial services firm also suggested that percentage realized spread be included in the summary report statistics and argued that this “simple addition would provide better transparency regarding the distinct characteristics of order flow among brokers which, in turn, affects the average execution quality metrics on the reports.” Both commenters stated that a person reviewing the summary report could calculate the price impact based on the realized spread and the effective spread.

The Commission agrees with the commenters that viewing the average realized spread in the summary report will be useful to investors. The average realized spread metrics for 15 seconds and 1 minute after the time of execution were proposed for inclusion in the detailed report required pursuant to Rule 605(a)(1) and will similarly allow users of the summary report to differentiate between various types of order flow. Moreover, because the final Rule 605(a)(1) detailed report requires the calculation of average realized spread at multiple time horizons, including 15 seconds and 1 minute, adding these two time horizons for average realized spread to the summary report should impose a minimum burden on reporting entities. Therefore, the Commission is requiring that the summary report include, for executions of covered orders, both the average percentage realized spread as calculated 15 seconds after the time of execution and the average percentage realized spread as calculated 1 minute after the time of execution.

An industry group further suggested adding share-weighted average execution price as a metric to the summary report. Although the Commission agrees with the commenter that the share-weighted average execution price could provide useful information, average execution price is not a metric included in the detailed report required by Rule 605(a)(1) and therefore if this statistic were included in the summary report it would not be derivable from the detailed report, contrary to commenters' suggestions that the metrics in the summary report should be derivable. Therefore, the Commission is adding to the summary report a metric for average midpoint for executions of covered orders because this metric will be included in the detailed report so that other summary report statistics will be derivable from the detailed report and, similar to share-weighted average execution price, average midpoint provides information about the mix of stocks represented in the reported statistics. Thus, the inclusion of the average midpoint will provide those using the summary report for comparison purposes with a means to assess whether differences in the price mix of stocks could be a factor affecting other execution quality statistics of reporting entities.

2. Required Format

As discussed below, commenters supported the production of the summary report in a human-readable format. A financial services firm supported the proposal to require a standardized summary report in a “user-friendly format.” A national securities exchange stated that the proposed format would make the data in the summary reports accessible to a wider audience in a standard format to facilitate comparisons. However, one academic believed that while the proposed summary reports “are most important,” the Commission's proposal “did not clearly display what the summary reports would look like.” Finally, one industry group recommended that CSV, or another format that could be copied into a spreadsheet software program, be used in place of XML for the summary report. According to the commenter, using CSV “would allow investors to compare summary data across firms more readily.”

After review of the comments, the Commission is requiring the use of PDF format as proposed and modifying proposed Rule 605(a)(2) to require that market centers and broker-dealers also produce the summary report in CSV format instead of XML format as suggested by the commenter. Making the summary report available in these file formats will allow market centers and broker-dealers to efficiently prepare the summary reports. In addition, investors and other members of the public will benefit from being able to access the summary report in multiple formats. Presently, it is challenging for individual investors to decipher and analyze the detailed Rule 605(a)(1) report. These individual investors will be more readily able to use a summary report to make a more informed choice about selection of a broker-dealer than they can now. Because the summary report is human-readable in PDF format, individual investors will be able to assess the data by reviewing and comparing summary reports without needing technical expertise or relying on an intermediary. Further, independent analysts, consultants, and the financial press may also analyze the summary reports to provide more information to individual investors, including those who do not themselves access the summary reports.

The Commission further agrees with the industry group commenter that investors will benefit from the summary report being provided in CSV format and has modified proposed Rule 605(a)(2) to require that the summary report required therein be provided in CSV format, instead of XML, and also provided using the associated PDF renderer. As would have been the case using XML, the requirement to use the Commission's schema for CSV format will result in the summary report data being provided in a format that is structured and machine-readable, which allows users to more easily process and analyze the data, and provides consistency of format across reports. Requiring a CSV file format also provides market participants and other interested parties with a simple and versatile format that is viewable in many programs. Like XML (and PDF), CSV is “open standard,” which is a term that is generally applied to technological specifications that are widely available to the public, royalty-free, at no cost. However, the Commission agrees with the commenter that a CSV file format may allow investors and other members of the public to compare summary data across firms more readily than XML. Investors and other members of the public may find a CSV file format preferable to an XML file format because the data can be more readily viewed and analyzed in widely used spreadsheet applications. Because the Rule 605 summary report consists solely of a series of discrete numeric values in a fixed tabular layout, and does not contain elements in nested structures, the sophisticated validations that XML enables would not have provided significant benefits for the Rule 605 summary report. Instead, the CSV format, which yields much smaller file sizes and therefore more efficient processing and storage of data than the XML format, is equally capable of handling the Rule 605 summary report content. The increased usability of the CSV file format will be more relevant to investors and other members of the public viewing and analyzing the summary report than the broader technical coverage of XML. Therefore, the Commission is requiring the use of a schema for CSV format rather than an XML schema. Further, the requirement that the same data be provided through the use of a PDF renderer helps ensure that the summary report is also available in a human-readable format and consistently presented across operating systems and applications.

3. Investor Testing and Education

An industry group and an association of securities regulators both strongly encouraged the Commission to provide investor education or testing to ensure that the summary report is useful. In addition, an academic stated that additional effort needs to be made to make sure the summary report is “human-friendly and provide[s] useful data for comparing brokers.” The industry group further stated that “the industry has expended significant effort and resources to ensure that retail investors have access to educational materials and support necessary to best inform their use of broker-dealer services” and stated that the Commission was in the best position to educate investors about the use of summary reports. This commenter suggested providing educational resources to retail investors that would help them understand the summary reports and how such information can be used to inform their investment decisions. This commenter also suggested that investors should understand how to interpret varying data in order to facilitate the most accurate cross-comparisons between broker-dealers' execution quality. The association of securities regulators suggested testing the summary report with investors prior to implementation, such as through focus groups, to confirm that the summary report provides useful information for retail investors. An individual supported investor testing and investor roundtables for all equity market system rules recently proposed by the Commission. Several individuals suggested that the Commission should provide clear guidance on how to read and interpret the amended Rule 605 reports.

The Commission does not agree that prescribed testing or investor focus groups or roundtables are needed at this time. Rule 605 has been in existence for over two decades. Although larger broker-dealers will be required to produce the detailed report under Rule 605(a)(1) for the first time, and both market centers and larger broker-dealers will be required to create and post a summary report under Rule 605(a)(2) for the first time, investors should be broadly familiar with many of the execution quality metrics that the summary report is intended to highlight. Further, many commenters, including individuals, supported the proposed summary report as it provides greater access to execution quality data. Notwithstanding any potential insights into the Rule 605 reports that could be gained from testing or focus groups, delay in the adoption of final Rule 605 would delay the benefits of the amendments from accruing.

Some commenters suggested that the Commission directly provide educational resources to individual investors related to the final Rule 605 amendments. However, many market participants, in addition to the Commission, have undertaken efforts to educate retail investors about securities trading and how to compare broker-dealer execution quality, and the Commission expects that these initiatives will continue to inform retail investors about means to evaluate their broker-dealers' performance, including the utilization of summary report statistics. Individual broker-dealers may provide their own educational resources addressing Rule 605 directly to their customers and other market participants and customers of broker-dealers may ask their broker-dealers questions about the Rule 605 reports. Likewise, broker-dealers can provide information about their firms and the nature of their order flow on their websites or through other communications to customers. Further, as stated above, third parties, including analysts, researchers, and the financial press, may also use the summary reports to analyze and compare execution quality across broker-dealers or market centers and provide such information to individual investors in different formats that provide individual investors with alternative ways to engage with Rule 605 data. The Commission therefore does not believe it is necessary to prescribe investor education at this time. However, the Commission will monitor the implementation of Rule 605, including with regard to whether additional information about investor use or analysis of the summary report would be helpful.

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

A. Proposed Approach

Prior to these amendments, the requirements for the dissemination of the market center report required by Rule 605 were set forth in paragraphs (a)(2) and (3) of Rule 605. Preexisting Rule 605(a)(2) required every national securities exchange on which NMS stocks are traded and each national securities association to act jointly in establishing procedures for market centers to make the reports required by Rule 605(a)(1) available to the public in a uniform, readily accessible, and usable electronic form. The Commission proposed to amend preexisting Rule 605(a)(2), which would be reorganized into amended Rule 605(a)(3), so that the proposed summary report would also be made available in accordance with the procedures established by the Rule 605 NMS Plan. Further, preexisting Rule 605(a)(2) provided that, in the event there is no effective national market system plan, market centers shall prepare their reports in a consistent, usable, and machine-readable electronic format and make such reports available for downloading from an internet website that is free and readily accessible to the public. The Commission proposed to reorganize this provision into amended Rule 605(a)(4) and modify amended paragraph (a)(4) to explicitly refer to the requirements in amended Rule 605(a)(1).

Rule 605(a)(2), prior to these amendments, also specified that the detailed reports required by Rule 605(a)(1) must be posted on an internet website that is free and readily accessible to the public for a period of three years from the initial date of posting. As proposed, these same requirements would be reorganized into amended Rule 605(a)(5) and would be extended to the summary report required under proposed Rule 605(a)(2).

Finally, prior to these amendments, Rule 605(a)(3) specified that the detailed report required by Rule 605(a)(1) must be made available within one month after the end of the month addressed in the report. The Commission proposed to renumber this provision as amended Rule 605(a)(6) and to extend this requirement to the amended Rule 605(a)(2) report.

B. Final Rule and Discussion

1. Accessibility of Rule 605 Reports

The Commission is updating these provisions of preexisting Rule 605 by reorganizing paragraphs (a)(2) and (3) of preexisting Rule 605 into amended paragraph (a)(3) and new paragraphs (a)(4) through (6) as proposed. In the amended paragraphs, the Commission proposed to apply the website posting, timing, and retention requirements to the proposed Rule 605(a)(2) summary report and to extend Rule 605's procedural requirements to brokers and dealers subject to Rule 605. The Commission received no comments regarding the proposed renumbering and reorganization of preexisting Rule 605(a)(2) and (3), but did receive comments on the substance of proposed Rule 605(a)(3). The Commission is adopting paragraphs (a)(3) through (6) of Rule 605 as proposed. These rule provisions set forth the requirements for making the Rule 605 reports accessible to the public, and retaining these requirements from preexisting Rule 605 will continue to provide interested parties with the ability to access the reports easily and efficiently.

Rule 605(a)(3) directs the SROs to act jointly in establishing procedures for market centers, brokers, and dealers to follow in making available to the public the detailed report under Rule 605(a)(1) and summary report under Rule 605(a)(2). The Rule 605 NMS Plan establishes procedures for market centers to make data available to the public in a uniform, readily accessible, and usable electronic form. The Rule 605 NMS Plan requires each market center to arrange with a single plan participant to act as the market center's Designated Participant. The Rule 605 NMS Plan also requires market centers to post their monthly reports on an internet website that is free of charge and readily accessible to the public. Inclusion of Rule 605(a)(2)'s summary reports within the scope of the Rule 605 NMS Plan will promote consistent administration of Rule 605 and allow the Designated Participant for each reporting entity to play a role with respect to the reports required by Rule 605(a)(1) and (2). As is the case for market centers that are not Participants prior to these rule amendments, the Participants will be required to enforce compliance with the terms of the Rule 605 NMS Plan by their members and persons associated with their members. In addition, formatting for Rule 605 data is governed by the Rule 605 NMS Plan. Among other things, the Rule 605 NMS Plan sets forth the file type and structure of the reports and the order and format of fields, yielding reports that are structured and machine-readable. Because of the amendments to Rule 605, the Rule 605 NMS Plan will need to be updated in order to incorporate references to larger broker-dealers subject to Rule 605 and to account for summary reports and the new data fields required to be reported. The compliance period for amending the Rule 605 NMS Plan, and other implementation details, are discussed in infra section VII.

With respect to report formatting, an investor advocacy group stated that header data should be included in the Rule 605 reports, arguing that “it is impossible to understand the reports” without looking separately to published Commission guidance. This commenter also stated that Rule 605 reports should continue to be made available in a machine-readable format. The Commission agrees that having more ready access to the information needed to understand the content of the reports could be beneficial for market participants. Because the Rule 605 NMS Plan establishes the procedures for reporting entities to follow in making the report available in a uniform, readily accessible, and usable electronic form, the Participants are well-positioned to determine how to include header information in connection with the updates to the record layout for the detailed Rule 605(a)(1) reports. The Commission encourages the Participants to consider whether header information or a more accessible record layout or key should be part of the procedures for making the reports available to the public, especially as it pertains to the detailed Rule 605(a)(1) reports.

In the event that an amendment to the Rule 605 NMS Plan establishing procedures for market centers, brokers, and dealers to comply with Rule 605 has not been approved by the Commission prior to the compliance date of the amendments to Rule 605, paragraph (a)(4) of Rule 605 provides that market centers, brokers, and dealers shall prepare their reports in a consistent, usable, and machine-readable electronic format, and make such reports available for downloading from an internet website that is free and readily accessible to the public. Paragraph (a)(5) of Rule 605 requires market centers, brokers, and dealers to keep the reports required by Rule 605(a)(1) and (2) posted on an internet website that is free and readily accessible to the public for a period of three years from the initial date of posting. Finally, paragraph (a)(6) of Rule 605 requires market centers, brokers, and dealers to make their Rule 605(a)(1) and (2) reports available within one month after the end of the month addressed in the reports. The Commission received no comments on its proposal to renumber and update paragraphs (a)(4) through (6) of Rule 605 and is adopting paragraphs (a)(4) through (6) of Rule 605 as proposed, for the reasons stated in the Proposing Release. Final Rule 605 will extend these procedural requirements to the Rule 605(a)(2) summary report so that valuable information on order execution quality will be made available to the public without undue delay. Further, the ability to access Rule 605(a)(1) and (2) reports at the same time and the availability of these reports for the same period of time will aid users of the reports in their review and analysis of execution quality data.

2. Alternatives to Rule 605 Proposal

(a) Centralization of Rule 605 Data

In the Proposing Release, the Commission solicited comment on whether to require centralized posting of Rule 605 reports and discussed as an alternative that instead of, or in addition to, having market centers and larger broker-dealers post Rule 605 reports to their websites, the Commission could require these reporting entities to submit their Rule 605 reports to a centralized electronic system, which would then make these reports available to market participants. The Commission stated that the creation of a centralized electronic system could promote greater transparency by better enabling market participants to access and evaluate the reports of multiple reporting entities because the reports would be available at a single location. However, the Commission recognized that the entity responsible for administering the centralized electronic system would incur compliance costs as a result of the creation and maintenance of such a system, and these costs could be passed on to reporting entities in the form of filing fees or to consumers of Rule 605 reports in the form of access fees.

Specifically, the Commission considered two options for how to implement a centralized electronic system. One option would have been for the Commission to require that the Plan Participants establish procedures pursuant to the Rule 605 NMS Plan to provide for the creation and maintenance of a centralized electronic system to serve as a repository for Rule 605 reports and make such reports available for viewing and downloading in a manner that is free and readily accessible to the public. The second option would have been for the Commission to require that reporting entities disclose Rule 605 information directly to the Commission through the Commission's Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system, with the Commission subsequently making the information publicly available on EDGAR.

Several commenters supported the centralized posting of Rule 605 reports (summary and detailed). Some of these commenters stated that providing centralized access to Rule 605 reports would “facilitate accessibility and comparability of the metrics to the benefit of retail customers and market participants” and that “market participants would be more likely to use the data to compare execution quality, leading to increased competition and improvements in execution quality.” Some of these commenters suggested various means of centralizing Rule 605 reports—having FINRA maintain a public database for Rule 605 reports, creating a central repository for Rule 605 reports to be located on a single page on the Commission's website, or working out the details of a central repository through the Rule 605 NMS Plan. An individual investor suggested that the Commission should require the summary and detailed reports to be posted in a centralized electronic system implemented by the Commission that subjects reporting entities to liabilities and has no access fees. An industry group and an investor advocacy group both specifically discouraged the use of EDGAR as the centralization method, stating that the EDGAR system is “outdated technology” and “inadequate for the task.”

The Commission has considered the comments but is not adopting a requirement for centralized posting of Rule 605 reports for a number of reasons. While several commenters supported the goal of centralizing Rule 605 reports, commenters did not have a consensus view on how to accomplish centralization. Further, two commenters expressed specific concerns with the Commission using EDGAR as a centralized repository. The Commission acknowledges that centralization of Rule 605 data, by providing standardization to the reports, could help to make it easier for market participants to access and evaluate Rule 605 reports. However, developing a centralized repository and procedures for reporting entities to follow, whether done by the Commission or by Plan Participants, could potentially result in implementation time delays and require the expenditure of considerable technology and personnel resources. Further, although a centralized repository could lower search cost for market participants, even without centralization, Rule 605 reports will be required to be readily available and accessible.

The changes to Rule 605 discussed herein will expand the scope of the reports and improve the usefulness of the execution quality statistics provided and made public. For example, the addition of a reporting requirement for larger-broker dealers will provide investors with information that they could use to compare the execution quality provided by different broker-dealers. The current disclosure requirements set forth in the amended rule and under the Plan will help ensure that implementation of final Rule 605 will proceed in a timely manner.

(b) Generation of Order Execution Quality Reports Using CAT Data

As an alternative to the proposed Rule 605 amendments, the Commission asked for comment on using CAT data to have either the Commission or the CAT NMS Plan Processor provide execution quality information to the public at monthly (or more frequent) intervals. This alternative would have effectively eliminated the need for market centers and larger broker-dealers to prepare Rule 605 reports.

A few commenters supported the use of CAT data to produce Rule 605 reports. An investment advisory firm stated that utilizing CAT data to create a report and making such reports easily accessible in one location “will likely result in a meaningful increase in transparency for investors.” An asset management firm stated that if every reporting firm generates its own reports, there would be “needless duplication of the costs and burdens associated with the implementation and ongoing maintenance of disclosures,” and that “a centralized processor for Rule 605 reports would also eliminate the inevitable inconsistencies or errors which arise when independent systems are responsible for creating reports.” Another broker-dealer specified that “for the sake of consistency and transparency, FINRA is best positioned to provide these reports” through the use of CAT data. Several commenters also stated that a central Rule 605 report processor would lower compliance burdens for broker-dealers. An industry group stated that if FINRA/CAT is not used to produce all Rule 605 reports, but FINRA prepares its own Rule 605 data for regulatory purposes, such FINRA data/report should be made available to the relevant firm.

The Commission recognizes the value in having one entity calculate the statistics required under Rule 605 and produce execution quality disclosures because it could result in more standardized data. This in turn could help facilitate one of the primary goals of the Rule 605 amendments—to enhance order execution quality reporting to better enable investors to compare and evaluate execution quality among different market centers and larger-broker-dealers. This approach could also allow for the publication of execution quality data for all broker-dealers instead of just those that meet the customer account threshold. However, there are potentially significant costs and time delays associated with implementation of this alternative. The obstacles associated with authorizing and enabling FINRA CAT to prepare execution quality disclosures could hinder the ability of investors and market participants more broadly to have ready access to enhanced execution quality information. Rule 605, as adopted, will require updated disclosure within a comparatively shorter timeframe. However, the Commission will continue to monitor this alternative in the context of the implementation of CAT and may in the future consider whether execution quality disclosure utilizing CAT data is practicable or advisable.

If the Commission in the future determines that CAT data should be utilized to produce execution quality disclosures, the Commission could also consider whether to eliminate the requirement that market centers and broker-dealers themselves produce Rule 605 reports in that context.

An industry group stated that “[t]o the extent FINRA/CAT are not utilized to produce Rule 605 reports, the Commission or FINRA should be required to provide a publicly available data template that specifies exactly how a market center or broker-dealer's Rule 605 reports should be produced.” The commenter further stated that “[d]oing so would establish a standardized metric consistent with regulators' expectations and reduce any regulatory risks reporting entities may face from having to make independent interpretations of various reporting requirements.” Although the Commission will not publish an exact data template for the detailed reports, the NMS Plan required by Rule 605(a)(3) will establish procedures for making the detailed report available to the public in a “uniform, readily accessible, and usable electronic form.” Further, Rule 605(a)(2) requires the summary report to be made available using the schema for CSV published on the Commission's website. In addition, the Commission is providing herein a detailed discussion of the final rule, including responses to issues and questions raised by commenters. Therefore, reporting entities will have the information needed to produce Rule 605 reports in a uniform manner.

VI. Existing Commission Exemptive Relief and Staff Statements

Upon the compliance date of the amendments to Rules 600 and 605, the Commission exemptive relief and staff statements listed below will be withdrawn. To the extent any staff statement is inconsistent with or conflicts with the requirements of Rule 600 or Rule 605, as amended, even if not specifically identified below, those statements are superseded.

As discussed in section III.A.1, the Commission is incorporating the Opening Exemption into the definition of covered order with respect to market or limit orders received during regular trading hours at a time when an NBBO is being disseminated. The Commission did not receive any comments opposing the proposed incorporation of the Opening Exemption into rule text or the rescission of the Opening Exemption in the 2001 Exemptive Letter. The Commission is rescinding the Opening Exemption as proposed, for the reasons discussed in the Proposing Release and in section III.A.1. The rescission of the Opening Exemption supersedes a staff FAQ.

In addition to the Opening Exemption, the Market Systems Exemptive Letter included a separate exemption from Rule 605 for orders received during a time when the consolidated best bid and offer (“BBO”) reflects a spread that exceeds $1 plus 5% of the midpoint of the consolidated BBO (“Spread Width Exemption”). As proposed, the Commission is not modifying or rescinding the Spread Width Exemption. Orders received during a time when the consolidated BBO reflects a spread that exceeds $1 plus 5% of the midpoint of the consolidated BBO “could be the result of potentially erroneous quotes or of abnormal trading conditions” and their inclusion “could significantly affect the comparability and reliability of the execution quality measures in market center monthly reports.”

As discussed in section III.B.1, commenters supported the inclusion of larger-sized orders, which necessarily requires the recission of the Large Order Exemptive Relief. The Commission is rescinding the Large Order Exemptive Relief as proposed, for the reasons discussed in the Proposing Release and in section III.B.1. The rescission of the Large Order Exemptive Relief supersedes the relevant staff FAQ.

Finally, two additional staff FAQs are specifically superseded by Rule 605, as amended, and the guidance contained in this release. First, the final rule incorporates a provision that supersedes current staff statements regarding the treatment of riskless principal orders. Specifically, adopted Rule 605(a)(1)(i)(D) provides that the number of shares of covered orders executed at the receiving market center, broker, or dealer excludes shares that the market center, broker, or dealer executes on a riskless principal basis. Second, as proposed, the Commission is providing guidance that non-exempt short sale orders will not be special handling orders unless a price test restriction is in effect for the security. The FAQs will be updated accordingly consistent with these changes.

VII. Transition Matters

The Commission is providing a transition period between when the amendments to Rule 605 are adopted and when the changes are fully implemented. As discussed above, the Rule 605 NMS Plan establishes procedures for market centers to make data available to the public in a uniform, readily accessible, and usable electronic form. In addition, formatting for Rule 605 data is governed by the Rule 605 NMS Plan, which sets forth, among other things, the file type and structure of the reports and the order and format of fields. As described in section V.B.1 above, the Commission is adopting paragraph (a)(3) of Rule 605 as proposed to direct the SROs to act jointly in establishing procedures for market centers, brokers, and dealers to follow in making Rule 605 reports available to the public. Because of the amendments to Rule 605 that the Commission is adopting, the Rule 605 NMS Plan will need to be updated to: (1) incorporate references to broker-dealers subject to Rule 605; (2) account for summary reports that will be required under Rule 605(a)(2); and (3) incorporate the new data fields that will be required under Rule 605(a)(1) for the detailed reports. In addition, larger broker-dealers and market centers will need time to test and implement programming and systems changes in order to comply with Rule 605 as amended.

The Proposing Release did not include a proposed compliance date for final Rule 605, but several commenters recommended that the Commission provide a sufficient implementation period for the proposed Rule 605 amendments, including an industry group that recommended a minimum of one year and an industry group that recommended a minimum of one year from “approval of applicable Plan amendments.” One of these industry groups suggested that the Commission should not require the inclusion of any data relating to the best available displayed price “until the best odd-lot order to buy and the best odd-lot order to sell have been included in the SIP and firms have had a reasonable time period, subsequent to such inclusion, to incorporate this data into their Rule 605 reports.” This industry group also stated that the implementation timetable for final Rule 605 should “commence from the date that the Commission publishes guidance in response to interpretive questions from industry members” regarding the adopted reporting requirements. However, an investor advocacy group recommended implementation of the proposed changes to Rule 605 “without delay.” In addition, a national securities exchange stated that deferring “key implementation details” to the Participants “may introduce additional complications and further delay implementation of the Rule 605 Proposal since NMS Plan Participants would first need to reach agreement and then file amendments to the Rule 605 NMS Plan with the Commission, which the Commission would need to approve.”

The amendments to Rule 605 discussed herein shall become effective 60 days after the date of publication in the Federal Register (“Effective Date”). The compliance date shall be 18 months after the Effective Date (“Compliance Date”). This amount of time is consistent with the commenter's request that the Commission provide a minimum implementation period of one year following adoption of amendments to Rule 605. The Commission also recognizes that preexisting market centers and vendors will need time to update their systems and processes to ensure that data responsive to the amended requirements are correctly collected and formatted, and that larger broker-dealers and market centers newly subject to Rule 605 will need time to create such systems and processes. Although two commenters referred to a potentially longer timeframe for implementation, the adopted timeframe will allow the benefits of the amended rule to be achieved sooner and therefore the Commission is adopting the implementation timeframe discussed in this section. After considering the comments, the Commission agrees that implementation of Rule 605 as amended should not be unnecessarily delayed because the modifications to Rule 605 that the Commission is adopting will expand its scope and improve the usefulness of the execution quality statistics that reporting entities will make available pursuant to Rule 605.

As part of the implementation process, and pursuant to the requirement in paragraph (a)(3) of Rule 605 as amended directing the SROs to act jointly in establishing procedures for market centers, brokers, and dealers to follow in making Rule 605 reports available to the public, the Rule 605 NMS Plan Participants (16 national securities exchanges and one national securities association) will need to file with the Commission a proposed Rule 605 NMS Plan amendment updating the Plan to reflect the amendments made herein to Rule 605, pursuant to Rule 608(a)(1) of Regulation NMS. The NMS Plan Participants are the appropriate parties to update the Rule 605 NMS Plan provisions given their experience in administering the Rule 605 NMS Plan since its approval by the Commission in 2001. Many of the detailed issues relating both to the format of the reports under Rule 605 as amended, and to the means of access to the reports, are appropriately addressed in the context of approval of an amendment to the Rule 605 NMS Plan. However, while the Rule 605 NMS Plan Participants will need to determine how to address certain technical elements of Rule 605, the modifications that will need to be made by the Rule 605 NMS Plan generally will be dictated by Rule 605 as amended ( e.g., updates to the list of fields included in the reports required by Rule 605(a)(1)).

In accordance with Rule 605 as amended, the Rule 605 NMS Plan amendment will need to establish procedures for market centers, brokers, and dealers to follow in making Rule 605 reports publicly available. Notice of the proposed amendment to the Rule 605 NMS Plan and the opportunity for comment will be provided.

In addition, market centers, brokers, and dealers will need to make necessary preparations to be in a position to comply with Rule 605 as amended by the Compliance Date. The Compliance Date strikes an appropriate balance between: (1) affording brokers, dealers, and market centers sufficient time to program their systems and implement business process changes necessary to comply with the new rules; and (2) requiring that the execution quality statistics in their Rule 605 reports become available to investors in a timely manner.

The Compliance Date is designed to allow time for both an amendment to the Rule 605 NMS Plan and time for brokers, dealers, and market centers time to comply with Rule 605 as amended.

Notwithstanding the Compliance Date, reporting entities will not be able to calculate the price improvement statistics relative to best available displayed price that will be required to be included in the detailed reports required by Rule 605(a)(1) for marketable order types, marketable stop orders, and midpoint-or-better order types until odd-lot order information is made available pursuant to an effective transaction reporting plan or effective national market system plan. The MDI Rules included odd-lot information in the data that will be made available within the national market system. Although the Commission adopted the MDI Rules, the MDI Rules have not been implemented. Once odd-lot order information is made available pursuant to an effective national market system plan, market centers, brokers, and dealers will need time to make any program updates and changes to their business processes that are necessary to calculate the price improvement statistics relative to the best available displayed price. In order for odd-lot order information to be made available pursuant to an effective national market system plan, participants will need to file with the Commission a proposed NMS plan or a proposed amendment to an NMS plan pursuant to Rule 608(a)(1) of Regulation NMS. Any such filing will be subject to public comment and Commission approval by order before the effectiveness of such plan or plan amendments pursuant to Rule 608(b)(2) of Regulation NMS. A Commission order approving a proposed plan or plan amendment making odd-lot information available will provide market participants notice of when odd-lot order information will be required to be made available. Further, to the extent that odd-lot information is collected, consolidated, and disseminated by the effective national market system plan(s), market participants will be provided notice of the availability of such information through usual communication channels that may be established by the competing consolidator(s) or that are used by exclusive SIPs, to the extent exclusive SIPs collect, consolidate, and disseminate odd-lot information pursuant to an effective national market system plan. Market centers, brokers, and dealers will have six months after odd-lot order information sufficient to calculate the best available displayed price is made available pursuant to an effective national market system plan to start including price improvement statistics relative to the best available displayed price in their Rule 605 reports.

VIII. Paperwork Reduction Act

Certain provisions of the rule amendments contain “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995 (“PRA”). The Commission requested comment on the collection of information requirements in the Proposing Release and submitted relevant information to the Office of Management and Budget (“OMB”) for review in accordance with 44 U.S.C 3507(d) and 5 CFR 1320.11. The Commission is altering an existing collection of information and applying such collection of information to new categories of respondents. The title of such existing collection of information is: Rule 605 of Regulation NMS (f/k/a Rule 11Ac1-5). An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the agency displays a currently valid control number.

Views of commenters relevant to the Commission's analysis of the reporting burdens imposed by the collection of information for Rule 605 as proposed are discussed below. In addition, certain estimates have been modified, as necessary, to conform to the adopted amendments and to reflect the most recent data available to the Commission.

A. Summary of Collection of Information

The amendments create burdens under the PRA by: (1) adding new categories of respondents to the existing collection of information and (2) modifying the requirements of such existing collection of information. The amendments do not create any new collections of information.

The categories of new respondents subject to Rule 605, as amended, are larger broker-dealers and new market centers, consisting of SDPs and entities that act as market centers for orders that were previously not covered by Rule 605, e.g., orders smaller than 100 shares.

The amendments modify both the scope of the standardized monthly reports required under Rule 605 and the required information. Rule 605, as amended: (1) expands the definition of “covered order” to include certain orders submitted outside of regular trading hours, certain orders submitted with stop prices, and non-exempt short sale orders; (2) modifies the existing order size categories to base them on notional value as well as whether an order is for less than a share, for an odd-lot, or for a round lot or greater rather than number of shares; (3) creates four new order type categories (marketable IOCs, executable market orders submitted with stop prices, executable marketable limit orders submitted with stop prices, and executable non-marketable limit orders submitted with stop prices) and replaces three existing categories of non-marketable order types with four new categories of order types (midpoint-or-better limit orders, midpoint-or-better IOCs, executable NMLOs, and NMLO IOCs); (4) modifies current time-to-execution reporting buckets; (5) modifies realized spread statistics to require realized spread to be calculated after 50 milliseconds, 1 second, 15 seconds, 1 minute, and 5 minutes; and (6) requires new statistical measures of execution quality including average effective spread divided by quoted spread, percentage effective and realized spread statistics, a size improvement benchmark and statistic, and certain statistical measures that could be used to measure execution quality of NMLOs. The amendments require all reporting entities to make a summary report available that will be formatted using the most recent versions of the schema for CSV format and the associated PDF renderer as published on the Commission's website. Finally, as a result of the amendments to Rule 605, Rule 605 NMS Plan Participants will need to amend the Rule 605 NMS Plan to account for the new data fields.

B. Proposed Use of Information

The purpose of the information collection is to make information about order execution practices available to the public and allow investors, broker-dealers, and market centers (which include exchange markets, OTC market makers, and ATSs) to undertake a comparative analysis of these practices across markets. Broker-dealers may use the information to make more informed choices in deciding where to route orders for execution and to evaluate their internal order handling practices. Investors may use the information to evaluate the order handling practices of their broker-dealers. Market centers may use the information to compete on the basis of execution quality.

C. Respondents

The collection of information obligations of Rule 605 applies to larger broker-dealers and market centers that receive covered orders in national market system securities (collectively, “reporting entities”). The Commission estimates that there are approximately 228 reporting entities (91 OTC market makers, plus 16 national securities exchanges, 1 national securities association, 87 exchange market makers, and 33 ATSs) under Rule 605 prior to these amendments. However, under the amendments, the Commission estimates there will be 343 reporting entities (91 OTC market makers, 85 broker-dealers that introduce or carry 100,000 or more customer accounts, 16 national securities exchanges, 1 national securities association, 87 exchange market makers, 33 ATSs, plus 30 new market center respondents ) that will be subject to the collection of information obligations of Rule 605. Each of these respondents will be required to respond to the collection of information on a monthly basis.

In addition, the amendments to Rule 605 will require the Rule 605 NMS Plan Participants (16 national securities exchanges and 1 national securities association) to prepare and file an amendment to the Rule 605 NMS Plan.

D. Total PRA Burdens

Rule 605, as amended, will require broker-dealers and market centers to make available to the public monthly order execution reports in electronic form. Broker-dealers and market centers retain most, if not all, of the underlying raw data necessary to generate these reports in electronic format or, if they do not, may obtain this information from publicly available data sources. Consequently, Rule 605 will not require new data collection or recordkeeping burdens. Respondents could either program their systems to generate the statistics and reports, or transfer the data to a service provider (such as an independent company in the business of preparing such reports or an SRO) that would generate the statistics and reports.

The currently approved PRA for prior Rule 605 estimates that each respondent spends 6 hours a month to collect the data necessary to generate the reports, or 72 hours per year. In the Proposing Release, the Commission estimated that each respondent would spend 8 hours a month, or 96 hours per year, on an ongoing basis, to comply with Rule 605 as proposed to be amended.

One commenter stated that the proposal did not include burdens related to business-line personnel or technical staff. Further, one commenter stated that the Commission's compliance cost estimates were too low because the Commission neglected to take into account dedicated staff time needed for data reconciliation and validation and other ongoing compliance costs. The commenters provided no data and provided no alternative estimates of the cost of preparing the monthly reports.

In response to the commenters, the Commission is adjusting its estimated annual burdens to account for work to be performed by technical staff, as described below. In addition, the Commission is adjusting the hourly rates used to monetize burden hours in order to account for recent inflation rates.

The Commission estimates that the initial and ongoing burdens will be different for those respondents that are already required to prepare reports and for new respondents. The Commission estimates that Rule 605 amendments will result in an initial burden for current respondents of 50 hours per respondent for systems updates to ensure that data responsive to the amended requirements is correctly collected and formatted. The initial burden estimate represents the work that will need to be done by existing respondents to modify their systems to collect data required under the amendments to Rule 605 and generate the monthly reports. The estimate includes time required to program and test automated systems to collect the necessary data, as well as review and approval by compliance personnel. The Commission does not believe the information required to be aggregated and included in Rule 605 reports, as amended, will require preexisting respondents to acquire new hardware or systems to process the information required in the reports. The Commission further estimates that the Rule 605 amendments will result in an ongoing monthly burden of 11 hours per respondent to collect the necessary data and to prepare the required Rule 605 reports, for a total annual burden of 132 hours per respondent. This estimate represents an increase of 3 hours per respondent over the Commission's initial estimate because it accounts for technical staff time that will be required to verify automated processes are functioning as intended and post and prepare the required reports, or transfer data to a service provider to generate the reports. This estimate has been revised from the Proposing Release in response to commenters who stated that the Commission did not adequately account for technical staff. With an estimated 228 respondents already subject to Rule 605, the total initial burden to comply with the Rule 605 amendments is estimated to be 11,400 hours while the monthly reporting requirement is estimated to be 30,096 hours per year (228 × 132). The burdens for respondents currently reporting under Rule 605 are likely to be lower than those of new reporting entities because currently reporting entities already have systems in place to collect the data necessary to generate reports under the current rule. These estimates include the impact of preparing and making summary reports available using the most recent versions of the schema for CSV format and the associated PDF renderer as published on the Commission's website.

The Commission estimates that Rule 605 amendments will result in an initial burden for new respondents of 100 hours for each respondent ⁹⁵⁵ for systems updates to ensure that data responsive to the amended requirements is correctly gathered and formatted. This burden is higher than the estimated burden for current respondents because new respondents do not currently have in place the systems to collect the information required for current Rule 605 reports. These respondents will likely require additional time to collect the relevant information. In addition, this estimate includes additional time for programming and testing automated systems to collect the necessary data and additional hours for review and approval by compliance personnel. Once the relevant data are collected, respondents could either program their systems to generate the reports or transfer the data to a service provider that will generate the reports. Respondents will likely not be required to acquire new hardware or other technological resources to be able to collect the data required by the amended rule given that respondents already have computing systems in place to, for example, transmit and process order information, and such systems could be leveraged to collect the required data. Further, to the extent a respondent does not have the technological capabilities or resources to generate the reports in-house, such respondents will likely utilize a service provider, as discussed below.

The Commission estimates that the Rule 605 amendments will result in an ongoing monthly burden of 11 hours to collect the necessary data and to prepare the required Rule 605 reports, for a total annual burden of 132 hours per respondent. With an estimated 115 new respondents subject to Rule 605, the total initial burden to comply with the Rule 605 amendments is estimated to be 11,500 hours while the monthly reporting requirement is estimated to be 15,180 hours per year (115 × 132). These estimates include the impact of preparing and making summary reports available using the most recent versions of the schema for CSV format and the associated PDF renderer as published on the Commission's website.

The Commission estimates that in lieu of preparing both summary and detailed monthly reports in-house, an individual respondent could retain a service provider to prepare its monthly reports for between approximately $3,000 and $3,500 per month or approximately $36,000 to $42,000 per year. This per-respondent estimate is based on the rate that a reporting entity could expect to obtain if it negotiated on an individual basis. Based on the $3,000 to $3,500 estimate, the monthly cost to the 343 respondents to retain service providers to prepare reports will be between approximately $1,029,000 and $1,200,500 ((343 × $3,000) and (343 × $3,500), respectively), or a total annual cost of between approximately $12,348,000 and $14,406,000 (($1,029,000 × 12) and ($1,200,500 × 12), respectively).

Finally, the 16 national securities exchanges and 1 national securities association will need to amend the Rule 605 NMS Plan to account for the new data fields required to be reported and to include references to larger broker-dealers in addition to market centers. The Commission is modifying the estimates for the initial burden and costs to the SROs to file the amendment to eliminate the per respondent burden for each SRO and instead estimate the burden for the SROs collectively because the respondents would file this amendment jointly, rather than individually, in connection with their status as participants in the effective national market system plan. The Commission estimates that there will be a one-time (or initial) burden of 85 hours to amend the Rule 605 NMS Plan to account for the new reporting fields and reporting parties. The Commission does not estimate that there will be any ongoing annual burden associated with the Rule 605 NMS Plan amendment to account for the new reporting fields and reporting parties. The Commission has based its estimate of SRO burden hours to amend the Rule 605 NMS Plan on the burden hours for existing NMS plans, while also taking into account the limited nature of the updates to the Rule 605 NMS Plan that will be required under the amendments to Rule 605.

The Commission estimates that there will be outsourcing of legal time to develop and draft the Rule 605 NMS Plan amendment in order to account for additional data fields and reporting parties. The Rule 605 NMS Plan amendment will be an update to the list of formats and fields to track the data elements set forth in the Rule and add references to broker-dealers subject to the Rule, and therefore the Commission estimates the hours necessary to develop and draft the amendment will be significantly lower than other recent NMS plan amendments. The Commission estimates that the plan participants will outsource 34 hours of legal time to prepare and file an amendment to the Rule 605 NMS Plan, at an average hourly rate of $575. The Commission estimates that the aggregate one-time reporting burden for preparing and filing an amendment to the Rule 605 NMS Plan will be approximately $19,550 in external costs from outsourced legal work [(at $575 for 34 hours = $19,550)].

The Commission currently estimates a total initial burden of 23,019 hours for all respondents and a total annual burden of 45,276 hours for all respondents.

IX. Economic Analysis

A. Introduction

The Commission is mindful of the economic effects that may result from these amendments to Rule 605, including the benefits, costs, and the effects on efficiency, competition, and capital formation. The following economic analysis identifies and considers the costs and benefits—including the effects on efficiency, competition, and capital formation—that could result from these amendments to Rule 605.

In 2000, when the Commission adopted Rule 11Ac1-5, which was later redesignated as Rule 605, it stated that the rule should facilitate comparisons across market centers and provoke more vigorous competition on execution quality and broker-dealer order routing performance. However, under prior Rule 605 reporting requirements, market participants have not been able to observe the variations across broker-dealers in terms of the execution quality achieved by their order routing services using standardized and publicly available execution quality reports. Furthermore, in the subsequent decades, substantial changes in equity markets, including increases in trading speeds and fragmentation, have made it so that Rule 605 reports have become less informative than they were when Rule 605 was adopted. These amendments to Rule 605, including expanding the scope of reporting entities, modernizing the content of Rule 605 reports, and broadening the reports' accessibility, will increase the relevance and use of the information contained in the reports, and promote competition among market centers and broker-dealers. This increase in competition is expected to ultimately lead to improved execution quality for investors.

The Commission recognizes that these amendments to Rule 605 will entail additional costs to market centers and broker-dealers of disclosing the required execution quality information. Market centers will face initial compliance costs when updating their methods for preparing Rule 605 reports, and broker-dealers that were not required to publish Rule 605 reports prior to these amendments will face initial compliance costs, including, but not limited to, developing the systems and processes and organizing the resources necessary to generate the reports pursuant to Rule 605, and ongoing compliance costs to publish Rule 605 reports each month.

The Commission has considered and is describing the economic effects of these amendments to Rule 605 and wherever possible has quantified the likely economic effects of these amendments. The Commission has incorporated data and other information, such as academic literature, to assist in the analysis of the economic effects of these amendments. However, because the Commission does not have, and in certain cases does not believe that it reasonably can obtain, data that may inform on certain economic effects, the Commission is unable to quantify those economic effects. Further, even in cases where the Commission has some data, the number and type of assumptions necessary to quantify certain economic effects would render any such quantification unreliable. Our inability to quantify certain costs, benefits, and effects does not imply that such costs, benefits, or effects are less significant.

B. Market Failure

The information disclosed under Rule 605 has provided significant insight into execution quality at different market centers. However, the utility of some of the metrics in Rule 605 reports has eroded because such metrics have not kept up with the substantial changes in equity markets since the initial adoption of Rule 605's predecessor in 2000. As a result, Rule 605 is less able to address the market failures identified in the Rule 11Ac1-5 Adopting Release, including market centers' limited incentives to produce publicly available, standardized execution quality reports. While some metrics remain robust, particular metrics required to be reported by Rule 605 prior to these amendments have become less useful for comparing execution quality across market centers than they were when the predecessor of Rule 605 was initially adopted. Further, some metrics that will be useful in today's market were not required to be reported prior to these amendments. These market changes have limited the degree to which the metrics reported under prior Rule 605 promoted competition among market centers and improved execution quality. To enhance the value of Rule 605 reports, the Commission is updating the disclosure of order execution information and expanding the scope of reporting entities under Rule 605, which will result in a variety of improvements to market participants' access to information about execution quality.

The Commission does not believe that improvements to the preexisting Rule 605 metrics are likely to be achieved through a market-based solution. Even if all market centers were incentivized to voluntarily produce updated statistics for competitive or reputational reasons ( e.g., they may lose business if their competitors provide reports and they do not), under current rules, there is little incentive for all market centers to agree on a standardized set of updated statistics. For example, market centers may be incentivized to design ad hoc reports to highlight areas where they believe they compare well to their competitors. Without a standardized set of statistics, it would be difficult for market participants to easily compare execution quality across market centers.

Furthermore, it may be difficult for certain market participants to compute accurate and relevant execution quality metrics from data sources other than Rule 605 reports, due to the lack of granularity and significant time delay of many other publicly available datasets, which can lead to imprecise or stale measures. This limits certain market participants' ability to conduct analyses that examine and compare execution quality across market centers to inform investors. Moreover, even if execution quality information were voluntarily reported by market centers, there may also be limits to market participants' incentives to access it. For example, even if a subset of market centers is able to coordinate on and produce a standardized set of voluntary execution quality metrics, the ability of market participants to use this measure to make comparisons across reporting entities would depend on the subset of reporting entities that choose to report it. If this subset is not of a significant enough size, there may be few incentives for market participants to access the information. Therefore, this rulemaking to modernize the information required to be reported by all Rule 605 reporting entities will prove beneficial.

In addition to modernizing the content of Rule 605, expanding the scope of entities that will be required to prepare Rule 605 reports to include larger broker-dealers will result in benefits that are unlikely to be achieved absent the amendments. Broker-dealers and their customers are subject to a classic principal-agent relationship in which the customer (the principal) submits an order to a broker-dealer (the agent) to handle its execution on the customer's behalf; however, information asymmetries prevent the customer from being able to directly observe the broker-dealer's handling of the customer's order. This limits the extent to which broker-dealers need to compete for customers or order flows on the basis of execution quality, which may result in lower execution quality for their customers.

As with market centers, most broker-dealers also do not necessarily have incentives to produce public and standardized execution quality reports and, therefore, are subject to the same market failures identified in the Rule 11Ac1-5 Adopting Release and described above. Furthermore, as discussed above in the context of market centers, even if broker-dealers are incentivized to produce execution quality reports, for example for marketing purposes or to protect against reputation loss, there are few incentives for broker-dealers to provide execution quality information that is standardized. As a result, individual investors and, to some extent, institutional investors, have limited access to standardized information that could be used to compare how execution quality varies across broker-dealers. Without standardized reporting requirements, broker-dealers may provide their customers with different metrics, such that customers would not be able to make comparisons among broker-dealers on the basis of execution quality. Additionally, even if broker-dealers provide their customers with the same metrics, they may use different methodologies to calculate these metrics, such that they would not be easily comparable. Both of these factors would limit customers' abilities to compare execution quality across broker-dealers.

One commenter stated that vendors could provide a market-based solution for producing comprehensive metrics and could compete for business. The Commission disagrees that a vendor-based market solution would achieve the same benefits as these amendments to Rule 605. Vendors would not have access to information that is granular enough to produce execution quality metrics similar to the ones required by Rule 605 reporting requirements without getting data from market centers and broker-dealers. As discussed above, market centers and broker-dealers do not necessarily have incentives to provide public and standardized execution quality information, and those who choose not to contribute data may do so because they believe it is in their interest to keep their data out of public view. This makes it unlikely that a commercial data vendor will be able to produce an execution quality data product that is comprehensive and free from selection biases. Absent a requirement for reporting entities to publish standardized execution quality reports, competing vendors would likely have incomplete data or produce non-standardized metrics while market centers and broker-dealers might select the vendors that make them look the best. As a result, this market-based solution would be less valuable for comparing execution quality across market centers and broker-dealers. Furthermore, while competing vendors would likely be able to offer a data product summarizing the information contained in Rule 605 reports, it is not necessarily the case that these summary reports would be “free and readily accessible to the public,” as required by the amended rule.

C. Baseline

The baseline is the status quo against which the costs, benefits, and the effects on efficiency, competition, and capital formation of these amendments are measured. This baseline consists, first, of the regulatory baseline, which frames both investors' access to execution quality information under Rule 606 and preexisting Rule 605 and market participants' access to market data, both currently and as expected under the unimplemented MDI Rules. The regulatory baseline also consists of other recently adopted rules. In addition, the baseline consists of the usage of preexisting Rule 605 execution quality information by market participants. Next, the baseline discusses issues with market participants' ability to use preexisting Rule 605 information to evaluate and compare execution quality across reporting entities prior to these amendments. Lastly, this baseline describes the state of the markets for brokerage and trading services and the extent to which Rule 605's ability to promote competition on the basis of execution quality, both among broker-dealers and among market centers, may have been limited prior to these amendments. The economic analysis considers existing regulatory requirements, including recently adopted rules, as part of its economic baseline against which the costs and benefits of the amended rule are measured.

1. Regulatory Baseline

(a) Disclosure Requirements Under Preexisting Rule 605

Rule 605 requires reporting entities to make available, on a monthly basis, standardized information concerning execution quality for covered orders in NMS stocks; prior to these amendments, these reporting entities included only market centers. Aggregated execution quality information on covered orders is reported for each individual security, with the information for each security broken out into multiple order type and size categories. This format allows market participants to partially control for differences in market centers' order flow characteristics when assessing execution quality information, facilitating more apples-to-apples comparisons of execution quality across market centers. This is important because a particular market center's order flow may be made up of a different mixture of securities, order types, and order sizes, which may impact or constrain that market center's overall execution quality. In addition, some of the information required to be reported by Rule 605, such as the realized spread, does not measure execution quality directly but serves the purpose of providing context to execution quality metrics and ascertaining how entities handle orders during different market conditions.

In addition, the execution quality information required by Rule 605 pertains to several different aspects of execution quality, namely, execution prices, execution speeds, and fill rates. Prior to these amendments, this information on execution prices included, for market orders and marketable limit orders, the average effective spread, number of shares executed at prices better than the quote, at the quote, or outside the quote, as well as average dollar amount per share that orders were executed at prices better than the quote or outside the quote. Information on execution speeds included, for all order types, the cumulative number of shares executed within different time-to-execution buckets and, for market and marketable limit orders, the share-weighted average time to execution of orders executed better than the quote, at the quote, or outside the quote. Information that could be used to calculate fill rates included, for all order types, the cumulative number of shares of covered orders, the cumulative number of shares of covered orders executed at the receiving market center, and the cumulative number of shares of covered orders executed at any other venue.

The Rule 605 NMS Plan establishes procedures for market centers to make data available to the public in a uniform, readily accessible, and usable electronic form. The Plan also requires market centers to post their monthly reports on an internet website that is free of charge and readily accessible to the public. Generally, reports are posted on market centers' own websites; however, they may be posted on a third-party vendor site if a market center uses a vendor to prepare its reports. Among other things, the Plan sets forth the file type and structure of the reports and the order and format of fields, yielding reports that are structured and machine-readable.

(b) Disclosure Requirements Under Rule 606

Under Rule 606, broker-dealers are required to identify the venues, including market centers, to which they route customer orders for execution. Specifically, with respect to held orders, Rule 606(a)(1) requires broker-dealers to produce quarterly public reports containing information about the venues to which the broker-dealer regularly routed non-directed orders for execution, including any payment relationship between the broker-dealer and the venue, such as any PFOF arrangements. In addition, Rule 606(b)(1) requires broker-dealers to provide to their customers, upon request, reports that include high-level customer-specific order routing information, such as the identity of the venues to which the customer orders were routed for execution in the prior six months and the time of the transactions, if any, that resulted from such orders. For orders submitted on a held basis, the reports required by Rule 606 do not contain any execution quality information.

When the Commission adopted the predecessor to Rule 606, it was intended to supply investors with information on where their orders are routed, which could be used along with information from Rule 605 about the quality of execution from the market centers to which their orders are routed. In theory, investors should be able to use Rule 606 reports to identify the market centers to which their broker-dealers are routing orders, and then use Rule 605 to estimate the execution quality offered by those market centers. These market centers' aggregated execution quality metrics could then be used as a proxy for the execution quality that broker-dealers achieved for their customers' orders.

Following amendments to Rule 606 in 2018, broker-dealers are subject to requirements to provide information about the execution quality that they achieved for not held orders, which are typically used by institutional investors. Specifically, Rule 606(b)(3) requires broker-dealers to produce reports pertaining to order handling upon the request of a customer that places, directly or indirectly, one or more orders in NMS stocks that are submitted on a not held basis, subject to a de minimis exception. These reports include aggregated execution quality metrics such as fill rate, percentage of shares executed at the midpoint, and percentages of total shares executed that were priced on the side of the spread more favorable to the order and on the side of the spread less favorable to the order.

(c) Rules Addressing Consolidated Market Data

In 2020, the Commission adopted a new rule and amended existing rules to establish a new infrastructure for consolidated market data, and the regulatory baseline includes these changes to the current arrangements for consolidated market data. However, as discussed in more detail below, the MDI Rules have not been implemented, and so they have not yet affected market practices. As a result, the data used to measure the baseline below reflects the regulatory structure in place for consolidated market data prior to the implementation of the MDI Rules.

The Commission received comments regarding uncertainty over the market effect of the MDI Rules, once implemented, and how this will affect the baseline assumptions of Rule 605, as amended. Accordingly, this section will first briefly summarize the regulatory structure for consolidated market data prior to the implementation of the MDI Rules. It then will discuss the current status of the implementation of the MDI Rules and provide an assessment of the potential effects that the implementation of the MDI Rules can have on the baseline estimations.

(1) Regulatory Structure for Consolidated Market Data Prior to the MDI Rules

Consolidated market data are made widely available to investors through the national market system, a system set forth by Congress in section 11A of the Exchange Act and facilitated by the Commission in Regulation NMS. Market data are collected by exclusive SIPs, which consolidate that information and disseminate an NBBO and last sale information. For quotation information, only the 16 national securities exchanges that currently trade NMS stocks provide quotation information to the SIPs for dissemination in consolidated market data. FINRA has the only SRO display-only facility (the Alternative Display Facility, or ADF). No broker-dealer, however, currently uses it to display quotations in NMS stocks in consolidated market data. ¹⁰¹¹ Disseminated quotation information includes each exchange's current highest bid and lowest offer and the shares available at those prices, as well as the NBBO. For transaction information, currently all national securities exchanges that trade NMS stocks, as well as FINRA, provide real-time transaction information to the SIPs for dissemination in consolidated market data. Such information includes the symbol, price, size, and exchange of the transaction, and it includes odd-lot transactions.

(2) Unimplemented Market Data Infrastructure Rules

Among other things, the unimplemented MDI Rules update and expand the content of consolidated market data to include: (1) certain odd-lot information; (2) information about certain orders that are outside of an exchange's best bid and best offer ( i.e., certain depth of book data); and (3) information about orders that are participating in opening, closing, and other auctions. The MDI Rules also introduce a four-tiered definition of round lot that is tied to a stock's average closing price during the previous month. For stocks with prices greater than $250, a round lot is defined as consisting of between 1 and 40 shares, depending on the tier. The MDI Rules also introduce a decentralized consolidation model under which competing consolidators, rather than the existing exclusive SIPs, will collect, consolidate, and disseminate certain NMS information. These competing consolidators are not required to offer a product containing all elements of consolidated market data, but are able to develop the consolidated market data products that their subscribers demand.

In the MDI Adopting Release, the Commission established a transition period for the implementation of the MDI Rules. The Commission's approval of such amendments will be the starting point for the rest of the MDI implementation schedule. After approval of the MDI Plan Amendments, the next step will be a 180-day development period, during which competing consolidators can register with the Commission. Based on the times provided in the transition plan for implementation of the MDI Rules, the Commission estimated that the full implementation of the MDI Rules will be at least two years after the Commission's approval of the plan amendment(s) required by Rule 614(e).

The Operating Committees of the CTA/CQ Plan and UTP Plan filed the MDI Plan Amendments on November 5, 2021. The Commission disapproved the proposed amendments on September 21, 2022. As a result, the participants to the effective national market system plan(s) will need to develop and file new proposed amendments as required by Rule 614(e), before the implementation period prescribed by the phased transition plan can commence. Because the implementation of the MDI Rules has been delayed, the end date of the implementation period cannot be estimated with greater certainty.

Given that the MDI Rules have not yet been implemented, they have not affected market practice and therefore data that would be required for a quantitative analysis of a baseline that includes the effects of the MDI Rules is not available. It is possible that the baseline (and therefore the economic effects relative to the baseline) could be different once the MDI Rules are implemented. The following discussion reflects the Commission's assessment of the anticipated economic effects of the MDI Rules described in the MDI Adopting Release as they relate to the baseline for the adoption of these amendments.

The Commission anticipated that the new round lot definition will result in narrower NBBO spreads for most stocks with prices greater than $250 because, for these stocks, fewer odd-lot shares will need to be aggregated together (possibly across multiple price levels ) to form a round lot and qualify for the NBBO. The reduction in spreads will be greater in higher-priced stocks because the definition of a round lot for these stocks will include fewer shares, such that even fewer odd-lot shares will need to be aggregated together. This could cause statistics that are measured against the NBBO to change because they will be measured against the new, narrower NBBO. For example, execution quality statistics on price improvement for higher-priced stocks may show a reduction in the number of shares of marketable orders that received price improvement because price improvement will be measured against a narrower NBBO. In addition, the Commission anticipated that the NBBO midpoint in stocks priced higher than $250 could be different under the MDI Rules than it otherwise would be, resulting in changes in the estimates for statistics calculated using the NBBO midpoint, such as effective spreads. In particular, at times when bid odd-lot quotations exist within the current NBBO but no odd-lot offer quotations exist (and vice versa), the midpoint of the NBBO resulting from the rule will be higher than the current NBBO midpoint. More broadly, the Commission anticipated that the adopted rules will have these effects whenever the new round lot bids do not exactly balance the new round lot offers. However, the Commission stated that it does not know to what extent or in which direction such odd-lot imbalances in higher priced stocks currently exist, so it is uncertain of the extent or direction of the change.

The Commission also anticipated that the MDI Rules could result in a smaller number of shares at the NBBO for most stocks in higher-priced round lot tiers. To the extent that this occurs, there could be an increase in the frequency with which marketable orders must walk the book to execute. This would affect statistics that are calculated using consolidated depth information, such as measures meant to capture information about whether orders received an execution of more than the displayed size at the quote, i.e., “size improvement.”

The new round lot definition will result in fewer odd-lot orders in stocks with prices greater than $250, as some orders that were defined as odd-lots prior to the MDI Rules are now defined as round lots. At the same time, the MDI Rules may also result in a higher number of odd-lot trades, as the inclusion of odd-lot quotes that may be priced better than the current NBBO in consolidated market data may attract more trading interest from market participants that did not have access to this information prior to the MDI Rules. However, the magnitude of this effect depends on the extent to which market participants who rely solely on SIP data and lack information on odd-lot quotes choose to receive the odd-lot information and trade on it. The Commission states in the MDI Adopting Release that it believes it is not possible to observe this willingness to trade with existing market data.

The MDI Rules may have implications for broker-dealers' order routing practices. For those market participants that rely solely on SIP data for their routing decisions and that choose to receive the expanded set of consolidated market data, the Commission anticipated that the additional information contained in consolidated market data will allow them to make more informed order routing decisions. This in turn would help facilitate best execution, which would reduce transaction costs and increase execution quality. Broker-dealers may choose to receive market data from competing consolidators, who may offer different consolidated market data products at different prices or at different latencies or with different amounts of data content. Competing consolidators will be required to disclose information about their consolidated market data products, including the services they will offer, the prices for such services as well as performance metrics, which will assist a broker-dealer in selecting an appropriate competing consolidator. The Commission states in the MDI Adopting Release that it believes that competition among consolidators will support high quality consolidated market data. Furthermore, while competing consolidators are not required to offer a product containing all elements of consolidated market data, the Commission states that it believes that one or more competing consolidators will be incentivized to offer a consolidated market product containing all of the data elements.

The MDI Rules may also result in differences in the baseline competitive standing among different trading venues, for several reasons. First, for stocks with prices greater than $250, the Commission anticipated that the new definition of round lots may affect order flows as market participants who rely on consolidated data will be aware of quotes at better prices that are currently in odd-lot sizes, and these may not be on the same trading venues as the one that has the best 100 share quote. Similarly, it anticipated that adding information on odd-lot quotes priced at or better than the NBBO to expanded core data may cause changes to order flow as market participants take advantage of newly visible quotes. However, the Commission stated that it was uncertain about the magnitude of both of these effects. To the extent that it occurs, a change in the flow of orders across trading venues may result in differences in the competitive baseline in the market for trading services.

Second, national securities exchanges and ATSs have a number of order types that are based on the NBBO, and so the Commission anticipated that the changes in the NBBO caused by the new round lot definitions may affect how these order types perform and could also affect other orders with which they interact. The Commission stated that these interactions may affect relative order execution quality among different trading platforms, which may in turn affect the competitive standing among different trading venues, with trading venues that experience an improvement/decline in execution quality attracting/losing order flow. However, the Commission stated that it was uncertain of the magnitude of these effects.

Third, the Commission anticipated that, as the NBBO narrows for securities in the smaller round lot tiers, it may become more difficult for the retail execution business of wholesalers to provide price improvement and other execution quality metrics at levels similar to those provided under a 100 share round lot definition. To the extent that wholesalers are held to the same price improvement standards by retail brokers in a narrower spread environment, the wholesalers' profits from executing individual investor orders might decline, and to make up for lower revenue per order filled in a narrower spread environment, wholesalers may respond by changing how they conduct their business in a way that may affect retail brokers. However, the Commission stated that it was uncertain as to how wholesalers may respond to the change in the round lot definition, and, in turn, how retail brokers may respond to those changes, and so was uncertain as to the extent of these effects. If wholesalers do change how they conduct business, it may impact wholesalers' competitive standing in terms of the execution quality offered, particularly to individual investor orders.

Where implementation of the above-described MDI Rules may affect certain numbers in the baseline, the description of the baseline below notes those effects.

(d) Other Recently Adopted/Proposed Rules

Several commenters requested that the Commission consider interactions between the economic effects of the proposal to amend Rule 605 and other recent Commission proposals. In addition to interaction between this rulemaking and the MDI Adopting Release, discussed supra, commenters stated that there could be interactions between this rulemaking and another proposal that has since been adopted, the Settlement Cycle Adopting Release, which affects the same market participants as the amendments to Rule 605. Commenters stated that implementing the rules together would impact industry resources, or that the rules had uncertain interacting effects. This rule was not included as part of the baseline in the Proposing Release because it was not adopted at the time of the Proposing Release. In response to commenters, this economic analysis considers potential economic effects arising from any overlap between the compliance period for the final amendments and that of the Settlement Cycle Adopting Release.

In addition, commenters stated that there were overlapping compliance costs between the final amendments and the proposals that have not been adopted: in particular, the Order Competition Rule Proposing Release, the Regulation Best Execution Proposing Release, and the Minimum Pricing Increments Proposing Release. Numerous commenters accordingly recommended an incremental or sequential approach to the Commission's market structure proposals. To the extent the Commission takes final action on any or all of those proposals, the baseline in each of those subsequent rulemakings will reflect the existing regulatory requirements at that time.

In a related comment, one commenter stated that the other market structure proposals should be delayed for a period sufficient to analyze the metrics under the amended Rule 605 reporting requirements, to establish an updated baseline for the other rules' benefits and costs and—if the other rules are adopted—to accurately measure their impact. This comment pertains to the timing of adoption and baseline assumptions of the other market structure proposals and will be considered in connection with those proposals.

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

(a) Relevance of Execution Quality Information

When a customer places an order in an NMS stock with a broker-dealer, the broker-dealer acts as an agent on behalf of that customer, to whom the broker-dealer owes a duty of best execution. These broker-dealers can generally decide how to route that order for execution to an exchange, a wholesaler, or an ATS, where the trade may be executed or potentially routed further. These market centers, among other things, match traders with counterparties, provide a framework for price negotiation and provide liquidity to those seeking to trade. In this way, individual and institutional investors are subject to a principal-agent relationship in which an order submitter (the principal) submits an order to an agent to handle on its behalf, in this case the broker-dealer. Since information asymmetries prevent the principal from being able to directly observe the agent's handling of the order, this creates possible conflicts of interest in which the agent's incentives may not align with the interests of the principal. Since the broker-dealers typically do not directly observe market centers' executions of their routed orders, similar information asymmetries exist between broker-dealers and the market centers to which they route customer orders.

Standardized execution quality information, such as the information available from Rule 605 reports, alleviates these information asymmetries. First, it provides broker-dealers access to information about the execution quality of market centers, which they can use to inform their routing decisions. Secondly, in conjunction with broker-dealer routing information from Rule 606 reports, preexisting Rule 605 allowed investors access to information about the execution quality achieved by the market centers to which their broker-dealers typically route.

Information on the execution quality obtained by broker-dealers is particularly important for investors. As broker-dealers that route customer orders have many choices about how and where to route orders for execution, their routing decisions affect the execution quality that their customers' orders receive, leading to significant variations in execution quality across broker-dealers. For example, a broker-dealer may route a marketable IOC order to a market center that is not posting any liquidity at the NBBO (in which case the order would be cancelled), or a broker-dealer may route a NMLO to a market center that is not attracting any trading interest (in which case the NMLO would likely be cancelled at the end of day, if not earlier). The authors of one recent academic working paper ran an experiment in which they placed identical simultaneous market orders across various broker-dealers; they found that the execution quality of these orders differed significantly in terms of average price improvement and effective spreads. The authors argue that these differences in execution quality across broker-dealers are economically significant, as they estimate that every basis point difference in execution quality is equivalent to an annual cost to investors of $2.8 billion. The evidence that there are significant differences in execution quality across broker-dealers suggests that without access to standardized information about broker-dealer execution quality, it is difficult for investors to compare these differences when choosing a broker-dealer.

Some information asymmetries are not fully addressed through the use of aggregated execution quality information, such as that available through Rule 605 (both prior to and after these amendments), because the principal is not able to use these data to observe the execution quality that the agent achieved for the principal's individual orders. However, the principal is able to receive a signal of the execution quality that the agent has achieved for comparable orders over a certain time period. This signal can be a useful proxy that investors and their broker-dealers can use to assess and compare the execution quality that they can expect to receive across market centers. Despite being aggregated, Rule 605 reports have indeed been useful. 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. The authors attribute this effect to broker-dealers factoring in information about the execution quality of market centers from Rule 605 reports when making their order routing decisions.

Market participants have access to some public information about the execution quality of market centers from sources other than Rule 605. For example, some wholesalers and ATSs produce order flow and execution quality statistics other than those required under Rule 605 and make them available either on their websites or as part of their ATS-N filings. However, these sources are either not standardized or are not available across all market centers such that Rule 605 remains an important source of standardized information about market center execution quality. At the same time, while Rule 605 data have been used by some market participants, such as broker-dealers and investment advisers as part of their review of execution quality, and by academics, analysts and the financial press, the use of these data by both individual and institutional investors to directly evaluate and compare execution quality across market centers has been limited. The following sections will discuss the use of data under preexisting Rule 605 by individual investors, institutional investors, and other market participants.

(b) Usage of Rule 605 Reports by Individual Investors

The extent to which individual investors directly access Rule 605 reports has likely been limited. Several commenters to the Proposing Release stated that individual investors have limited or no usage of Rule 605 data. This limited usage is likely for two reasons.

First, since Rule 605 reporting requirements did not extend to broker-dealers that were not market centers prior to these amendments, investors' ability to use preexisting Rule 605 to assess and compare the execution quality that they receive from their broker-dealers has been limited. Information about the execution quality received by market centers is only or mostly relevant for investors to the extent that investors can combine this information with information about broker-dealer routing practices from Rule 606 reports to infer the execution quality of their broker-dealers. As will be discussed in detail later in this analysis, if broker-dealers receive different execution quality from a given market center, combining Rule 606 and preexisting Rule 605 data is not necessarily informative about an individual broker-dealer's average execution quality at that market center, since a market center's Rule 605 report is aggregated across all of its broker-dealer customers. This has likely limited the incentive for broker-dealer customers, including individual investors, to access Rule 605 reports. Second, to the extent that information in Rule 605 reports has been relevant to individual investors such that they are incentivized to access them, Rule 605 reports are designed to be machine readable, rather than human readable. While machine-readable data are useful for facilitating further processing and analysis, they are not easily consumable by market participants who do not have the access to necessary software or programming skills. This may limit the accessibility of Rule 605 reports, particularly for those individual investors who lack access to these resources. Such individual investors may instead prefer to consume human-readable reports or summary statistics. In the Rule 11Ac1-5 Adopting Release, the Commission anticipated that, rather than individual investors obtaining and digesting Rule 605 reports themselves, independent analysts, consultants, broker-dealers, the financial press, and market centers would analyze the information and produce summaries that respond to the needs of investors. Although the Commission is unable to observe the full extent to which this has occurred, third parties have produced information based on Rule 605 reports that is meant for public consumption. For example, data obtained from Rule 605 reports have been used by academics to study a variety of topics related to execution quality, including liquidity measurement, exchange competition, zero-commission trading, and broker-dealer execution quality. Rule 605 data have also been used in the financial press.

Unlike institutional investors, individual investors typically have limited access to alternative sources of standardized execution quality information that could be used to compare across broker-dealers other than information obtained (directly or indirectly) from reports under prior Rule 605. The requirement in Rule 606(b)(3) for broker-dealers to provide individualized reports of execution quality to their customers upon request does not extend to held orders, which are those most used by individual investors, and contains a customer-level de minimis exception that likely excludes most individual investors. In addition, many individual investors likely do not have access to the data processing tools and/or sufficiently granular datasets that are required to calculate their own execution quality statistics, which makes it difficult for them to compare how execution quality varies across broker-dealers. One exception is the recent effort by a few broker-dealers and wholesalers to make available voluntary summary disclosures of execution quality in exchange-listed stocks for individual investors using the FIF Template. Although the reports produced using the FIF Template may be useful, this disclosure is voluntary, and only a few firms are making or have made such disclosures. The Commission understands that only three retail brokers began producing reports using the FIF Template in 2015 on a quarterly basis. One of these broker-dealers was acquired and stopped producing these reports in 2017, and another stopped producing these reports in 2018. Only one retail broker currently produces reports using the FIF Template. Likewise, the Commission understands that there is currently only one wholesaler producing reports using the FIF Template.

(c) Usage of Rule 605 Reports by Institutional Investors

The Commission understands that, while the usage of Rule 605 reports by institutional investors has been limited by several factors, Rule 605 reports nevertheless contain information about execution quality that has been useful for institutional investors.

First, the ability of institutional investors to use preexisting Rule 605 to assess and compare the execution quality that they receive from their broker-dealers has been limited, for several reasons. First, Rule 605 reports only contain information about the execution quality of investors' held orders. Not held orders, which are excluded from the definition of “covered order,” are excluded from Rule 605 metrics. As many institutional orders tend to be not held, this may limit the extent to which Rule 605 reports contain relevant information for institutional investors. Second, to the extent that institutional investors make use of held orders, the ability of institutional investors to use Rule 605 reports in combination with Rule 606 reports to assess the execution quality of broker-dealers has been limited for the same reasons described above. This has likely limited the incentives for some institutional investors to access Rule 605 reports.

Second, even if institutional investors are incentivized to access execution quality information such as that in Rule 605 reports, institutional investors typically have access to alternative sources of execution quality information. Many institutional investors regularly conduct, directly or through a third-party vendor, transaction cost analysis (“TCA”) of their orders to assess execution quality against various benchmarks. Institutional investors that perform their own in-house analyses of execution quality or obtain analyses of execution quality from third-party vendors may have been less likely to rely on information from Rule 605 reports. Furthermore, Rule 606(b)(3) requires broker-dealers to provide some of their customers with individualized reports of execution quality of not held orders upon request. Since not held orders, which are not covered by Rule 605 reporting requirements, are most likely to be utilized by institutional investors, Rule 606(b)(3) provides institutional investors with another alternative source of information about the execution quality of their orders. Given the large size of most institutional investors and their businesses, institutional investors may also have sufficient bargaining power such that broker-dealers have strong incentives to provide them with execution quality information of their held orders when asked. However, any ad hoc reports that institutional investors may receive from their broker-dealers containing information about their held orders may not be sufficiently standardized to allow for easy comparisons across broker-dealers or market centers.

At the same time, the information on execution quality that is collected by institutional investors from these alternative sources may only cover the institutions' own orders, and as such could be highly individualized and nonpublic. Therefore, institutional investors may not be able to use these individualized reports to compare their broker-dealers' execution quality to that of broker-dealers with which they do not currently have a relationship, or to examine the execution quality of a market center to which their broker-dealers do not currently route orders. In contrast, because Rule 605 reports are public, institutional investors can use these reports to assess the execution quality of the broker-dealers and market centers with which they do not currently do business.

To the extent that institutional investors do utilize Rule 605 reports, the Commission believes that, due to their typically greater resources, institutional investors may be more likely than individual investors to access Rule 605 reports directly. Rule 605 reports are machine-readable, which makes them useful for facilitating further processing and analysis by market participants that have access to the resources necessary for handling large amounts of raw data, such as many institutional investors. However, the Commission understands some institutional investors may use aggregated statistics or summaries of Rule 605 reports prepared by third parties, who make these reports available, possibly for a fee.

(d) Other Users of Rule 605 Reports

While the direct usage of Rule 605 reports by individual and institutional investors may have been limited, Rule 605 reports have been used by other market participants, including analysts and researchers, as well as financial service providers, such as investment advisers and broker-dealers, that are subject to best execution obligations.

The Commission understands that investment advisers and broker-dealers typically use Rule 605 reports as part of their internal review of execution quality. As fiduciaries, investment advisers owe their clients a duty of care and a duty of loyalty. The duty of care includes, among other things, 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. Broker-dealers also have an obligation to seek best execution of customer orders. The Commission understands that these financial service providers often have Best Execution Committees that periodically review order execution quality, and typically use Rule 605 reports as part of their review.

3. Disclosure Requirements Under Preexisting Rule 605

The information disclosed under preexisting Rule 605 has provided significant insight into execution quality at different market centers. However, market participants' access to information about execution quality under Rule 605 has been limited in several areas. Specifically, broker-dealers that are not market centers have not been required to report under Rule 605, which has limited market participants' ability to assess and compare the execution quality that broker-dealers obtain for their customers. Furthermore, changes in equity market conditions and technological advancements since Rule 11Ac1-5 was adopted in 2000, such as an increase in the number of high-priced stocks, the corresponding greater use of odd-lots, and the greater speed of trading in some stocks, have led to a situation in which certain aspects of Rule 605 reports are no longer as well-tailored to current market conditions.

(a) Scope of Reporting Entities Under Preexisting Rule 605 Reporting Requirements

The scope of entities that were required to report under Rule 605 prior to these amendments did not include broker-dealers that only route customer orders externally, rather than executing customer orders internally, because they did not meet the definition of a market center. As a result, it has been difficult for market participants to use available execution quality statistics to compare execution quality across these broker-dealers. Furthermore, to the extent that firms operating two separate market centers commingled execution quality information about multiple market centers in Rule 605 reports, this has made it difficult for market participants to assess the execution quality of each market center individually.

(1) Broker-Dealers

Prior to these amendments, broker-dealers that were not market centers were not required to prepare Rule 605 reports, which has limited market participants' ability to assess and compare the execution quality that broker-dealers obtain for their customers.

Rules 605 and 606 operate together to allow investors to evaluate what happens to their orders after investors submit their orders to a broker-dealer for execution. If a market center's Rule 605 reports are representative of the aggregate execution quality that any given broker-dealer receives from that market center, then a customer of a broker-dealer can use that broker-dealer's Rule 606 reports to identify the venues to which the broker-dealer regularly routes orders for execution and use Rule 605 reports to get information on aggregate order execution quality at those market centers. However, if the aggregate execution quality from a given market center varies across broker-dealers, combining Rule 606 and Rule 605 data will not be informative about the execution quality of individual broker-dealers' average execution quality.

Specifically, combining this data will not be informative because a market center's Rule 605 report is aggregated across all of its broker-dealer customers, meaning that it is not possible to determine how execution quality varies across individual broker-dealers at a particular market center. This is an important consideration given evidence that execution quality can differ significantly across broker-dealers, and that this dispersion is at least partially due to off-exchange wholesalers systematically giving different execution prices for the same trades to different brokers.

(2) Reporting Entities That Operate SDPs

Prior to these amendments, the commingling of SDP activity in Rule 605 reports with other market center activity, by market centers that also operate SDPs, may have obscured or distorted information about the market centers' execution quality, making it more difficult for market participants to observe the execution quality of each separate trading venue. For example, an SDP that accepts IOC orders will offer different order execution quality than other market centers. These types of SDPs are sometimes called “ping pools,” reflecting that institutional investors use these venues to “ping” ( i.e., submit a small order in search of hidden liquidity on) SDPs, often using IOC orders. IOC orders typically have different execution profiles than other types of orders, including lower fill rates. Combining information on orders submitted to a market center's SDP “ping pool” along with its other orders will therefore effect a downward skew on the market center's fill rates, and analogously an upward skew on the SDP's fill rates. This may particularly be the case for wholesalers who combine the orders submitted to their SDPs with orders that are internalized or executed on a riskless principal basis, since SDP activity represents a significant portion of their trading volume. Also, since information on executions in SDPs largely reflects institutional orders, combining information on SDP orders along with other orders will tend to obscure information that is particularly relevant for institutional investors or broker-dealers handling institutional investors' orders in assessing differences across these market centers. To the extent that institutional investors have been less able to observe and compare differences in execution quality across market centers as a result, this may have reduced incentives for these market centers to compete for institutional investor orders on the basis of execution quality.

(b) Coverage of Orders Under Preexisting Rule 605 Reporting Requirements

Prior to these amendments, Rule 605 reporting requirements excluded execution quality information about some order sizes and types that are relevant to market participants.

To estimate the percentage of shares that have been excluded from Rule 605 reporting requirements and the driving factor behind their exclusion ( i.e., whether they are excluded based on their submission time, type, or size), the Commission analyzed data from the Tick Size Pilot B.I Market Quality dataset, which had much broader reporting requirements than Rule 605 prior to these amendments, for a period from April 2016 to March 2019. As a first step, approximately 25% of orders were estimated to have been excluded from Rule 605 requirements as they were flagged as having special handling requests. A breakdown of the remaining submitted share volume ( i.e., after excluded special handling orders) is presented in Figure 4, and shows that around 2.2% of shares were excluded from preexisting Rule 605 reporting requirements due to having effective times outside of regular trading hours. A further 51.6% of shares were excluded from Rule 605 reports because they were of an order type that was excluded from reporting requirements prior to these amendments. An additional 11.3% of the remaining order volume was excluded from Rule 605 reports because of the exclusion of orders less than 100 shares and larger-sized orders from reporting requirements prior to these amendments. This leaves only around a third of share volume that was eligible to be included in Rule 605 reports prior to these amendments.¹¹²⁰

The following sections will discuss the various facets of preexisting Rule 605 reporting requirements that led to the exclusion of orders from Rule 605 reports prior to these amendments, as well as the extent to which these orders are relevant for assessing execution quality. This includes orders that were excluded on the basis of size, as well as other orders that were excluded such as stop orders, non-exempt short sale orders, and orders submitted outside of regular trading hours.

(1) Orders Less Than 100 Shares and Larger-Sized Orders

Prior to these amendments, orders of certain sizes were excluded from Rule 605 reporting requirements, including orders for less than 100 shares and larger-sized orders. Taken together, data on the usage of orders of these sizes imply that a large percentage of orders and trades was excluded from preexisting Rule 605 reporting requirements on the basis of order size, thus limiting the ability of reporting entities to compete for customers on the basis of execution quality.

(a) Orders Less Than 100 Shares

Due to preexisting Rule 605's exclusion of orders sized smaller than 100 shares, which excluded all odd-lot orders and, in some cases, round lot orders where a round lot was less than 100 shares, information about an important segment of order flow has been missing from Rule 605 reports.

The rise in the use of odd-lot orders is a phenomenon that has been well-documented in modern markets. An analysis of data from the SEC's MIDAS analytics tool confirms that the use of odd-lots has increased substantially as a percentage of total on-exchange trades within the past decade. Figure 5 plots monthly averages of odd-lot share volumes across stock price deciles, showing that executed odd-lot shares as a percentage of total executed shares have increased sharply between 2012 and 2023, for high-priced stocks in particular. Specifically, the figure shows that odd-lot share volume increased from around 0.6% to 1.25% for the lowest-price stocks (Decile 1), and from 10.6% to 37.5% for the highest-priced stocks (Decile 10).

There is evidence that these high percentages are not only the case for odd-lot trades, but for odd-lot orders as well. Using data from January to March 2021, a recent academic working paper found that the rate of orders sized between 1 and 100 shares ranges from 5.6% of all submitted orders for less than 500 shares in the lowest-priced stocks, to 46.9% of all such orders in the highest-priced stocks. This is supported by an analysis of the distribution of order sizes using order submission data from MIDAS for a sample of 80 stocks during the month of Mar. 2023. Confirming results from Figure 5 examining the time series of odd-lot order rates, Figure 6 shows that odd-lot orders make up a significant percentage of orders (13.81%), although these orders are only a small percentage of total submitted share volume (0.68%).

Market commentators have attributed this rise in odd-lot trading to a variety of factors. For example, an increase in the number of high-priced stocks caused order sizes to decrease in these stocks, where trading in larger order sizes is more expensive. In this vein, one commenter to the Proposing Release stated that “the fact that many issuers have moved away from stock splits and allowed their stock prices generally to increase” has contributed to the increase in odd-lot orders.

Another factor is a rise in algorithmic trading, which chops orders into many smaller orders. Broker-dealers that handle institutional orders often make use of odd-lot orders because of trading algorithms that split larger parent orders into smaller child orders to reduce the market impact of their trades. High frequency traders also use inside the spread odd-lot orders as a means of probing for hidden liquidity or detecting forthcoming order flow. Academic papers have found evidence that high frequency traders and other institutional investors make up a substantial fraction of odd-lot trades. Another potential reason for the increase in odd-lot trading is the increasing presence of trading by individual investors, who tend to use smaller order sizes. All-in-all, by not capturing information related to these orders, preexisting Rule 605 reports have been missing information about potentially important segments of order flow from both individual and institutional investors.

(b) Orders Less Than a Share

Due to the exclusion of fractional orders that are smaller than one share from Rule 605 prior to these amendments, information about an increasingly important segment of individual investor order flow has been missing from Rule 605 reports. Similar to the increase in odd-lots, one reason for the increase in the use of fractional shares is the increasing presence of trading by individual investors, who tend to use smaller order sizes. The past few years have seen increasing attention paid to fractional shares, as more and more retail brokers are offering this functionality. The Commission understands that there are at least two different ways that retail brokers handle fractional trades: first, they rely on their clearing firm, which will often “round up” the fractional part of the order and deposit the residual in an internal “fractional inventory account;” and second, they execute fractional trades against their own inventory.

An estimation of the percentage of orders that were excluded from preexisting Rule 605 reporting requirements because they are smaller than one share is difficult, as these orders are executed off-exchange and therefore not included in public datasets. However, an analysis using data from CAT confirms that levels of fractional trading are mostly the result of individual investor trading: in August 2023, there were 54.7 million orders for less than one share that eventually received an execution, the majority (65.3%) of which were submitted by accounts attributed to “Individual Customers.” While these fractional orders represented only a small part (around 3.3%) of total executed orders, they represented a much higher percentage (16.4%) of executions received by individual account holders. Therefore, by not capturing information related to these orders, Rule 605 reports have been missing information about an important segment of individual investor trades. The Commission estimates that there are 20 market centers that exclusively execute fractional orders less than one share and were not required to file Rule 605 reports prior to these amendments due to these orders falling below the smallest order size category in preexisting Rule 605.

(c) Larger-Sized Orders

Due to the exclusion of orders sized larger than 10,000 shares from preexisting Rule 605, information about another important segment of order flow has been missing from Rule 605 reporting requirements. The Commission understands that practices have evolved such that most broker-dealers that service institutional investors use SORs to break up these customers' large parent orders into smaller-sized child orders. As shown in Figure 7, which plots the number of shares associated with trades that are for 10,000 or more shares as a percent of total executed shares, the rate of larger-sized trades declined from more than 25% in late 2003 to 12.8% as of March 2023. This decline is likely at least partly due to the increased use of SORs, though other market changes such as the overall increase in stock prices may also play a part. However, the rate of larger-sized trades has been increasing since August 2011, when the rate of larger-sized trades was around 6.7%.

Furthermore, larger-sized orders make up a non-negligible percent of order flow. Figure 6, which plots the distribution of NMLO sizes in order submission data from MIDAS for the month of Mar. 2023, shows that while NMLOs of 10,000 or more shares made up only 0.27% of order flow in terms of number of orders, they made up around 8.5% of order flow in terms of share volume. However, some, or possibly most, of these larger-sized orders may be not held to the market, and so would not be required to be included in Rule 605 reports even without the exemptive relief.

(2) Orders Submitted With Stop Prices

The exclusion of orders with stop prices from the definition of “covered order” prior to these amendments has resulted in the exclusion of orders that are likely relevant for investors from preexisting Rule 605 reports. A stop order, also referred to as a stop-loss order, is an order to buy or sell a stock once the price of the stock reaches the specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order, or a limit order in the case of so-called stop limit orders. The treatment of stop orders varies across broker-dealers and market centers. At the same time, the execution prices of stop orders are highly sensitive to handling and execution practices, as these orders are more likely to execute when the stock price is in decline and any delay in execution will result in a larger loss (or smaller gain) for the investor.¹¹⁵⁹

The Commission understands that stop orders resting on national securities exchanges have been uncommon, and the vast majority of stop orders are handled by broker-dealers. Some national securities exchanges have eliminated this order type from their rule book. Furthermore, the use of stop orders has typically been associated with individual investors, who may be less likely to have the resources to actively monitor their orders, and thus use stop orders to try to protect a gain or to limit potential losses of a currently held position. Table 3 breaks down a sample of stop loss order volume by account type and stop loss order type using CAT data for Mar. 2023. The data confirm that the use of stop orders by institutional investors is very rare (only 0.25% of market and 0.0011% of limit orders are submitted with stop prices), while their use is relatively more common for individual investors, particularly for market orders, around 4.91% of which are submitted with stop prices. The data also confirm that, while most stop orders are triggered by the last sale price (“Stop/Stop Limit”), there is also nontrivial order flow associated with other trigger events as well, such as the quotation (“Stop on Quote/Stop Limit on Quote”).

(3) Non-Exempt Short Sale Orders

Prior to these amendments, Commission staff had taken the position that staff would view all non-exempt short sale orders as special handling orders. As a result, these orders have not been included in prior Rule 605 statistics, which has resulted in the exclusion of a large portion of orders that are likely relevant for market participants.

Non-exempt short sale orders are orders that are subject to price restrictions under Rule 201 of Regulation SHO, which contains a short sale circuit breaker that, when triggered by a price decline of 10% or more from a covered security's prior closing price, imposes a restriction on the price at which the covered security may be sold short ( i.e., must be above the current national best bid). Once triggered, the price restriction will apply to short sale orders in that security for the remainder of the day and the following day, unless the short sale order is “short exempt.” Since a non-exempt short sale that is subject to a price restriction is only allowed to take place at least one tick above the NBB, these could be “orders to be executed on a particular type of tick or bid,” which would exclude them from the definition of “covered order.” The exclusion of tick-sensitive orders from preexisting Rule 605 reporting requirements was designed so that these orders did not skew execution quality statistics, as the prevention of these orders from executing at the best bid would likely lead to lower execution quality statistics ( e.g., negative price improvement and higher effective spreads) as compared to other orders.

In the years since Rule 201's adoption, it has become clear that Rule 201 price test restrictions are not often triggered. Between April 2015 and November 2023, a Rule 201 trigger event only occurred on 1.8% of trading days for an average stock. Around 15.4% of Rule 201 triggers occur the day after a previous trigger event, and around 45.4% occur within a week after a previous trigger event. These statistics imply that Rule 201 triggers tend to be relatively rare, and clustered around a few isolated events. This has resulted in a significant portion of non-exempt short sale orders being excluded from prior Rule 605 statistics when Rule 201 was not triggered, at which point a price test restriction was not in effect and their exclusion would not have skewed execution quality statistics.

(4) Orders Submitted Pre-Opening/Post-Closing

When Rule 605 was first adopted, the Commission explained the decision to exclude orders submitted outside of regular trading hours by stating that there are substantial differences in the nature of the market between regular trading hours and after-hours, and therefore orders executed at these times should not be blended together. However, the preexisting exclusion of all orders submitted outside of regular market hours from the definition of “covered order,” in addition to excluding orders that execute outside of regular hours, also extended to orders that, while submitted outside of regular market hours, are only eligible to execute during regular market hours. While these orders represent only a small portion of order flow, they represent a relatively high concentration of orders from individual investors. Therefore, the exclusion of all orders submitted outside of regular trading hours from Rule 605 prior to these amendments may have led to the exclusion of an important segment of individual investor orders.

When Rule 605 was first adopted, after-hours markets were still mostly the purview of institutional investors, but a growing number of broker-dealers had recently begun providing their retail customers with the ability to have their orders directed to electronic communication networks (ECNs) after the major markets close for the day. The growth in the availability of after-hours trading for individual investors raised concerns over, and heightened awareness of, the differences in execution quality for after-hours trades, which tend to be much riskier due to lower liquidity levels and higher volatility in after-hours markets.

Along with an increase in access to after-hours trading, the late 1990s and early 2000s saw an increase in the prevalence of online brokerages, in which individual investors in particular were given newfound access to order entry systems. Early research into the rise of online brokerages describes a shift from a system in which retail brokers “communicate buy/sell recommendations to clients over the telephone” (presumably during regular working hours), to a system in which individual investors have “round-the-clock access to trading systems and account information.” Logically, as investors make use of the “round-the-clock” access offered by online brokerages, the number of orders submitted outside of regular market hours has likely increased over the preceding decades. However, not all orders submitted after hours are eligible to trade in after-hours markets, which continues to be the case even in today's market. For example, some broker-dealers' platforms allow customers to submit orders at any time, but unless the customer requests to trade during extended hours and the security is eligible to trade as such, the order will only be executed during regular market hours. Since these orders are not intended, and in many cases are not eligible, to execute outside of regular trading hours, these orders may not be subject to the same concerns that drove the Commission to exclude orders submitted outside of trading hours from Rule 605 reporting requirements in the Rule 11Ac1-5 Adopting Release.

To estimate the amount of orders that are submitted outside of regular trading hours, data from the Tick Size Pilot B.I Market Quality dataset were analyzed to break order volume down into different trading sessions according to when the order was eligible to trade. The Commission considered only those orders that have an effective time during regular market hours to be eligible for Rule 605 reporting, and excluded orders that were otherwise excluded from preexisting Rule 605 reporting requirements, i.e., because they are an excluded order type or size. The Commission found that a small fraction of orders are effective outside of regular market hours (1.3%), while the vast majority of orders (98.7%) are effective during regular market hours.

At least some of these orders, while submitted outside of regular market hours, execute during regular trading hours, e.g., because they are NMLOs that are only executable during regular trading hours. In order to estimate the extent to which this occurs, a sample of 400 stocks using CAT data from Q1 2023 was analyzed to examine how the submission volume of executable NMLOs submitted outside of regular trading hours compares to the full sample of executable NMLO submission volume. This analysis confirms that pre-open orders make up a small percentage of order volume, representing around 1.3% of total submitted shares (0.4% of total submitted orders). However, further analysis reveals that these orders contain a higher concentration of orders associated with Individual Customer accounts. Specifically, for those pre-open orders that could be identified as originating from either individual or institutional customer accounts, 81.8% of these pre-open orders (82.6% of pre-open shares) originated from individual customer accounts. In comparison, individual customer accounts were responsible for just 1.5% of orders (1.7% of shares) of total individual and institutional customer account originations.

This is consistent with the idea that at least some of this order flow represents orders that are submitted by individual investors outside of market hours, i.e., via online brokerage accounts, but not necessarily with the intention to engage in after-hours trading.

(c) Required Information

In addition to decreasing the coverage of Rule 605, subsequent market changes since the initial adoption of Rule 605 may have also decreased the relevance of some of the metrics required to be reported by preexisting Rule 605 reporting entities. This section will discuss how market changes may have affected, or will likely affect in the near future, aspects of several such metrics, including the definition of round lots for order size categories, the granularity of metrics related to time-to-execution, and the use of a five-minute time horizon for realized spreads.

(1) Order Size Categories

Preexisting Rule 605 defined order size categories in terms of numbers of shares. Given that share prices and thus the notional value of orders can differ dramatically, defining a size category in terms of number of shares has disadvantages. Figure 1 shows that the vast majority of orders are for a notional value of less than $100,000, and Figure 2 shows that this is the case for stocks across all different price levels. This implies that, for a $500 stock in which a $100,000 order is equivalent to an order of only 200 shares, nearly all covered orders were clustered within preexisting Rule 605's smallest order size category of 100 to 499 shares. Clustering all covered orders into a single category would have limited market participants' ability to use these categories to compare across orders of different sizes in such higher-priced stocks. Furthermore, combined with the exclusion of orders for less than 100 shares, defining order sizes in terms of number of shares led to the exclusion of many orders in higher-priced stocks. For example, a 99-share odd-lot in a $500 stock already has a notional value of $49,500, which is greater than the notional value of around 93% all orders according to Figure 1. Similarly, one industry analyst stated that the definition of order size categories in terms of number of shares, together with the exclusion of orders of less than 100 shares under preexisting Rule 605, has led to the exclusion of more orders with low dollar values as the average stock price increases.

Lastly, the Commission's 2020 adoption of the MDI Rules included a new definition of “round lot” that would have caused some round lots to be excluded from reporting requirements, absent an update to Rule 605's order size categories. Specifically, the order size categories as defined under preexisting Rule 605, which excluded orders with fewer than 100 shares, would have excluded a portion of round lots for stocks with prices greater than $250.

(2) Non-Marketable Limit Order Categories

As a result of the categorization of NMLOs under preexisting Rule 605, execution quality statistics for some NMLOs may have included orders whose executions are more likely to depend on their limit prices and price movements in the market, and excluded orders whose executions are more likely to depend on their handling by the market center.

Given that the aim of Rule 605 is to enable investors to compare and evaluate execution quality among different market centers, Rule 605 reports are designed to include only orders that provide a basis for meaningful comparisons across measures of execution quality. Depending on their characteristics, execution quality statistics for some NMLOs may be less meaningful because their executions depend more on the order's limit price and price movement in the market than on handling by the market center. In preexisting Rule 605, the exclusion of NMLOs with limit prices more than $0.10 outside the NBBO (“away-from-the-quote” NMLOs) from reporting requirements was intended to eliminate NMLOs with less meaningful execution quality statistic. The “near-the-quote” limit order category, consisting of NMLOs that were outside the NBBO by no more than 10 cents, was meant to include limit orders that are submitted away from the NBBO, but that still have a relative likelihood of being executed (hence the maximum distance requirement from the NBBO).

However, the likelihood of execution of a NMLO greatly depends on the movement of the NBBO, such that even an order submitted within 10 cents of the NBBO may never receive an opportunity to be executed if that order never touches the NBBO ( e.g., if prices were to move away from that order immediately after submission), and an order that is submitted further than 10 cents may indeed eventually execute if prices move towards the order. Figure 8 presents data on the fill rates of NMLO orders, broken down by NMLO type, including away-from-the-quote, near-the-quote, and at-the-quote NMLOs, along with several categories of inside-the-quote NMLOs depending on their distance from the midpoint (below-the-midpoint, at-the-midpoint, and beyond-the-midpoint), using a sample of MIDAS NMLO submission data. The figure shows that near-the-quote and away-from-the-quote NMLOs appear very similar in terms of fill rates (0.27% and 0.02%, respectively), particularly compared to other types of NMLOs ( e.g., inside-the-quote NMLOs have an average fill rate of around 0.36% to 3.57%). The fact that near-the-quote and away-from-the-quote NMLOs have similar fill rates is consistent with the possibility that the exclusion of NMLOs priced more than 10 cents away from the NBBO under preexisting Rule 605 was based on a threshold that does not optimally differentiate between orders that have a meaningful chance to execute. Meanwhile, orders that never have a meaningful opportunity to execute ( e.g., because they never touch the NBBO) may have been included in Rule 605 statistics prior to these amendments.

To get an idea of the extent to which these orders were included in Rule 605 statistics prior to these amendments, Figure 9 breaks down the sample of MIDAS NMLO submission data into NMLO types. According to Figure 8, more than 99% of near-the-quote NMLOs do not execute, which, according to Figure 9 represents around 29.3% of total submission volume. While it is possible that some of these orders did not execute because of their handling by the market center, it is unlikely that this is the case for all of them, and likely that some of the lack of fills was the result of other factors, such as price movements or cancellations by the submitter.

Furthermore, the fact that the threshold for inclusion in preexisting Rule 605 reports was based on nominal terms ( i.e., 10 cents) means that NMLO coverage varied depending on the stock price: high-price stocks with smaller relative tick sizes would have had less NMLO coverage, since 10 cents represents a relatively tighter band around the NBBO when considered as a percentage of stock price. This is shown in Figure 10, which breaks down the NMLO submission volumes in Figure 9 by both order type and average share prices. The figure shows that away-from-the-quote NMLOs represent 35.5% of total NMLO share volume for the group of stocks with the highest share prices, but only 15.0% for the group of stocks with the lowest share prices. Given the positive fill rates for away-from-the-quote NMLOs from Figure 8, this implies that a higher portion of executed away-from-the-quote NMLOs have been excluded from preexisting Rule 605 reports for high-priced stocks. Excluding large portions of relevant NMLOs results in less reliable market quality measures; this may especially be the case for high-priced stocks, thus making comparisons between market centers less reliable for these stocks.

Preexisting Rule 605 also required execution quality information for NMLOs to be measured relative to the time of order receipt. As will be shown in Figure 12 below, NMLOs that are submitted further away from the NBBO tend to take longer from the time of order receipt to execute than those submitted closer to the NBBO, as the NBBO has a further distance to move before it reaches the order's limit price. This requirement thus may have made it difficult to compare the execution times of market centers that handle NMLOs with varying distances from the NBBO.

(3) Midpoint-or-Better NMLOs

Prior to these amendments, Rule 605 reports required the separate reporting of execution quality information for inside-the-quote NMLOs. However, the Commission understands that some inside-the-quote limit orders may have different execution quality characteristics than other types of NMLOs, including other inside-the-quote NMLOs, and that this may vary across market centers. In particular, similarly to market and marketable limit orders, some at-the-midpoint and beyond-the-midpoint limit orders (collectively, “midpoint-or-better” orders) are submitted by traders with the intention of executing immediately, in this case against hidden or odd-lot inside-the-quote liquidity. However, because they are not a marketable order type ( i.e., they do not fully cross the spread), preexisting Rule 605 did not require certain statistics that are appropriate for marketable orders, such as effective spreads, to be reported for inside-the-quote NMLOs. Furthermore, some market centers, such as some wholesalers, treat “beyond-the-midpoint” limit orders ( i.e., NMLOs that are priced more aggressively than the midpoint) like marketable limit orders and will offer price improvement to these orders.

Confirming that there are differences between certain types of inside-the-quote NMLOs, Table 4 presents results from an analysis of the execution quality of different order types, including market, marketable limit, and various types of inside-the-quote NMLOs, along with at-the-quote NMLOs. The analysis uses a sample of orders from CAT data for the period of Q1 2023. First, the high percentage of beyond-the-midpoint and at-the-midpoint NMLO share volume that is submitted with IOC designations as compared to below-the-midpoint and at-the-quote NMLOs confirms that these orders are often submitted with the intention of executing immediately. Furthermore, the results show that there are differences between the execution characteristics of midpoint-or-better NMLOs as compared to NMLOs that are below the midpoint or at the quote. For example, for wholesalers, there is a notable difference in the fill rates of midpoint-or-better NMLOs (9.8% to 10%%) as compared to NMLOs below the midpoint (3.7% to 4.4%). Similarly, while around 70-77% of on-exchange midpoint-or-better NMLOs execute in less than a millisecond, this number drops to around 28.6% for below-the-midpoint NMLOs, and 9.3% for at-the-quote NMLOs. This analysis suggests that midpoint or better orders have a sufficiently different execution profile from other NMLOs to warrant different reporting requirements.

(4) Time-to-Execution

Prior to these amendments, Rule 605 required the reporting of time-to-execution information in two ways. First, for market and marketable limit orders, reporting entities were required to report the share-weighted average time-to-execution for orders executed with price improvement, at the quote, and with price dis-improvement, calculated based on timestamps recorded in seconds. Second, for all orders, reporting entities were required to report the number of shares executed within certain predefined time-to-execution categories or buckets.

First, calculating average time-to-execution statistics using timestamps recorded in terms of seconds does not reflect changes in market speeds. Figure 11 uses data from the SEC's MIDAS analytics tool to plot the percentage of on-exchange NMLOs that, conditional on being executed, are fully executed within one second or less from the time of submission between Q4 2012 and Q1 2023. The figure shows that this percentage has increased over time across different market capitalization groups, and that in Q1 2023 nearly half (48.0%) of executed NMLOs are executed in less than one second in large market cap stocks. Therefore, while timestamps expressed in seconds may have been appropriate for the markets when Rule 605 was first adopted, they are likely to miss variation in time-to-execution across market centers in today's markets.

Second, given that many orders are executed on a sub-second basis, the time-to-execution buckets prescribed by preexisting Rule 605 are not able to fully capture variations in execution times across order types. To illustrate this, Figure 12 groups on-exchange NMLO executions collected from MIDAS for the period of Mar. 2023 into time-to-execution buckets that correspond to those defined in preexisting Rule 605. The figure shows that, while away-from-the-quote and near-the-quote NMLOs are relatively evenly distributed across the time-to-execution categories, these categories do not capture much differentiation for other NMLO types, particularly for those that take place inside the quote. For inside-the-quote NMLOs, 66.6% to 86.9% of orders are grouped in the shortest time-to-execution bucket (from 0 to less than 10 seconds), depending on the distance to the midpoint, while the category corresponding to the longest time-to-execution bucket defined by preexisting Rule 605 (5 to 30 minutes) has 0.4% to 0.6% of inside-the-quote NMLO executions. Therefore, these time-to-execution categories likely did not fully capture variations in the execution times of these orders across reporting entities.

MIDAS data include only orders and quotes that are posted on national securities exchanges' limit order books and trades that are executed against those orders, and as such it is not possible to view the submission times (and thus calculate the time-to-execution of) market and marketable limit orders using MIDAS data. As a result, the above analysis is only able to consider the time-to-execution of on-exchange NMLOs. In order to estimate the time-to-execution of both on- and off-exchange orders, including market and marketable limit orders, the Commission used the Tick Size Pilot B.I Market Quality data from April 2016 until March 2019. Figure 13 shows the distribution of time-to-execution statistics for market and marketable limit orders, along with the three categories of non-marketable limit orders required in Rule 605 reports prior to these amendments ( i.e., inside-the-quote, at-the-quote, and near-the-quote). Note that the time-to-execution categories defined in the Tick Size Pilot dataset are more granular than those in preexisting Rule 605.