[Federal Register Volume 88, Number 13 (Friday, January 20, 2023)]
[Proposed Rules]
[Pages 3786-3905]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-27614]



[[Page 3785]]

Vol. 88

Friday,

No. 13

January 20, 2023

Part II





Securities and Exchange Commission





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17 CFR Part 242





Disclosure of Order Execution Information; Proposed Rule

  Federal Register / Vol. 88, No. 13 / Friday, January 20, 2023 / 
Proposed Rules  

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 242

[Release No. 34-96493; File No. S7-29-22]
RIN 3235-AN22


Disclosure of Order Execution Information

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') is proposing to amend existing requirements under the 
Securities Exchange Act of 1934 (``Exchange Act'') to update the 
disclosure required for order executions in national market system 
(``NMS'') stocks. First, the Commission is proposing to expand the 
scope of reporting entities subject to the rule that requires market 
centers to make available to the public monthly execution quality 
reports to encompass broker-dealers with a larger number of customers. 
Next, the Commission is proposing to modify the definition of ``covered 
order'' to include certain orders submitted outside of regular trading 
hours and certain orders submitted with stop prices. In addition, the 
Commission is proposing modifications to the information required to be 
reported under the rule, including changing how orders are categorized 
by order size as well as how they are categorized by order type. As 
part of the changes to these categories, the Commission is proposing to 
capture execution quality information for fractional share orders, odd-
lot orders, and larger-sized orders. Additionally, the Commission is 
proposing to modify reporting requirements for non-marketable limit 
orders (``NMLOs'') in order to capture more relevant execution quality 
information for these orders by requiring statistics to be reported 
from the time such orders become executable. The Commission is also 
proposing to eliminate time-to-execution categories in favor of average 
time to execution, median time to execution, and 99th percentile time 
to execution, each as measured in increments of a millisecond or finer 
and calculated on a share-weighted basis. In order to better reflect 
the speed of the marketplace, the Commission is proposing that the time 
of order receipt and time of order execution be measured in increments 
of a millisecond or finer, and that realized spread be calculated at 
both 15 seconds and one minute. Finally, the Commission is proposing to 
enhance the accessibility of the required reports by requiring all 
reporting entities to make a summary report available.

DATES: Comments should be received on or before March 31, 2023.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/submitcomments.htm); or
     Send an email to [email protected]. Please include 
File Number S7-29-22 on the subject line.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-29-22. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method of submission. The Commission will post all 
comments on the Commission's website (http://www.sec.gov/rules/proposed.shtml). Comments are also available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Operating conditions may limit access to the 
Commission's Public Reference Room. All comments received will be 
posted without change. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any materials will 
be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Kathleen Gross, Senior Special 
Counsel, Lauren Yates, Senior Special Counsel, Christopher Chow, 
Special Counsel, or David Michehl, Special Counsel, at (202) 551-5500, 
Division of Trading and Markets, Commission, 100 F Street NE, 
Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to 17 
CFR 242.600 of Regulation National Market System (``Regulation NMS'') 
under the Exchange Act (``Rule 600'') to add new defined terms to and 
modify certain existing defined terms in Rule 600 that are used in 17 
CFR 242.605 of Regulation NMS under the Exchange Act (``Rule 605'' or 
``Rule'') as proposed to be amended; as well as amendments to Rule 605.

Table of Contents

I. Introduction
II. Current Reporting of Execution Quality Statistics
    A. Adoption of Rule 11Ac1-5
    B. Scope and Content of Rule 605
    1. Scope
    2. Required Information
    3. Procedures for Making Reports Available to the Public
    C. Other Relevant Rules
    D. Overview of Need for Modernization
    E. EMSAC Recommendations, Petition for Rulemaking, and Other 
Comments
III. Proposed Modifications to Reporting Entities
    A. Larger Broker-Dealers
    B. Qualified Auction Mechanisms
    C. ATSs and Single-Dealer Platforms
IV. Proposed Modifications to Scope of Orders Covered and Required 
Information
    A. Covered Order
    1. Orders Submitted Pre-Opening/Post-Closing
    2. Stop Orders
    3. Non-Exempt Short Sale Orders
    B. Required Information
    1. Categorization by Order Size
    2. Categorization by Order Type
    3. Timestamp Conventions
    4. Changes to Information Required for All Types of Orders
    5. Additional Required Information for Market, Marketable Limit, 
Marketable IOC, and Beyond-the-Midpoint Limit Orders
    6. Additional Required Information for Executable NMLOs, 
Executable Stop Orders, and Beyond-the-Midpoint Limit Orders
V. Proposed Summary Execution Quality Reports
VI. Paperwork Reduction Act
    A. Summary of Collection of Information
    B. Proposed Use of Information
    C. Respondents
    D. Total PRA Burdens
    E. Request for Comment
VII. Economic Analysis
    A. Introduction
    B. Market Failure
    C. Baseline
    1. Regulatory Baseline
    2. Current Rule 605 Disclosure Requirements
    3. Markets for Brokerage and Trading Services for NMS Stocks 
Under Current Rule 605 Disclosure Requirements
    D. Economic Effects
    1. Benefits
    2. Costs

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    3. Economic Effects on Efficiency, Competition, and Capital 
Formation
    E. Reasonable Alternatives
    1. Reasonable Alternative Modifications to Reporting Entities
    2. Reasonable Alternative Modifications to Scope of Covered 
Orders
    3. Reasonable Alternative Modifications to Required Information
    4. Reasonable Alternative Modifications to Accessibility
    5. Other Reasonable Alternatives
    F. Request for Comment
VIII. Consideration of Impact on the Economy
IX. Initial Regulatory Flexibility Analysis
    Statutory Authority and Text of Proposed Rule

I. Introduction

    The Commission is proposing to update the requirements to disclose 
order execution information under Rule 605. Currently, market centers 
that execute investor orders are required to make monthly disclosures 
of basic information concerning their quality of executions. The 
required disclosures have provided significant insight into execution 
quality at different market centers; however, both the scope and the 
content of Rule 605 reports have not kept pace with technological and 
market developments. The proposal would require broker-dealers with a 
larger number of customers (``larger broker-dealers'') \1\ to prepare 
execution quality reports, would capture execution quality information 
for more order types and sizes, and would require time-based metrics to 
be recorded at a more granular level that reflects current market 
speed. By providing more relevant and accessible metrics, the proposal 
would better promote competition among market centers and broker-
dealers on the basis of execution quality and ultimately improve the 
efficiency of securities transactions, consistent with the national 
market system objectives.\2\
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    \1\ Throughout the release, the term ``larger broker-dealer'' 
refers to a broker-dealer that meets or exceeds the ``customer 
account threshold,'' as defined in proposed Rule 605(a)(7). See also 
infra section III.A (discussing proposed Rule 605(a)(7)).
    \2\ 15 U.S.C. 78k-1.
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    The national market system objectives of section 11A of the 
Exchange Act include the economically efficient executions of 
securities transactions; fair competition among brokers and dealers, 
among exchange markets, and between exchange markets and markets other 
than exchange markets; the availability of information on securities 
quotations and transactions; and the practicability of brokers 
executing investor orders in the best market.\3\ These objectives guide 
the Commission as it seeks to ensure market structure rules keep pace 
with continually changing economic conditions and technological 
advancements. However, these objectives, in particular the goal of 
promoting opportunities for the most willing seller to meet the most 
willing buyer (i.e., order interaction) and the goal of promoting 
competition among markets, can be difficult to reconcile.\4\ The Rule, 
along with 17 CFR 242.606 (``Rule 606'') of Regulation NMS, was adopted 
in 2000 and together these rules required the public disclosure of 
execution quality and order routing practices.\5\ In adopting these 
rules, the Commission recognized the importance of vigorous competition 
among buyers and sellers in an individual security.\6\ However, the 
Commission also recognized the importance of competition among market 
centers, which entails some fragmentation of order flow.\7\ Such 
competition has benefits to investors including the development of 
innovative trading services, lower fees, and faster executions.\8\ The 
Commission characterized the rules as a ``minimum step necessary to 
address fragmentation'' \9\ and stated that by making visible the 
execution quality of the securities markets, the rules are intended to 
spur more vigorous competition among market participants to provide the 
best possible prices for investor orders.\10\
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    \3\ See 15 U.S.C. 78k-1(a)(1)(C).
    \4\ See Securities Exchange Act Release No. 61358 (Jan. 14, 
2010), 75 FR 3594, 3597 (Jan. 21, 2010) (``Concept Release on Equity 
Market Structure'').
    \5\ See Securities Exchange Act Release No. 43590 (Nov. 17, 
2000), 65 FR 75414, 75416 (Dec. 1, 2000) (Disclosure of Order 
Execution and Routing Practices) (``Adopting Release'').
    \6\ See id. at 75415.
    \7\ See id. at 75416.
    \8\ See id.
    \9\ Id.
    \10\ See id. at 75414.
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    Although the Rule has provided visibility into execution quality at 
different market centers, the content of the disclosures required by 
the Rule has not been substantively updated since the Rule was adopted 
in 2000.\11\ Changed equity market conditions and technological 
advancements have eroded the utility of the Rule. The speed and nature 
of trading have changed dramatically as a result of technological 
improvements and the markets' response to the changing regulatory 
landscape.\12\ Trading has moved from being concentrated on a given 
security's listing exchange \13\ to being spread across a highly 
fragmented market where national securities exchanges, alternative 
trading systems (``ATSs''), single-dealer platforms (``SDPs''), off-
exchange market makers, and others compete for order flow. Orders may 
be matched, routed, or cancelled in microseconds and market information 
is transmitted nearly instantaneously. At the same time, individual 
investor \14\ participation in the equity markets has increased.\15\ 
Further, the average share prices of certain stocks have continued to 
increase over time.\16\
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    \11\ In 2018, the Commission amended Rule 600, 605, and 606 of 
Regulation NMS (``the 2018 Rule 606 Amendments''). The 2018 Rule 606 
Amendments modified Rule 605 to require that the public order 
execution quality reports be kept publicly available for a period of 
three years. See Securities Exchange Act Release No. 84528 (Nov. 2, 
2018), 83 FR 58338 (Nov. 19, 2018) (``2018 Rule 606 Amendments 
Release'').
    \12\ For example, since the adoption of the Rule in 2000, the 
Commission has periodically revised certain of its NMS rules, 
including the adoption of Regulation NMS in 2005. See, e.g., 
Securities Exchange Act Release Nos. 51808 (June 9, 2005), 70 FR 
37496 (June 29, 2005) (``Regulation NMS Adopting Release''); and 
90610 (Dec. 9, 2020), 86 FR 18596 (Apr. 9, 2021) (``MDI Adopting 
Release'').
    \13\ For example, in January 2005, the New York Stock Exchange 
Inc. (``NYSE'') executed approximately 79.1% of the consolidated 
share volume in its listed stocks, compared to 25.1% in October 
2009. See Concept Release on Equity Market Structure, 75 FR 3594 
(Jan. 21, 2010) at 3595.
    \14\ As used in this release, the term ``individual investor'' 
will refer to natural persons that trade relatively infrequently for 
their own or closely related accounts.
    \15\ See, e.g., Caitlin McCabe, ``New Army of Individual 
Investors Flexes Its Muscle,'' The Wall Street Journal (Dec. 30, 
2020), available at https://www.wsj.com/articles/new-army-of-individual-investors-flexes-its-muscle-11609329600.
    \16\ See MDI Adopting Release, 86 FR at 18606-07 (citing 
Securities Exchange Act Release No. 88216 (Feb. 14, 2020), 85 FR 
16726, 16739 (Mar. 24, 2020) (``MDI Proposing Release'') (stating 
that ``between 2004 and 2019, the average price of a stock in the 
Dow Jones Industrial Average nearly quadrupled'')).
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    The Commission continues to believe that facilitating the ability 
of the public to compare and evaluate execution quality among different 
market centers is an effective means of reconciling the need to promote 
both vigorous price competition and fair competition among market 
centers. Providing increased visibility into the execution quality of 
larger broker-dealers would similarly encourage competition among 
market participants. It is the Commission's task continually to monitor 
market conditions and competitive forces and to evaluate whether the 
structure of the national market system as it evolves is achieving its 
Exchange Act objectives.\17\ Section 11A of the Exchange Act \18\ 
grants the Commission authority to promulgate rules necessary or 
appropriate to assure the fairness and usefulness of information on 
securities

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transactions \19\ and to assure that broker-dealers transmit and direct 
orders for the purchase or sale of qualified securities in a manner 
consistent with the establishment and operation of a national market 
system.\20\ Through the proposed updates to Rule 605, the Commission 
seeks to promote increased transparency of order execution quality, 
increase the information available to investors, and help to promote 
competition among market centers and broker-dealers, while ameliorating 
the potentially adverse effects of fragmentation on efficiency, price 
transparency, best execution of investor orders, and order 
interaction.\21\
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    \17\ See Securities Exchange Act Release No. 42450 (Feb. 23, 
2000), 65 FR 10577, 10585 (Feb. 28, 2000) (``Fragmentation 
Release'').
    \18\ 15 U.S.C. 78k-1.
    \19\ 15 U.S.C. 78k-1(c)(1)(B).
    \20\ 15 U.S.C. 78k-1(c)(1)(E).
    \21\ See Concept Release on Equity Market Structure, 75 FR 3594 
(Jan. 20, 2010) at 3597.
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II. Current Reporting of Execution Quality Statistics

A. Adoption of Rule 11Ac1-5

    When the Commission adopted Rule 11Ac1-5, which was later re-
designated as Rule 605, in 2000, there was little publicly available 
information to enable investors to compare and evaluate execution 
quality among different market centers.\22\ The Commission proposed and 
adopted Rule 11Ac1-5 together with Rule 11Ac1-6, which was later re-
designated as Rule 606, requiring broker-dealers to disclose the 
identity of market centers to which they route orders on behalf of 
customers. When adopting these rules, the Commission stated that, taken 
together, they should significantly improve the opportunity for 
investors to evaluate what happens to their orders after they submit 
them to a broker-dealer for execution.\23\ The Commission reasoned that 
competitive forces could then be brought to bear on broker-dealers both 
with respect to the explicit trading costs associated with brokerage 
commissions and the implicit trading costs associated with execution 
quality.\24\ Rule 11Ac1-5 was intended to remedy an absence of public 
information about how broker-dealers responded to trade-offs between 
price and other factors, such as speed or reliability, and establish a 
baseline level of disclosure in order to facilitate cross-market 
comparisons of execution quality.\25\
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    \22\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75416. 
For clarity, when this release discusses the adoption of Rule 605, 
it is referring to the Adopting Release, supra note 5.
    \23\ See id. at 75414.
    \24\ See id. at 75419. Although it is difficult to isolate the 
effects of the Rule given the evolution of the equity markets over 
time, one academic study examining the introduction of Rule 605 
found that the routing of marketable order flow by broker-dealers 
became more sensitive to changes in execution quality across market 
centers after Rule 605 reports became available. See Ekkehart 
Boehmer, Robert Jennings & Li Wei, Public Disclosure and Private 
Decisions: Equity Market Execution Quality and Order Routing, 20 
Rev. Fin. Stud. 315 (2007) (``Boehmer et al.''). Another study 
attributed a significant decline in effective and quoted spreads 
following the implementation of Rule 605 to an increase in 
competition between market centers, who improved the execution 
quality that they offered in order to attract more order flow. See 
Xin Zhao & Kee H. Chung, Information Disclosure and Market Quality: 
The Effect of SEC Rule 605 on Trading Costs, 42 J. Fin. Quantitative 
Analysis, 657 (Sept. 2007) (``Zhao & Chung'').
    \25\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75418, 
75419. Data obtained from Rule 605 reports are used by the third 
parties including academics and the financial press to study a 
variety of topics related to execution quality, including liquidity 
measurement, exchange competition, zero commission trading, and 
broker-dealer execution quality. See infra notes 545-547 and 
accompanying text.
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B. Scope and Content of Rule 605

1. Scope
    Currently, Rule 605 requires market centers to make available, on a 
monthly basis, standardized information concerning execution quality 
for covered orders in NMS stocks that they received for execution. 
Market centers must provide specified measures of execution quality, 
including effective spread, average amount of price improvement, number 
of shares executed, and speed of execution.\26\
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    \26\ See 17 CFR 242.605.
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(a) Market Centers
    Regulation NMS defines the term ``market center'' to mean any 
exchange market maker,\27\ OTC market maker,\28\ ATS,\29\ national 
securities exchange,\30\ or national securities association.\31\ This 
definition was intended to cover entities that hold themselves out as 
willing to accept and execute orders in NMS securities.\32\ Further, a 
market center must report on orders that it ``received for execution 
from any person,'' which was intended to assign the disclosure 
obligation to an entity that controls whether and when an order will be 
executed.\33\
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    \27\ ``Exchange market maker'' means any member of a national 
securities exchange that is registered as a specialist or market 
maker pursuant to the rules of such exchange. See 17 CFR 
242.600(b)(32).
    \28\ ``OTC market maker'' means any dealer that holds itself out 
as being willing to buy from and sell to its customers, or others, 
in the United States, an NMS stock for its own account on a regular 
or continuous basis otherwise than on a national securities exchange 
in amounts of less than a block size. See 17 CFR 242.600(b)(64).
    \29\ ``Alternative trading system'' or ``ATS'' means any 
organization, association, person, group of persons, or system: (1) 
That constitutes, maintains, or provides a market place or 
facilities for bringing together purchasers and sellers of 
securities or for otherwise performing with respect to securities 
the functions commonly performed by a stock exchange within the 
meaning of 17 CFR 240.3b-16; and (2) That does not: (i) Set rules 
governing the conduct of subscribers other than the conduct of such 
subscribers' trading on such organization, association, person, 
group of persons, or system; or (ii) Discipline subscribers other 
than by exclusion from trading. See 17 CFR 242.300(a). See also 17 
CFR 242.600(b)(4) (stating that ``alternative trading system'' has 
the meaning provided in 17 CFR 242.300(a)).
    \30\ ``National securities exchange'' means any exchange 
registered pursuant to section 6 of the Exchange Act. See 17 CFR 
242.600(b)(53).
    \31\ See 17 CFR 242.600(b)(46). ``National securities 
association'' means any association of brokers and dealers 
registered pursuant to section 15A of the Exchange Act. See 17 CFR 
242.600(b)(52).
    \32\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75421.
    \33\ See id.
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    In many instances, broker-dealers accept orders from customers for 
execution and then route these customer orders to various execution 
venues, but do not execute customer orders directly. These broker-
dealers generally do not fall within the definition of ``market 
center'' and therefore fall outside of the scope of Rule 605's 
reporting requirements.\34\
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    \34\ See, e.g., 17 CFR 242.605(a) (monthly electronic reports by 
market centers). In some instances, broker-dealers accept orders 
from customers for execution and execute a small portion of their 
order flow internally (e.g., fractional share orders), and therefore 
would fall within the definition of ``market center'' in Rule 
600(b)(46) with respect to the portion of their order flow for which 
they hold themselves out as being willing to buy or sell for their 
own account on a regular or continuous basis. However, if, for 
example, they only act as a market center for orders smaller than 
100 shares, then these market centers would not be required to 
prepare Rule 605 reports currently because the portion of their 
order flow for which they act as a market center would include only 
orders that fall below the smallest order size category (i.e., 100 
to 499 shares). See 17 CFR 242.600(b)(defining ``categorized by 
order size''); 17 CFR 242.605)(a)(1) (stating that a market center's 
monthly report ``shall be categorized by security, order type, and 
order size'').
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(b) Covered Orders
    The covered order definition is limited by several conditions and 
exclusions in order to include those orders that provide a basis for 
meaningful and comparable statistical measures of execution quality. A 
``covered order'' is defined to include any market order or any limit 
order (including immediate-or-cancel orders) received by a market 
center during regular trading hours at a time when the national best 
bid and national best offer is being disseminated, and, if executed, is 
executed during regular trading hours.\35\ This definition serves two 
purposes: (1) because the nature and execution quality for regular and 
after-hours trading differs, it avoids blending statistics for orders 
executed after-hours with those executed during the regular

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trading day; and (2) because many of the statistical measures included 
in the rule rely on the availability of the national best bid and offer 
(``NBBO'') at the time of order receipt, it excludes orders for which 
execution quality metrics could not be calculated.
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    \35\ See 17 CFR 242.600(b)(22).
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    Covered orders do not include any orders for which the customer 
requests special handling, which include, but are not limited to, 
market on open and market on close orders, stop orders, all or none 
orders, and ``not held'' orders.\36\ The Commission reasoned that 
special handling instructions could skew general execution quality 
measures.\37\
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    \36\ See id. Generally, a ``not held'' order provides the 
broker-dealer with price and time discretion in handling the order, 
whereas a broker-dealer must attempt to execute a ``held'' order 
immediately. See 2018 Rule 606 Amendments Release, 83 FR 58338 (Nov. 
19, 2018) at 58340. As a general matter, if a customer submits an 
order for an NMS stock to its broker-dealer, whether it be for a 
fractional share, whole shares, or whole shares with a fractional 
share component, and the customer reasonably expects its broker-
dealer to attempt to execute such order immediately, then the 
broker-dealer generally should categorize the order as a held order.
    \37\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75421.
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2. Required Information
    Rule 605 reports contain a number of execution quality metrics for 
covered orders, including statistics for all NMLOs with limit prices 
within ten cents of the NBBO at the time of order receipt as well as 
separate statistics for market orders and marketable limit orders. 
Under the Rule, the information is categorized by (1) individual 
security,\38\ (2) one of five order types,\39\ and (3) one of four 
order sizes.\40\ These categories provide users flexibility in 
determining how to summarize and analyze the information.\41\
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    \38\ See 17 CFR 242.605(a)(1).
    \39\ See id. ``Categorized by order type'' refers to 
categorization by whether an order is a market order, a marketable 
limit order, an inside-the-quote limit order, an at-the-quote limit 
order, or a near-the-quote limit order. See 17 CFR 242.600(b)(14).
    \40\ See 17 CFR 242.605(a)(1). The current size categories are: 
100 to 499 shares; 500 to 1999 shares; 2000 to 4999 shares, and 5000 
or greater shares. See 17 CFR 242.600(b)(11). On June 22, 2001, the 
Commission granted exemptive relief to any order with a size of 
10,000 shares or greater, reasoning that the exclusion of very large 
orders would help assure greater comparability of statistics in the 
largest size category of 5,000 or greater shares. See Letter from 
Annette L. Nazareth, Director, Division of Market Regulation to 
Darla C. Stuckey, Assistant Secretary, NYSE, dated June 22, 2001 
(``Large Order Exemptive Letter'').
    \41\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75417. 
For instance, a user could analyze execution quality for a group of 
securities and by size and order type.
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    Within each of the three categories, the reports are required to 
include statistics about the total number of orders submitted as well 
as the total number of shares submitted, shares cancelled prior to 
execution, shares executed at the receiving market center, shares 
executed at another venue, shares executed within different time-to-
execution buckets, and average realized spread.\42\ For market and 
marketable limit orders, the reports also must include average 
effective spread; number of shares executed better than the quote, at 
the quote, or outside the quote; average time to execution when 
executed better than the quote, at the quote, or outside the quote; as 
well as average dollar amount per share that orders were executed 
better than the quote or outside the quote.\43\ In addition, time of 
order execution and time of order receipt are required to be measured 
to the nearest second.\44\
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    \42\ See 17 CFR 242.605(a)(1)(i).
    \43\ See 17 CFR 242.605(a)(1)(ii).
    \44\ See 17 CFR 242.600(b)(91), (92).
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    The categorization by order type does not currently include away-
from-the-quote NMLOs, i.e., those orders with a limit price more than 
ten cents away from the NBBO. In proposing to exclude these orders in 
2000, the Commission indicated that the execution quality statistics 
for these types of orders may be less meaningful because execution of 
these types of orders may be more dependent on the extent to which the 
orders' limit prices were outside the consolidated best bid and offer 
(``BBO'') and price movement in the market than on their handling by 
the market center.\45\
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    \45\ See Securities Exchange Act Release No. 43084 (July 28, 
2000), 65 FR 48406, 48414 (Aug. 8, 2000) (File No. S7-16-00) 
(Disclosure of Order Execution and Routing Practices) (``Proposing 
Release'') (stating that the Commission preliminarily believed that 
the rule's statistical measures (e.g., fill rates and speed of 
execution) for this type of order may be less meaningful because 
they would be more dependent on the extent to which the orders' 
limit prices were outside the consolidated BBO (and movements in 
market prices) than on their handling by a market center).
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3. Procedures for Making Reports Available to the Public
    The Rule 605 NMS Plan establishes procedures for market centers to 
make data available to the public in a uniform, readily accessible, and 
usable electronic form.\46\ The Plan also requires market centers to 
post their monthly reports on an internet website that is free of 
charge and readily accessible to the public.\47\ Generally, reports are 
posted on market centers' own websites; however, they may be posted on 
a third-party vendor site if a market center uses a vendor to prepare 
its reports.\48\ In addition, formatting for Rule 605 data is governed 
by the Plan. Among other things, the Plan sets forth the file type and 
structure of the reports and the order and format of fields, yielding 
reports that are structured and machine-readable.\49\
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    \46\ See 17 CFR 242.605(a)(2) and Securities and Exchange 
Commission File No. 4-518 (National Market System Plan Establishing 
Procedures Under Rule 605 of Regulation NMS) (``Rule 605 NMS Plan'' 
or ``Plan''). See also Securities Exchange Act Release No. 44177 
(Apr. 12, 2001), 66 FR 19814 (Apr. 17, 2001) (order approving the 
Plan).
    \47\ Currently, the parties to the Plan are the 16 registered 
national securities exchanges trading NMS stocks and 1 national 
securities association (the ``Participants''). Although not all 
market centers are Participants, the Participants are required to 
enforce compliance with the terms of the Plan by their members and 
person associated with their members. See 17 CFR 242.608(c). Market 
centers that are not Participants must make arrangements with a 
Participant to act as their ``Designated Participant.'' See Plan at 
IV. Each market center must notify its Designated Participant of the 
website where its reports may be downloaded, and each Designated 
Participant must maintain a comprehensive list of links for all 
market centers for which it functions as a Designated Participant. 
See Plan at IV, VIII(c).
    \48\ See Plan at n.3.
    \49\ See id. at 2 (``Section V . . . provides that market center 
files must be in standard, pipe-delimited ASCII format'').
---------------------------------------------------------------------------

C. Other Relevant Rules

    Rule 606 reports address order handling information and Rule 606's 
reporting requirements differ for held orders versus not held orders. 
With respect to held orders, Rule 606(a)(1) requires broker-dealers to 
produce quarterly public reports regarding their routing of non-
directed orders \50\ in NMS stocks that are submitted on a held basis. 
These reports must identify certain regularly-used venues to which the 
broker-dealer routed non-directed orders for execution and provide data 
on the percentage of orders routed to each venue.\51\ These reports 
also must provide information, for each venue identified, about the 
payment relationship between the broker-dealer and the venue, including 
any payments made by a venue to a broker-dealer for the right to trade 
with its customer order flow (i.e., payment for order flow or ``PFOF'') 
or rebates,\52\ and a description of the material aspects of the 
broker-dealer's relationship with the venue and the terms of 
arrangements that may influence a broker-dealer's order routing

[[Page 3790]]

decision.\53\ In addition, Rule 606(b)(1) requires broker-dealers to 
provide to their customers, upon request, reports that include high-
level customer-specific order routing information, such as the identity 
of the venues to which the customer orders were routed for execution in 
the prior six months and the time of the transactions, if any, that 
resulted from such orders.\54\ For orders submitted on a held basis, 
the reports required by Rule 606 do not contain any execution quality 
information. However, a customer of a reporting broker-dealer may 
access the execution quality reports produced pursuant to Rule 605 by 
each venue identified as a routing destination in the broker-dealer's 
Rule 606 reports, to the extent that venue is a market center.\55\
---------------------------------------------------------------------------

    \50\ A ``non-directed order'' means any order from a customer 
other than a directed order. See 17 CFR 242.600(b)(56). A ``directed 
order'' means an order from a customer that the customer 
specifically instructed the broker or dealer to route to a 
particular venue for execution. See 17 CFR 242.600(b)(27).
    \51\ See 17 CFR 242.606(a)(1)(ii) (stating that each section in 
the required report shall include the identity of the ten venues to 
which the largest number of total non-directed orders for the 
section were routed for execution and of any venue to which five 
percent or more of non-directed orders were routed).
    \52\ See 17 CFR 242.606(a)(1)(iii).
    \53\ See 17 CFR 242.606(a)(1)(iv).
    \54\ See 17 CFR 242.606(b)(1).
    \55\ See supra note 23 and accompanying text.
---------------------------------------------------------------------------

    In contrast, Rule 606 requires broker-dealers to produce reports 
that provide detail regarding execution quality in connection with not 
held orders, which are typically used by institutional investors.\56\ 
Specifically, Rule 606(b)(3) requires broker-dealers to produce reports 
pertaining to order routing upon the request of a customer that places, 
directly or indirectly, one or more orders in NMS stocks that are 
submitted on a not held basis.\57\ These customer-specific reports 
generally must include detailed information, by venue, including 
metrics pertaining to the broker-dealer's routing of the customer's 
orders and the execution of such orders.\58\ In particular, the venue-
by-venue order execution information must include aggregated metrics 
such as fill rate, percentage of shares executed at the midpoint, and 
percentages of total shares executed that were priced on the side of 
the spread more favorable to the order and on the side of the spread 
less favorable to the order.\59\
---------------------------------------------------------------------------

    \56\ See 2018 Rule 606 Amendments Release, 83 FR 58338 (Nov. 19, 
2018) at 58345 (stating that by using the not held order 
distinction, Rule 606(b)(3) as adopted will likely result in more 
Rule 606(b)(3) disclosures for order flow that is typically 
characteristic of institutional customers--not retail customers--and 
will likely cover all or nearly all of the institutional order 
flow). In contrast, held orders are typically used by individual 
investors. See, e.g., id. at 58372 (stating that retail investors' 
orders are typically submitted on a held basis and are typically 
smaller in size).
    \57\ See 17 CFR 240.606(b)(3).
    \58\ See 17 CFR 240.606(b)(3).
    \59\ See 17 CFR 240.606(b)(3)(ii).
---------------------------------------------------------------------------

    Current Rule 606 reflects significant changes that were made in the 
2018 Rule 606 Amendments.\60\ When adopting the 2018 Rule 606 
Amendments, the Commission identified intensified competition for 
customer orders, the rise in the number of trading centers, and the 
introduction of new fee models for execution services as the main 
concerns with held orders for NMS stocks that it sought to address with 
the proposal.\61\ The Commission stated that the more prevalent use of 
financial inducements to attract order flow from broker-dealers that 
handle retail investor orders created new, and in many cases 
significant, potential conflicts of interests for these broker-
dealers.\62\ Further, the Commission stated that enhanced public 
disclosures for held orders should focus on providing more detailed 
information regarding these financial inducements, as opposed to the 
different information geared towards not held orders from customers 
that is set forth in Rule 606(b)(3).\63\ Therefore, the Commission 
adopted enhanced public disclosures pursuant to Rule 606(a)(1) that 
focused on increased transparency for the financial inducements that 
broker-dealers face when determining where to route held order 
flow.\64\ The Commission stated that this enhancement would allow 
customers to better assess the nature and quality of broker-dealers' 
order handling services, including the potential for broker-dealer 
conflicts of interest, and would also benefit customers to the extent 
that broker-dealers were spurred to compete further by providing 
enhanced order routing services and better execution quality.\65\
---------------------------------------------------------------------------

    \60\ See generally 2018 Rule 606 Amendments Release.
    \61\ See 2018 Rule 606 Amendments Release, 83 FR 58338 (Nov. 19, 
2018) at 58372.
    \62\ See id.
    \63\ See id. The Commission also considered but did not adopt an 
aspect of the proposal that would have required broker-dealers to 
make publicly available a report that would have aggregated Rule 
606(b)(3) order handling information pertaining to not held orders. 
See id. at 58369-70. The Commission stated that its decision stemmed 
from fundamental differences between held order flow and not held 
order flow, because held orders are typically non-directed orders 
with no specific order-handling instructions for the broker-dealer. 
See id. at 58371 (stating that held order flow is handled similarly 
by broker-dealers--held orders are generally small orders that are 
internalized or sent to OTC market makers if marketable or fully 
executed on a single trading center if not marketable). The 
Commission further stated that, by contrast, not held order flow is 
diverse and customers may provide specific order handling 
instructions to their broker-dealers, limit the order handling 
discretion of their broker-dealers, or have specific needs that 
impact the broker-dealers' handling of these orders. See id. 
Therefore, the Commission concluded that the disparate behavior of 
customers when using not held orders limited the potential ability 
for customers and broker-dealers to use aggregated Rule 606(b)(3) 
order handling information to better understand broker-dealers' 
routing behavior or compare broker-dealers' order routing 
performance. See id.
    \64\ See 2018 Rule 606 Amendments Release, 83 FR 58338 (Nov. 19, 
2018) at 58373.
    \65\ See id. In comparison, with respect to the addition of 
customer-specific order-handling disclosures in Rule 606(b)(3), the 
Commission stated that these disclosures are particularly suited to 
customers that submit not held NMS stock orders because the 
disclosures set forth detailed order handling information that is 
useful in evaluating how broker-dealers exercise the discretion 
attendant to not held orders and, in the process, carry out their 
best execution obligations and manage the potential for information 
leakage and conflicts of interest. See id. at 58344. As part of the 
2018 Rule 606 Amendments, the Commission added Rule 606(b)(3) to 
require broker-dealers to make detailed, customer-specific order 
handling disclosures available to institutional customers, in 
particular, who previously were not entitled to disclosures under 
the rule for their order flow, or were entitled to disclosures that 
had become inadequate in a highly automated and more complex market. 
See id.
---------------------------------------------------------------------------

    At the time of the 2018 Rule 606 Amendments, the Commission 
considered suggestions from the Equity Market Structure Advisory 
Committee (``EMSAC'') and other commenters that the Commission include 
more or different execution quality statistics in the required 
disclosures.\66\ But the Commission stated that the limited 
modifications to Rule 606(a) that it was adopting were reasonably 
designed to further the goal of enhancing transparency regarding 
broker-dealers' order routing practices and customers' ability to 
assess the quality of those practices, and that the suggested execution 
quality statistics were not necessary to achieve that goal.\67\ 
However, the Commission noted that its determination not to adopt the 
additional specific disclosures was not an indication that the 
Commission had formed a decision on the validity or usefulness of the 
suggested execution quality statistics.\68\
---------------------------------------------------------------------------

    \66\ See id. at 58379. See also EMSAC III at 2-3 (suggesting 
that the Commission modify the enhancements to Rule 606 to include, 
among other things, execution quality statistics by routing 
destination).
    \67\ See 2018 Rule 606 Amendments Release, 83 FR 58338 (Nov. 19, 
2018) at 58379.
    \68\ See id.
---------------------------------------------------------------------------

    Separately, each broker-dealer has a legal duty to seek to obtain 
best execution of customer orders.\69\ The

[[Page 3791]]

duty of best execution requires broker-dealers to execute customers' 
trades at the most favorable terms reasonably available under the 
circumstances.\70\ When adopting Rule 605 and Rule 606, the Commission 
stated that these rules do not address and therefore do not change the 
existing legal standards that govern a broker-dealer's duty of best 
execution.\71\ The Commission recognized that the information contained 
in the Rule 605 reports (and Rule 606 reports) will not, by itself, be 
sufficient to support conclusions regarding a broker-dealer's 
compliance with its legal responsibility to obtain the best execution 
of customer orders.\72\ As the Commission stated, any such conclusions 
would require a more in-depth analysis of the broker-dealer's order 
routing practices than will be available from the disclosures required 
by the rules.\73\
---------------------------------------------------------------------------

    \69\ See, e.g., Regulation NMS Adopting Release, 70 FR at 37537; 
Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 
266, 269-70, 274 (3d Cir.), cert. denied, 525 U.S. 811 (1998); 
Certain Market Making Activities on Nasdaq, Securities Exchange Act 
Release No. 40900, 53 SEC 1150, 1162 (1999) (settled case) (citing 
Sinclair v. SEC, 444 F.2d 399 (2d Cir. 1971); Arleen Hughes, 27 SEC 
629, 636 (1948), aff'd sub nom. Hughes v. SEC, 174 F.2d 969 (D.C. 
Cir. 1949)). In addition, the Commission is separately proposing a 
rule concerning broker-dealers' duty of best execution. See 
Securities Exchange Act Release No. 96496 (Dec. 14, 2022) (File No. 
S7-32-22) (Regulation Best Execution). The Commission encourages 
commenters to review that proposal to determine whether it might 
affect their comments on this proposing release.
    \70\ See Regulation NMS Adopting Release, 70 FR 37496 (Jun. 29, 
2005) at 37538 (referring to the best reasonably available price and 
citing Newton, 135 F.3d at 266, 269-70, 274). Newton also specified 
certain other factors relevant to best execution--order size, 
trading characteristics of the security, speed of execution, 
clearing costs, and the cost and difficulty of executing an order in 
a particular market. See Newton, 135 F.3d at 270 n.2.
    \71\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75420.
    \72\ See id.
    \73\ See id. For example, the execution quality statistics 
included in Rule 605 do not encompass every factor that may be 
relevant in determining whether a broker-dealer has obtained best 
execution, and the statistics in a market center's reports typically 
will reflect orders received from a number of different routing 
broker-dealers. See id. See also infra notes 564-565 and 
accompanying text for discussion of an investment adviser's 
fiduciary duty, including the duty to seek best execution of a 
client's transactions where the investment adviser has the 
responsibility to select broker-dealers to execute client trades.
---------------------------------------------------------------------------

D. Overview of Need for Modernization

    The U.S. equity markets have evolved significantly since the 
Commission adopted the Rule in 2000. For instance, the equities markets 
have become increasingly fragmented, as both the market shares of 
individual national securities exchanges became less concentrated and 
an increased percentage of order flow moved off-exchange. In 2000, 
there were 9 registered national securities exchanges and one 
registered national securities association.\74\ A large proportion of 
the order flow in listed equity securities was routed to a few, mostly 
manual, trading centers,\75\ and the primary listing exchanges retained 
a high percentage of the order flow for exchange-listed equities.\76\
---------------------------------------------------------------------------

    \74\ See Securities and Exchange Commission, Annual Report for 
fiscal year 2000, at 38 available at https://www.sec.gov/pdf/annrep00/ar00full.pdf.
    \75\ See Securities Exchange Act Release No. 78309 (July 13, 
2016), 81 FR 49432, 49436 (July 27, 2016) (``Rule 606 Proposing 
Release''); Fragmentation Release, 65 FR 10577 (Feb. 28, 2000) at 
10579-80.
    \76\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75415 
(stating that in September 2000, for example, NYSE accounted for 
83.3% of the share volume in NYSE equities and that the American 
Stock Exchange, LLC (``Amex'') accounted for 69.9% of share volume 
in Amex equities). See also Concept Release on Equity Market 
Structure, 75 FR 3594 (Jan. 21, 2010) at 3595 (stating that in 
January 2005, NYSE executed approximately 79.1% of the consolidated 
share volume in its listed stocks, as compared to 25.1% in October 
2009). In addition, NYSE-listed stocks were traded primarily on the 
floor of the NYSE in a manual fashion until October 2006, at which 
time NYSE began to offer fully automated access to its displayed 
quotations. See Concept Release on Equity Market Structure, 75 FR 
3594 (Jan. 21, 2010) at 3594-95. However, stocks traded on the 
NASDAQ Stock Market LLC (``NASDAQ''), which in 2000 was owned and 
operated by a national securities association, were already trading 
in a highly automated fashion at many different trading centers. See 
id. at 3595; Fragmentation Release, 65 FR 10577 (Feb. 28, 2000) at 
10580.
---------------------------------------------------------------------------

    In contrast, trading in the U.S. equity markets today is highly 
automated and spread among different types of trading centers, allowing 
even more choices about where orders may be routed. The types of 
trading centers that currently trade NMS stocks are: (1) national 
securities exchanges operating SRO trading facilities; \77\ (2) ATSs 
that trade NMS stocks (``NMS Stock ATSs''); \78\ (3) exchange market 
makers; (4) wholesalers; \79\ and (5) any other broker-dealer that 
executes orders internally by trading as principal or crossing orders 
as agent.\80\ In the first quarter of 2022, NMS stocks were traded on 
16 national securities exchanges, and off-exchange at 32 NMS Stock ATSs 
and at over 230 other FINRA members.\81\ National securities exchanges 
executed approximately 60% of NMS share volume.\82\ The majority of 
off-exchange volume was executed by wholesalers, who executed almost 
one quarter of total volume (23.9%) and about 60% of off-exchange 
volume.\83\ Some OTC market makers, such as wholesalers, operate SDPs 
through which they execute institutional orders in NMS stocks against 
their own inventory.\84\
---------------------------------------------------------------------------

    \77\ See 17 CFR 242.600(b)(89) (defining ``SRO trading 
facility'' as, among other things, a facility operated by a national 
securities exchange that executes orders in a security).
    \78\ An ``NMS Stock ATS'' as used in this release is an ATS that 
has filed an effective Form ATS-N with the Commission.
    \79\ The term ``wholesaler'' is not defined in Regulation NMS, 
but is commonly used to refer to an OTC market maker that seeks to 
attract orders from broker-dealers that service the accounts of a 
large number of individual investors.
    \80\ See 15 U.S.C. 78c(a)(4)(A) (defining ``broker'' generally 
as any person engaged in the business of effecting transactions in 
securities for the account of others); 15 U.S.C. 78c(a)(5)(A) 
(defining ``dealer'' generally as any person engaged in the business 
of buying and selling securities for such person's own account 
through a broker or otherwise). The term ``broker-dealer'' is used 
in this release to encompass all brokers, all dealers, and firms 
that are both brokers and dealers. See also 17 CFR 242.600(b)(95) 
(defining ``trading center'').
    \81\ See infra note 766 and accompanying text; Table 7.
    \82\ See infra note 767 and accompanying text; Table 7.
    \83\ See infra Table 7.
    \84\ See infra note 768 and accompanying text.
---------------------------------------------------------------------------

    Broker-dealers that primarily service the accounts of individual 
investors (referred to in this release as ``retail brokers'') often 
route the marketable orders of individual investors in NMS stocks to 
wholesalers.\85\ The primary business model of wholesalers is to trade 
internally as principal with individual investor orders. They do not 
publicly display or otherwise reveal the prices at which they are 
willing to trade internally as a means to attract individual investor 
orders from broker-dealers. Moreover, it is generally more profitable 
for liquidity providers such as wholesalers to execute against orders 
with lower adverse selection risk because of the reduced risk that 
prices will move against the liquidity provider.\86\ Wholesalers may 
provide different execution quality to different broker-dealers, 
depending on factors including the level of adverse selection risk of 
their order flow.\87\
---------------------------------------------------------------------------

    \85\ There are six wholesalers that internalize the majority of 
individual investors' marketable orders. See infra note 766 and 
accompanying text.
    \86\ See infra note 608 and accompanying text.
    \87\ Analysis of Consolidated Audit Trail (``CAT'') data from 
the first five months of 2022 found that wholesalers provide 
different execution quality to different retail brokers, and in 
particular that broker-dealers with higher adverse selection risk 
systematically receive higher effective spreads and lower price 
improvement than broker-dealers with lower adverse selection risk. 
See infra notes 609-613 and accompanying text; Table 3. For further 
discussion of differences in execution quality across broker-
dealers, see infra section VII.C.1.a).
---------------------------------------------------------------------------

    Some retail brokers may face conflicts of interest when making 
order routing decisions, including whether to route to a particular 
wholesaler.\88\ For example, broker-dealers could face conflicts of 
interest when making routing decisions due to their own affiliation 
with market centers (e.g., if the broker-dealer operates its own ATS), 
from the presence of liquidity fees and rebates on some market centers, 
or from payments that some retail brokers receive from wholesalers to 
attract the order flow of

[[Page 3792]]

their individual investor customers (PFOF).\89\
---------------------------------------------------------------------------

    \88\ See infra section VII.C.3.a)(2). See also 2018 Rule 606 
Amendments Release, 83 FR 58338 (Nov. 19, 2018) at 58372 (stating 
that financial inducements to attract order flow from broker-dealers 
that handle retail investor orders have become more prevalent and 
for some broker-dealers such inducements may be a significant source 
of revenue); supra note 62 and accompanying text (stating that these 
financial inducements have created new, and in many cases 
significant, potential conflicts of interest for these broker-
dealers).
    \89\ See infra notes 759-762 and accompanying text.
---------------------------------------------------------------------------

    The Commission is concerned that variations in execution quality 
across broker-dealers may be difficult to assess using current Rule 605 
and Rule 606 reports. In particular, broker-dealers that route customer 
orders externally, rather than executing customer orders internally, 
are not required to prepare Rule 605 reports because they do not meet 
the definition of market center. Customers of a broker-dealer can use 
Rule 606 reports to identify market centers to which the broker-dealer 
routes, and then access those market centers' Rule 605 reports to 
review the execution quality that the market center provides to all 
orders that the market center received for execution. However, to the 
extent that the market center may provide different execution quality 
to orders based on different order routing arrangements with different 
broker-dealers, current Rule 605 and 606 do not require reports that 
provide investors with a way to assess these differences.
    In addition, developments in trading, including the increased speed 
of trading, further necessitate proposing updates to the Rule. Average 
stock prices have continued to increase over time,\90\ and odd-lots 
\91\ and fractional shares \92\ continue to trade with increasing 
frequency. Similarly, odd-lot quotes in higher-priced stocks continue 
to offer prices that are frequently better than the round lot NBBO for 
these stocks,\93\ and this better-priced odd-lot liquidity is 
distributed across multiple price levels.\94\ In addition, odd-lot 
rates have increased among lower priced stocks.\95\ Because current 
Rule 605 size categories exclude orders smaller than 100 shares, a 
significant proportion of market activity is currently excluded.\96\ An 
analysis of Rule 605 data shows that Rule 605 coverage has likely 
declined in the decades since the initial adoption of Rule 605.\97\ 
Further, because order size categories are tied to the number of 
shares, the categories may group orders of very different notional 
values, which may complicate comparisons of aggregate execution 
quality. Finally, the speed of the market has increased exponentially 
since 2000,\98\ rendering the Rule's current one-second timestamp 
conventions less meaningful.
---------------------------------------------------------------------------

    \90\ See supra note 16.
    \91\ See MDI Adopting Release, 85 FR 18612 (Apr. 2, 2020) at 
18616 (describing analyses included in the MDI Adopting Release 
confirming observations made in the MDI Proposing Release that a 
significant proportion of quotation and trading activity occurs in 
odd-lots, particularly for frequently traded, high-priced stocks). 
Analysis using the NYSE Trade and Quote database (obtained via 
Wharton Research Data Services (WRDS) (``TAQ data'' or ``NYSE TAQ 
data'') found that odd-lots increased from around 15% of trades in 
January 2014 to more than 55% of trades in March 2022. An analysis 
of data from the SEC's MIDAS analytics tool available at https://www.sec.gov/marketstructure/datavis.html#.YoPskqjMKUk shows that, in 
Q1 2022, odd-lots made up 81.2% of on-exchange trades (40% of 
volume) for stocks in the highest price decile and 25% of on-
exchange trades (2.72% of volume) for stocks in the lowest price 
decile. See dataset ``Summary Metrics by Decile and Quartile'' 
available at https://www.sec.gov/marketstructure/downloads.html.
    \92\ Analysis using CAT data for executed orders in March 2022 
found that an estimated 46.63 million originating orders with a 
fractional share component were eventually executed on- or off-
exchange. This represents approximately 2% of all executed orders 
and 14% of executed orders from individual accounts. Generally, 
accounts classified as ``individual'' in CAT are attributed to 
natural persons. See also infra note 647 and accompanying text.
    \93\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at 
18729. In addition, a recent academic working paper shows that odd-
lots offer better prices than the NBBO 18% of the time for bids and 
16% of the time for offers. This percentage increases monotonically 
in the stock price, for example, for bid prices, increasing from 5% 
for the group of lowest-price stocks in their sample, to 42% for the 
group of highest-priced stocks. See Robert P. Bartlett, Justin 
McCrary, and Maureen O'Hara, The Market Inside the Market: Odd-Lot 
Quotes (Feb. 1, 2022), available at SSRN: https://ssrn.com/abstract=4027099 (``Bartlett, et al.''). See also Elliot Banks, BMLL 
Technologies, Inside the SIP and the Microstructure of Odd-Lot 
Quotes (observing an upward trend in odd-lot trading inside the NBBO 
from January 2019 to January 2022).
    \94\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at 
18613 n.202 (describing analysis included in the MDI Adopting 
Release that examined quotation data for the week of May 22-29, 2020 
for stocks priced from $250.01 to $1000.00 and found that there is 
odd-lot interest priced better than the new round lot NBBO 28.49% of 
the time, and, in 48.49% of those cases, there are better priced 
odd-lots at multiple price levels).
    \95\ For example, odd-lot rates for corporate stock price 
deciles 1-3 (the lowest priced corporate stocks comprising 30% of 
all corporate stocks) have been higher on average in 2021 and June 
2022 (34%, 39%) as compared to 2019 and 2020 (26%, 29%). Similarly, 
exchange-traded products (``ETPs'') also exhibit higher average odd-
lot rates in price quartiles 1 and 2 (the lowest priced ETPs 
comprising 50% of all ETPs) on average in 2021 and June 2022 (26%, 
29%) compared to 2019 and 2020 (20%, 23%). See SEC market structure 
analytics data, available at https://www.sec.gov/marketstructure/midas.html.
    \96\ See supra notes 91-92. See also infra notes 619-622 and 
accompanying text (estimating, based on analysis of Tick Size Pilot 
data, coverage of current Rule 605 reporting requirements).
    \97\ Analysis comparing one market center's volume (NYSE) to TAQ 
data shows that an estimated 50% of shares executed during regular 
market hours were included in Rule 605 reports as of February 2021, 
and shows that this number has been on a slightly downward trend 
since around mid-2012. See infra section VII.C.2.b) and infra Figure 
3.
    \98\ Analysis of data from the SEC's MIDAS analytics tool shows 
that the percent of on-exchange NMLOs that are fully executed within 
one millisecond (as a percentage of all fully executed on-exchange 
NMLOs) has increased from 2.1% in Q1 2012 to 10.3% in Q1 2022 for 
small cap stocks, and from 5.9% in Q1 2012 to 15.7% in Q1 2022 for 
large cap stocks. Further, in Q1 2022 more than half (51.6%) of 
NMLOs executed in less than one second in large market cap stocks. 
See dataset ``Conditional Cancel and Trade Distribution,'' available 
at https://www.sec.gov/marketstructure/downloads.html. See also 
infra note 692 and accompanying text.
---------------------------------------------------------------------------

E. EMSAC Recommendations, Petition for Rulemaking, and Other Comments

    The EMSAC \99\ as well as commenters responding to the Commission's 
Concept Release on Equity Market Structure \100\ and to the 2018 Rule 
606 Amendments,\101\ have recommended

[[Page 3793]]

that the Commission amend Rule 605 to modernize the Rule and increase 
the usefulness of available execution quality disclosures. In addition, 
one broker-dealer petitioned the Commission to make ``modest rule 
amendments'' to Rule 605 and further stated that ``[i]mproving these 
metrics is essential for a market participant to quantitatively and 
qualitatively assess whether any particular broker-dealer obtained the 
most favorable terms under the circumstances for customer orders.'' 
\102\
---------------------------------------------------------------------------

    \99\ See Transcript from EMSAC Meeting (Aug. 2, 2016), available 
at https://www.sec.gov/spotlight/emsac/emsac-080216-transcript.txt 
(``EMSAC I''); Transcript from EMSAC Meeting (Nov. 29, 2016), 
available at https://www.sec.gov/spotlight/equity-market-structure/emsac-transcript-112916.txt (``EMSAC II''); EMSAC Recommendations 
Regarding Modifying Rule 605 and Rule 606 (``EMSAC III''), Nov. 29, 
2016, available at https://www.sec.gov/spotlight/emsac/emsac-recommendations-rules-605-606.pdf.
    \100\ See, e.g., Letter from Christopher Nagy, CEO, and Dave 
Lauer, President, KOR Group LLC (Apr. 4, 2014) (``KOR Group I''); 
Letter from Citigroup Global Markets Inc. and its affiliates re 
Concept Release on Equity Market Structure (Release No. 34-61358; 
File No. S7-02-10) (Aug. 7, 2014) (``Citigroup Letter''); Letter 
from Consumer Federation of America re File Number S7-02-10, 
Comments on Concept Release on Equity Market Structure (Sept. 9, 
2014) (``Consumer Federation I''); Letter from BlackRock, Inc. re 
Equity Market Structure Recommendations; Concept Release on Equity 
Market Structure, File No. S7-02-10; Regulation Systems Compliance 
and Integrity, File No. S7-01-13; and Equity Market Structure Review 
(Sept. 12, 2014) (``BlackRock Letter''); Letter from Financial 
Information Forum re Rule 605/606 Enhancements from a Retail 
Perspective (Oct. 22, 2014) (``FIF I''); Letter from Securities 
Industry and Financial Markets Association re Recommendations for 
Equity Market Structure Reforms (Oct. 24, 2014) (``SIFMA Letter''); 
Healthy Markets Proposal re SEC Rule 605/606 Reform (referenced in 
Aug. 2, 2016 statement of Christopher Nagy before the EMSAC) 
(``Healthy Markets II'') at 2; Letter from Healthy Markets re Notice 
of Meeting of Equity Market Structure Advisory Committee Meeting 
(File No. 265-29); List of Rules to be Reviewed Pursuant to the 
Regulatory Flexibility Act (File No. S7-21-16); Concept Release on 
Equity Market Structure (File No. S7-02-10) (Apr. 3, 2017) 
(``Healthy Markets III''); Letter from Healthy Markets re Potential 
Reforms Regarding the Provision of Market Data, Concept Release on 
Equity Market Structure (Rel. No. 34-61358; File No. S7-02-10), and 
Market Data and Market Access Roundtable (Rel. No. 4-729) (Jan. 3, 
2020) (``Healthy Markets IV''). Comments on the Commission's 2010 
Concept Release on Equity Market Structure are available at https://www.sec.gov/comments/s7-02-10/s70210.shtml. As with various other 
comments referenced herein, including, without limitation, comments 
received in connection with the Concept Release, the comments were 
not provided with reference to the proposals discussed in this 
release.
    \101\ See, e.g., Letter from James J. Angel, Ph.D., CFA, 
Georgetown University re Disclosure of Order Handling Information, 
File S7-14-16 (Aug. 26, 2016) (``Angel Letter''); Letter from 
Consumer Federation of America re File Number S7-14-16, Disclosure 
of Order Handling Information (Sept. 26, 2016) (``Consumer 
Federation II''); Letter from Fidelity Investments re Disclosure of 
Order Handling Information; File No. S7-14-16 (Sept. 26, 2016) 
(``Fidelity Letter''); Letter from Financial Information Forum re 
Release No. 34-78309; File No. S7-14-16; Disclosure of Order 
Handling Information (Sept. 26, 2016) (``FIF II''); Letter from 
Financial Services Roundtable re Disclosure of Order Handling 
Information Proposal [File No. S7-14-16] (Sept. 26, 2016) 
(``Financial Services Roundtable Letter''); Letter from Healthy 
Markets Association re Disclosure of Order Handling Information (S7-
14-16) (Sept. 26, 2016) (``Healthy Markets I''); Letter from IHS 
Markit re Disclosure of Order Handling Information; Proposed Rule, 
Release No. 34-78309; File No. S7-14-16 (Sept. 26, 2016) (``IHS 
Markit Letter''). Comments receiving in connection with the 2018 
Rule 606 Amendments are available at https://www.sec.gov/comments/s7-14-16/s71416.htm.
    \102\ Letter from Virtu Financial re Petition for Rulemaking to 
Amend SEC Rule 605 (Sept. 20, 2021) (``Virtu Petition'') at 2, 
available at https://www.sec.gov/rules/petitions/2021/petn4-775.pdf.
---------------------------------------------------------------------------

    The EMSAC and commenters generally support expanding the Rule's 
scope beyond market centers.\103\ In particular, in November 2016, the 
EMSAC recommended that the Commission ``[e]xpand the scope of Rule 605 
by requiring every broker-dealer to report with an exemption for 
broker[-]dealers with de minimis order flow, aligning the scope of Rule 
605 reporting with Rule 606.'' \104\ The EMSAC's recommendation 
acknowledged that there would be compliance and implementation costs 
associated with this expansion, but stated that the use of third-party 
vendors may mitigate some of these concerns.\105\ Further, the EMSAC's 
recommendation stated that having all broker-dealers provide Rule 605 
data would create an opportunity for market participants, academics, 
and the press to evaluate these statistics in a consistent manner.\106\
---------------------------------------------------------------------------

    \103\ See EMSAC III at 2; IHS Markit Letter at 2; Healthy 
Markets II at 2.
    \104\ EMSAC III at 2 (adopting recommendations of the Customer 
Issues Subcommittee).
    \105\ See id.
    \106\ See id.
---------------------------------------------------------------------------

    When the EMSAC met to consider this recommendation, panelists 
provided some explanation of the gaps in current execution quality 
disclosures. One panelist stated that the current reporting regime 
``miss[es] important information about the overall execution quality of 
a covered order'' because Rule 605 reports only pertain to order 
routing handled by market centers.\107\ This panelist explained that 
orders are handled by smart order routers that may not be located 
within a market center, and the Rule 605 data does not capture price 
slippage or delays that may occur as these orders are received by 
multiple non-executing market centers or broker-dealers.\108\ Another 
panelist described the difficulties that he encountered when trying to 
compare the execution quality of brokers using data available under the 
existing rules.\109\ According to the panelist, he ``had to make very 
rough inferences about the brokers' executions because of the gaps in 
the disclosure requirements.'' \110\ Moreover, this panelist stated 
that one fundamental problem with making these inferences was that a 
market maker's average execution quality across all of its orders 
received from brokers may be better or worse than its execution quality 
with respect to a particular broker's order flow.\111\
---------------------------------------------------------------------------

    \107\ See EMSAC I at 0103:23-0104:7 (Frank Hatheway, NASDAQ).
    \108\ See id. at 0104:7-12 (Frank Hatheway, NASDAQ).
    \109\ See id. at 0094:6-0100:12 (Bill Alpert, Barron's).
    \110\ Id. at 0096:12-15 (Bill Alpert, Barron's). See also id. at 
0097:3-8 (Bill Alpert, Barron's) (stating that ``the only effective, 
objective way to use the available disclosures was to score each 
broker with a weighted sum of their order flow fractions from the 
routing reports and then weight those with the effective over quoted 
measures of the market makers that they were sending their orders 
to''); 0096:25-0097:3 (stating that some brokers voluntarily 
disclose execution quality information, but they use different 
information and so the information is not comparable).
    \111\ See EMSAC I at 0097:14-22 (Bill Alpert, Barron's). See 
also id. at 0096:18-22 (Bill Alpert, Barron's) (stating that 
``almost every broker'' claimed that the execution quality that it 
received at a particular market maker was above average). This 
panelist also argued, based on the introduction of voluntary 
disclosures regarding price improvement for odd-lot orders by a few 
brokers and market makers, that disclosure improves behavior. See 
id. at 0098:6-0099:9 (Bill Alpert, Barron's) (stating the price 
improvement on odd-lot orders improved within a year after voluntary 
disclosures started). See also id. at 0132:6-11 (Brad Katsuyama, 
IEX) (stating that improving disclosures leads to improved 
performance).
---------------------------------------------------------------------------

    One EMSAC committee member acknowledged that retail brokerage firms 
did not favor the recommendation to expand Rule 605 reporting to 
broker-dealers, and stated that these firms would argue that aggregate 
statistics are more important for retail investors, who they claim are 
not going to look at the Rule 605 reports.\112\ This committee member 
stated that the counter-argument to this position is that if everyone 
is preparing Rule 605 reports, it would be possible to do various types 
of aggregation using that data.\113\ When the EMSAC met later to 
approve the recommendation, one committee member stated that the goal 
is to make data publicly available so that ``experts can help people 
make better decisions'' and that different groups would turn the data 
into usable reports, so it is not necessary to scale back the 
disclosures for the consumer.\114\
---------------------------------------------------------------------------

    \112\ See id. at 0136:24-0137:7 (Manisha Kimmel, Thomson 
Reuters). But see id. at 0102:22-0103:2) (Frank Hatheway, NASDAQ) 
(``While individual retail investors generally don't review 605 
statistics themselves, . . . the existence of the reports appears to 
provide precisely the form of discipline that the Commission 
envisioned when it adopted Rule 605 and 606.'').
    \113\ See EMSAC I at 0137:7-10 (Manisha Kimmel, Thomson 
Reuters). See also Statement of Christopher Nagy, Healthy Markets 
Association, at 6 (suggesting that the Commission mandate reporting 
of some execution quality statistics for retail orders); Healthy 
Markets I at 5-6 (recommending that the Commission modify Rule 606 
to include select execution quality statistics from Rule 605 for 
each identified routing destination).
    \114\ EMSAC II at 0065:1-16 (Brad Katsuyama, IEX). But see id. 
at 0064:18-24 (Jamil Nazarali, Citadel) (stating that his firm's 
retail broker clients expressed concerns with the recommendation 
that Rule 606 include the execution quality of the market makers 
that they route to, because there is a lot of important criteria 
that goes into routing and the reports could be misleading).
---------------------------------------------------------------------------

    When the Commission solicited comment on the 2018 Rule 606 
Amendments, several commenters recommended that the Commission expand 
the required reporting of execution quality statistics to better cover 
retail investors.\115\ One commenter stated that the type of 
standardized execution statistics that several firms voluntarily 
publish on a quarterly basis measure the quality of trade executions on 
retail investor orders in exchange-listed stocks and help investors 
evaluate their particular retail brokerage firm.\116\ Another commenter 
stated that there is a ``fundamental flaw'' in the logic of Rule 605 
and Rule 606 because ``[t]he structure of the rules implicitly assumes

[[Page 3794]]

that execution quality is solely a function of the market center and 
that the brokerage firm has no impact on execution quality.'' \117\ 
According to this commenter, execution quality is a product of both the 
broker's skill and the quality of the market center's execution, and 
therefore requiring brokers to show where they route orders does not 
provide retail investors with useful information about the actual 
execution quality that their orders receive.\118\ Another commenter 
stated that even though most retail investors may not use the 
disclosures directly, disclosures provide indirect benefits by 
promoting competition and by facilitating use by third-party analysts 
and academic researchers that provide an in-depth review of the 
disclosures.\119\
---------------------------------------------------------------------------

    \115\ See Angel Letter at 3 (recommending that brokers should be 
required to provide execution quality statistics by providing 
information on individual trade confirmations and displaying summary 
statistics on their websites); Fidelity Letter at 7-8 (recommending 
that the Commission require brokers to make publicly available 
certain execution quality statistics); Healthy Markets I at 7, 11 
(recommending that execution quality metrics should be provided to 
retail customers); IHS Markit Letter at 2 (recommending that all 
brokers that receive client orders and subsequently route orders on 
behalf of the client should provide information on the execution 
quality received at each venue). See also Consumer Federation II at 
10; Financial Services Roundtable Letter at 4-5.
    \116\ See Fidelity Letter at 7-8. For additional discussion 
about this voluntary effort to provide aggregated execution quality 
statistics, see infra notes 450-451 and accompanying text. See also 
Consumer Federation II at 10 (stating that voluntary disclosures by 
several market participants show that such disclosures are possible, 
and undercut arguments that doing so is too costly or burdensome).
    \117\ Angel Letter at 3.
    \118\ See id. However, this commenter also stated that the Rule 
605 data on execution quality is too raw for most investors to 
interpret. See id. at 2. See also Consumer Federation II at 10 
(stating that the only way to assess whether customers are being 
best served by their broker-dealer's routing decisions is by 
requiring execution quality statistics); Financial Services 
Roundtable Letter at 4-5 (stating that currently Rule 605 reports 
require investors to draw an inference that they will achieve the 
same performance as the average order sent to that venue, and 
additional data would help an investor compare the execution quality 
that various broker-dealers obtain at a particular execution venue).
    \119\ See Consumer Federation II at 10. See also IHS Markit 
Letter at 29-30 (stating that large retail routing brokers use 
private, internal versions of Rule 605 reports to calculate 
execution quality metrics for different market centers, leading to 
significant improvement in execution quality statistics for covered 
orders, and that voluntary reporting of execution quality metrics 
has also improved execution quality).
---------------------------------------------------------------------------

    One market participant, in a letter recommending that the 
Commission require broker-dealers to publish monthly cost of execution 
statistics, stated that Rule 605 and Rule 606 statistics published by 
market centers and broker-dealers do not provide a means for customers 
to judge how their brokers have performed with respect to keeping 
commissions low without adversely affecting execution quality.\120\ 
This commenter further remarked that matching a broker's routing 
statistics up with a receiving market center's execution quality 
statistics is ``essentially impossible.'' \121\
---------------------------------------------------------------------------

    \120\ See Letter from Thomas Peterffy, Chairman, Interactive 
Brokers Group (Aug. 1, 2014), at 3 (``Interactive Brokers Letter''), 
available at https://www.interactivebrokers.com/download/execution_stats_comment_letter.pdf (``Payment for order flow has 
often been justified by its advocates based on the claim that the 
receipt of such payments allows brokers to keep commissions low and 
does not affect execution quality (or if it does, such costs are 
passed back to customers in the form of lower commissions). . . . 
[T]he current Rule 605 and 606 statistics published by market 
centers and brokers . . . do not provide a basis for regulators to 
judge these claims, or for customers to judge their broker's 
performance.'').
    \121\ Interactive Brokers Letter at 3.
---------------------------------------------------------------------------

    Commenters have also suggested various ways to expand or modify the 
definition of covered order, including broadening its scope to capture 
additional order types.\122\ In particular, the petitioner for 
rulemaking recommended including short sales, stop orders, and pre-
market orders in Rule 605 reports.\123\ The petitioner stated that 
these order types are ``critical to a complete assessment of execution 
quality,'' and stated that many retail brokers include these orders 
when measuring the execution quality provided by market centers.\124\ A 
commenter to the 2018 Rule 606 Amendments also recommended including 
orders submitted prior to the market open in Rule 605 reports and 
stated that the marketable or non-marketable characteristics of such 
orders cannot be determined under the current framework.\125\
---------------------------------------------------------------------------

    \122\ See Letter from Financial Information Forum re Request for 
Comment--FIF Rule 605 Modernization Recommendations (Jan. 30, 2019) 
(``FIF III''), available at https://www.sec.gov/comments/s7-02-10/s70210-5002077-182848.pdf; EMSAC III; IHS Markit Letter; Healthy 
Markets II; FIF Letter I; KOR Group I.
    \123\ See Virtu Petition at 5.
    \124\ Id.
    \125\ See FIF II at 11-12.
---------------------------------------------------------------------------

    The EMSAC and commenters have also suggested bringing smaller and 
larger order sizes within scope.\126\ The petitioner stated that 
bucketing orders solely by numbers of shares is skewing 
comparisons.\127\ Another commenter, responding to the Commission's 
Concept Release on Equity Market Structure, recommended the following 
order size buckets: one share to 99 shares; 100 shares up to 9,999 
shares, divided into 100 share increments; 10,000 shares to 24,999 
shares; greater than 25,000 shares.\128\ One commenter that offered 
recommendations to modify Rule 605 suggested including a $500,000 
notional cap on all share size buckets.\129\ Another market participant 
expressed support for that cap or a different one.\130\ The market 
participant suggested that a cap of $200,000, consistent with the 
definition of ``block size'' in 17 CFR 242.600(b)(12)(ii), would make 
sense, but noted that benchmark has not changed with inflation.\131\ 
The market participant also stated that the use of notional buckets in 
the ``categorized by order size'' definition would account for 
fractional share and odd-lot orders.\132\
---------------------------------------------------------------------------

    \126\ See EMSAC III at 2; FIF III at 4; Healthy Markets II at 3; 
IHS Markit Letter at 9-10, 34.
    \127\ See Virtu Petition at 5.
    \128\ See Healthy Markets II at 4.
    \129\ See FIF III at 4.
    \130\ See ``Would 605 Work Better in Dollars?'', Phil 
Mackintosh, Chief Economist and Senior Vice President, Nasdaq (Sept. 
16, 2021), available at: https://www.nasdaq.com/articles/would-605-work-better-in-dollars-2021-09-16.
    \131\ See id. The market participant stated that ``a lower [than 
$500,000] notional cap makes sense too, given the small sizes of 
retail orders, especially when we consider the limits of the typical 
depth of book to fill covered orders.'' Id.
    \132\ See id.
---------------------------------------------------------------------------

    Commenters have also raised concerns about the current provisions 
in the Rule for timestamps, especially given the speed of today's 
marketplace.\133\ Others have also suggested modifications to improve 
the accessibility and standardizations of reports, including 
centralizing report creation and requiring summary statistics.\134\ In 
several contexts in which the Commission has received general feedback 
on equity market structure, commenters have suggested that the 
Commission require a simplified execution quality report, particularly 
for retail investors.\135\ One commenter on the Concept Release on 
Equity Market Structure stated that if the Commission's goal was for 
execution quality statistics to make the markets more transparent for 
retail investors, the commenter did not believe that was occurring, and 
the average retail investor might benefit more from a simplified 
version of the report.\136\ One EMSAC committee member stated that some 
retail firms have argued that aggregate statistics are more important 
for the retail investor, and that retail investors are not going to 
look at Rule 605 reports.\137\ This EMSAC committee member further 
stated that an issue with aggregation is what to include in the 
aggregate statistics, and depending on a firm's business model, the 
firm may want to

[[Page 3795]]

put in different things.\138\ Separately, the EMSAC, as well as a 
commenter to the 2018 Rule 606 Amendments, recommended that the 
Commission incorporate Rule 605 and 606 data into the Commission's data 
visualization tool.\139\
---------------------------------------------------------------------------

    \133\ See KOR Group I at 2, FIF I at 2.
    \134\ See EMSAC I at 0099:25-0100:3, 0106:14-25; EMSAC III at 2; 
Healthy Markets II at 3; BlackRock Letter at 3; Citi Letter at 8; 
Consumer Federation II at 6.
    \135\ See, e.g., Citigroup Letter at 8 (suggesting in connection 
with the Concept Release on Equity Market Structure that a 
simplified execution quality report geared towards retail investors 
should contain a simple chart or graph showing how often a 
customer's trades are executed at the NBBO or better, how fast the 
trade is done, and whether the customer received enhanced 
liquidity); SIFMA Letter at 12 (stating in providing recommendations 
for equity market structure reforms that regulators should direct 
broker-dealers to provide public reports of order routing and 
execution quality metrics that are geared towards retail investors, 
and these reports should include relevant information in a uniform 
format that is easy to understand).
    \136\ See Citigroup Letter at 8.
    \137\ See EMSAC I at 0137:4-7 (Manisha Kimmel, Thomson Reuters). 
See also id. at 0137:7-10 (``The counter argument to that is, if 
everybody is doing the 605 [reports], then you could have all sorts 
of aggregation based on that . . .'').
    \138\ See id. at 0137:11-16 (Manisha Kimmel, Thomson Reuters).
    \139\ See EMSAC III at 2; FIF II at 13. See also EMSAC I at 
0139:20-0140:11 (Gary Stone) (stating that individual investors need 
the Commission to provide the data, because they cannot rely on 
vendors that will charge for that service); EMSAC I at 0105:20-
0106:7 (Frank Hatheway, NASDAQ) (stating that before replacing these 
existing offerings by data vendors of data visualization tools for 
Rule 605 and 606 data, the Commission may want to consider 
alternatives for making the data widely available and accessible); 
EMSAC I at 0140:12-15 (Bill Alpert, Barron's) (stating that it would 
be salutary to have competition between vendors, the Commission, and 
the press to develop easier to use tools and better presentations).
---------------------------------------------------------------------------

III. Proposed Modifications to Reporting Entities

A. Larger Broker-Dealers

    Rule 605 of Regulation NMS requires market centers, such as 
national securities exchanges, OTC market makers, and ATSs, to produce 
publicly available, monthly execution quality reports. However, broker-
dealers are not included within the scope of Rule 605's reporting 
requirements unless they are market centers. Although Rule 606 requires 
broker-dealers to identify the venues, including market centers, to 
which they route customer orders for execution, customers of those 
broker-dealers do not have access to comprehensive information about 
execution quality. For example, to the extent that a market center's 
execution quality differs for orders received from one broker-dealer 
versus another broker-dealer, that difference would not be apparent 
from currently available execution quality statistics.
    The Commission is proposing to expand the scope of entities that 
must prepare Rule 605 reports to include larger broker-dealers, which 
have a customer-facing line of business. As proposed, Rule 605 would 
include broker-dealers as reporting entities, in addition to market 
centers, but exclude from that expanded requirement broker-dealers that 
do not introduce or carry at least 100,000 customer \140\ accounts. 
This expansion of the scope of Rule 605 would improve the usefulness of 
execution quality statistics, promote fair competition, and enhance 
transparency by providing investors with information that they could 
use to compare the execution quality provided by customer-facing 
broker-dealers. Further, limiting these reporting obligations to 
broker-dealers that have a larger number of customers would focus the 
associated implementation costs on those broker-dealers for which the 
availability of more specific execution quality statistics would 
provide a greater benefit.
---------------------------------------------------------------------------

    \140\ ``Customer'' means any person that is not a broker or 
dealer. See 17 CFR 242.600(b)(23).
---------------------------------------------------------------------------

    Rule 605 and Rule 606 operate together to allow investors to 
evaluate what happens to their orders after investors submit their 
orders to a broker-dealer for execution.\141\ In the current regulatory 
environment, customers that submit held orders (in many cases, 
individual investors) have a limited ability to assess the execution 
quality that their broker-dealers are providing. A customer of a 
broker-dealer can use a broker-dealer's Rule 606 reports to identify 
certain regularly-used venues to which the broker-dealer routes orders 
for execution. However, with respect to held orders, these Rule 606 
reports are not required to include any detailed execution quality 
information.\142\ Moreover, Rule 605 reports prepared by market centers 
commingle orders from all broker-dealers that send covered order flow 
to the reporting market center. Yet a market center may provide 
different execution quality to customers of different broker-dealers, 
and in some cases this difference may be substantial.\143\ Therefore, a 
customer of that broker-dealer must make an inference about the 
execution quality achieved by that particular broker-dealer at a market 
center based on a Rule 605 report that covers all orders received by 
the market center, even though that inference may not be accurate.\144\
---------------------------------------------------------------------------

    \141\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75414.
    \142\ See supra notes 50-55 and accompanying text.
    \143\ See supra notes 108-110 and accompanying text (discussing 
an EMSAC panelist's observations after trying to infer execution 
quality based on available data that one ``fundamental problem'' 
with making these inferences was that a market maker's execution 
quality may vary according to each broker's order flow). See also 
supra note 87 and accompanying text.
    \144\ See supra notes 107-111, 115-118, and 120-121 and 
accompanying text.
---------------------------------------------------------------------------

    Due to this gap in the reporting requirements, variations in 
execution quality provided by a market center to a particular broker-
dealer submitting the order are not observable by market participants 
and other interested parties using publicly available execution quality 
reports.\145\ When requiring each market center to report on all orders 
that it received for execution, the Commission intended to assign the 
disclosure obligation to the entity that would control whether and when 
the order would be executed.\146\ The Commission required market 
centers to include in their Rule 605 reports those orders that they 
routed to another venue for execution, thereby recognizing that market 
centers' decisions about whether and how to route orders can affect 
execution quality.\147\ Likewise, broker-dealers that route customer 
orders make decisions that affect the execution quality that their 
customers' orders receive.
---------------------------------------------------------------------------

    \145\ The Commission preliminarily believes that many 
institutional customers regularly conduct, directly or through a 
third-party vendor, transaction cost analysis of their orders to 
assess execution quality against various benchmarks, but this 
information is not publicly available. The Commission believes that 
some institutional investors may currently use aggregated statistics 
or summaries of Rule 605 reports prepared by third parties, who make 
these reports available for a fee. See infra section VII.C.1.(c)(2).
    \146\ See supra note 33 and accompanying text (citing Adopting 
Release, 65 FR 75414 (Dec. 1, 2000) at 75421).
    \147\ When adopting Rule 605, the Commission stated that from 
the perspective of the customer who submitted the order, the fact 
that a market center chooses to route the order away ``does not 
reduce the customer's interest in a fast execution that reflects the 
consolidated BBO'' that is ``as close to the time of order 
submission as possible,'' and that, consequently, in evaluating the 
quality of order routing and execution, it is important for 
customers to know how the market center handles ``all orders that it 
receives, not just those it chooses to execute.'' Adopting Release, 
65 FR 75414 (Dec. 1, 2000) at 75423.
---------------------------------------------------------------------------

    In addition, while the Commission adopted Rule 605 in 2000 as a 
``minimum step necessary to address fragmentation,'' \148\ the equities 
markets have grown even more fragmented since that time.\149\ Broker-
dealers have many choices about where to route customer orders for 
execution. But broker-dealers may face conflicts of interest when 
discussing arrangements regarding the outsourcing of customer order 
flow, including those that involve PFOF, and making routing 
decisions.\150\ With respect to orders submitted on a held basis, 
broker-dealers must include information about their payment 
relationships with execution venues in quarterly reports prepared 
pursuant to Rule 606(a)(1).\151\ Without information

[[Page 3796]]

about the execution quality that broker-dealers in the business of 
routing customer orders obtain for those orders, market participants 
and other interested parties lack key information that would facilitate 
their ability to evaluate how these payment relationships may affect 
execution quality. Recognizing these and other concerns, the EMSAC and 
other commenters in multiple contexts have suggested that the 
Commission expand the scope of Rule 605 to require reporting by broker-
dealers.\152\
---------------------------------------------------------------------------

    \148\ See supra note 9 and accompanying text.
    \149\ See supra notes 74-84 and accompanying text.
    \150\ See supra notes 88-89 and accompanying text.
    \151\ See supra notes 50-52 and accompanying text. As discussed 
above (supra section II.D), Rule 606 requires broker-dealers to 
identify and report data according to execution venue, rather than 
by market center. Not all execution venues reflected on Rule 606 
reports will necessarily fall within Regulation NMS's definition of 
``market center.'' See, e.g., 2018 Rule 606 Amendments Release, 83 
FR 58338 (Nov. 19, 2018) at 58365 (stating that the Commission's 
reference to ``venues'' for purposes of Rule 606(b)(3) is meant to 
refer to external liquidity providers to which the broker-dealer may 
send actionable indications of interest (``IOIs''), and that this 
category of market participants likely would include market centers 
as defined in Rule 600(b)(38), but may not be limited to such market 
centers).
    \152\ See generally supra section II.E.
---------------------------------------------------------------------------

    Consequently, the Commission is now proposing to require larger 
broker-dealers to prepare and publish execution quality reports 
pursuant to Rule 605, through the proposed revisions to Rule 605 and 
the addition of proposed Rule 605(a)(7). This expansion of the scope of 
reporting entities would increase transparency into the differences in 
execution quality achieved by broker-dealers when they route customer 
orders to execution venues, and thereby would make the execution 
quality statistics more useful to market participants and other 
interested parties.\153\ This change would increase competition among 
broker-dealers that accept customer orders for execution by providing 
information that market participants can use to evaluate and compare 
broker-dealers' execution quality. This could lead to faster 
executions, better price improvement, and a shift in order flow to 
those broker-dealers offering the best execution quality for their 
customers. This would further the national market system objectives set 
forth in section 11A(a)(1) of the Exchange Act, including the efficient 
execution of securities transactions, fair competition among market 
participants, the public availability of information on securities 
transactions, and the best execution of investor orders.\154\
---------------------------------------------------------------------------

    \153\ Among the commenters that raised concerns about the lack 
of available information regarding the execution broker-dealers 
provide to their customers' orders, one commenter stated that there 
is a ``fundamental flaw'' in the logic of Rule 605 and Rule 606 
because these rules assume that execution quality is solely the 
function of the market center, but instead execution quality is a 
product of a combination of the broker's skill and the quality of 
the market center's execution. See supra notes 117-118 and 
accompanying text. The proposal would address this concern by 
requiring larger broker-dealers to produce execution quality 
reports, rather than leaving market participants and other 
interested parties to rely solely on the execution quality reports 
produced by the market centers to which a particular broker-dealer 
routes orders.
    \154\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75414 
n.1, 75417 (citing 15 U.S.C. 78k-1).
---------------------------------------------------------------------------

    Specifically, the Commission is proposing to amend Rule 605 to 
apply the reporting requirements contained therein to brokers and 
dealers, in addition to market centers. Where current Rule 605 refers 
to ``market centers,'' the Commission is proposing to insert references 
to ``brokers'' and ``dealers.'' \155\ The proposed expansion of Rule 
605's reporting requirements to cover broker-dealers would also affect 
Rule 600 of Regulation NMS. Specifically, the definition of ``covered 
order'' in Rule 600(b)(22) refers to ``any market order or any limit 
order (including immediate-or-cancel orders) received by a market 
center.'' \156\ The Commission is proposing to amend this provision to 
refer to orders ``received by a market center, broker, or dealer.'' 
\157\ Further, as noted above, the Plan establishes procedures for 
market centers to follow in making available to the public the monthly 
reports required by the Rule.\158\ Because of the proposed amendments 
to the Rule, the existing Plan would no longer comply with proposed 
Rule 605(a)(3) and thus would need to be updated in order to 
incorporate references to broker-dealers subject to the Rule.\159\ As 
is currently the case for market centers that are not Participants, the 
Participants would be required to enforce compliance with the terms of 
the Plan by their members and person associated with their 
members.\160\
---------------------------------------------------------------------------

    \155\ See proposed Rules 605 (introductory paragraph), 605(a) 
(caption), 605(a)(1), 605(a)(1)(i)(D), 605(a)(3), 605(a)(4), 
605(a)(5), and 605(a)(6).
    \156\ 17 CFR 242.600(b)(22). The Commission is proposing to 
renumber the definition of ``covered order'' as proposed Rule 
600(b)(30).
    \157\ See proposed Rule 600(b)(30).
    \158\ See supra section II.B.3.
    \159\ The Plan details procedures for market centers to follow 
and, among other things, specifies the order and format of fields in 
a manner that aligns with current Rule 605(a)(1). See Plan generally 
and section VI(a) of the Plan. Under current Rule 605(a)(2), every 
national securities exchange trading NMS stocks and each national 
securities association is required to act jointly in establishing 
procedures for market centers to follow in making the reports 
required by Rule 605(a)(1) available to the public in a uniform, 
readily accessible, and usable electronic form. See 17 CFR 
242.605(a)(2). The proposal would add brokers and dealers to the 
scope of entities to be covered by the Plan's procedures and 
renumber Rule 605(a)(2) as Rule 605(a)(3). See proposed Rule 
605(a)(3). The Plan would also need to be updated to accommodate any 
new data elements in the order and format of fields.
    \160\ See 17 CFR 242.608(c). See also supra note 47 (describing 
Participants and Designated Participants under the Plan).
---------------------------------------------------------------------------

    The Commission is mindful that Rule 605's execution quality reports 
contain a large volume of statistical data, and as a result it may be 
difficult for individual investors to review and digest the reports. 
The Commission considered the volume of execution quality statistics 
that would be produced when adopting Rule 605, and stated that the 
large volume of statistics reflects a deliberate decision by the 
Commission to avoid the dangers of overly general statistics that could 
hide significant differences in execution quality.\161\ By requiring 
brokers-dealers to report stock-by-stock order execution information in 
a uniform manner, the proposal would make it possible for market 
participants and other interested parties to make their own 
determinations about how to group stocks or orders when comparing 
execution quality across broker-dealers.\162\ Further, to the extent 
that certain market participants may not have the means to directly 
analyze the detailed statistics,\163\ the Commission expects that 
independent analysts, consultants, broker-dealers, the financial press, 
and market centers will respond to the needs of investors by analyzing 
the disclosures and producing more digestible information using the 
data, as the Commission anticipated when approving the predecessor to 
Rule 605 and has observed since that time.\164\ As discussed further 
below, the Commission also is proposing to require all market centers 
and broker-dealers that would be subject to Rule 605's reporting 
requirements to produce summary reports with aggregated execution 
quality information.\165\ Requiring broker-dealers to produce more 
detailed execution quality data would help ameliorate potential 
concerns about overly general statistics, or about the specific 
categorization of orders and selection of metrics in the summary 
reports, by allowing market participants and other interested parties 
to conduct their own analysis based on

[[Page 3797]]

alternative categorizations of the underlying data.
---------------------------------------------------------------------------

    \161\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75419. 
See also id. (stating that after this basic information is disclosed 
by all market centers in a uniform manner, market participants and 
other interested parties will be able to determine the most 
appropriate classes of stocks and orders to use in comparing 
execution quality across market centers).
    \162\ See, e.g., supra note 113 and accompanying text.
    \163\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75419, 
text accompanying n.27 (stating that most individual investors 
likely would not obtain and digest the reports themselves). See also 
supra note 112 and accompanying text (EMSAC committee member stating 
that retail investors will not look at the Rule 605 reports); note 
118 (commenter stating that Rule 605 data is too raw for most 
investors to interpret); note 119 and accompanying text (commenter 
stating that most retail investors may not use the disclosures 
directly).
    \164\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75419. 
See also supra notes 106, 114, 116 and accompanying text; infra 
notes 544-546 and accompanying text.
    \165\ See infra section V.
---------------------------------------------------------------------------

    Proposed Rule 605(a)(7) states that a broker or dealer that is not 
a market center shall not be subject to the requirements of Rule 605 
unless that broker or dealer introduces or carries 100,000 or more 
customer accounts through which transactions are effected for the 
purchase or sale of NMS stocks (the ``customer account 
threshold'').\166\ The Commission is mindful of the additional costs 
that broad expansion of the rule to broker-dealers would entail. The 
relative benefit of having a broker-dealer prepare Rule 605 reports 
increases when the broker-dealer has more customers. The Commission is 
proposing a minimum reporting threshold of 100,000 customers to balance 
the benefits of having broker-dealers produce execution quality 
statistics with the costs of implementation and continued 
reporting.\167\
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    \166\ In addition, as discussed further below, proposed Rule 
605(a)(7) states that any broker or dealer that meets or exceeds 
this customer account threshold and is also a market center shall 
produce separate reports pertaining to each function.
    \167\ See infra section VII.D.2 for a discussion of the costs of 
the proposed amendments to Rule 605. As discussed further below, 
broker-dealers that were previously not required to publish Rule 605 
reports would incur initial costs to develop the policies and 
procedures to post Rule 605 reports for the first time, and all 
broker-dealers would face ongoing costs to continue to prepare them 
each month. Other potential costs include a potential for less 
transparency or lower execution quality, and the costs to update 
best execution methodology. See also infra section VII.E.1.(a) for a 
discussion about the potential costs of imposing Rule 605's 
reporting requirements on broker-dealers with a smaller number of 
customer accounts.
---------------------------------------------------------------------------

    Analysis indicates that approximately 85 broker-dealers (or 
approximately 6.7% of customer-carrying broker-dealers) introduce or 
carry more than 100,000 customer accounts and these broker-dealers 
together handle over 98% of customer accounts.\168\ Utilizing a 100,000 
customer account threshold would allow the Rule 605 reporting 
requirements to capture those broker-dealers that introduce or carry 
the vast majority of customer accounts, while subjecting only a 
relatively small percentage of broker-dealers that accept customer 
orders for execution to the reporting obligation and excluding those 
broker-dealers that introduce or carry a smaller number of customer 
accounts. Although utilizing a lower customer account threshold, such 
as 10,000 customer accounts, would result in capturing substantially 
more transactions, the lower customer account threshold would result in 
capturing only marginally more customer accounts. This implies that the 
additional customer coverage would result from a small number of 
accounts that trade in large volumes. Therefore, the additional 
coverage may not be as beneficial because many of the additional 
customer accounts that would be included with a lower threshold likely 
belong to institutional traders that have access to alternative 
execution quality information and also are likely to use not held 
orders, which are not included in Rule 605 reports.\169\
---------------------------------------------------------------------------

    \168\ See infra Table 13 for cost-benefit analysis of different 
customer account thresholds defining ``larger broker-dealer'' and 
infra note 1008 and accompanying text for methodology. For example, 
approximately 45 broker-dealers introduce or carry more than 500,000 
customer accounts and these broker-dealers together handle over 96% 
of customer accounts. Further, approximately 235 broker-dealers 
introduce or carry more than 10,000 customer accounts and these 
broker-dealers together handle over 99% of customer accounts. See 
infra Table 13.
    \169\ See infra note 1011 and accompanying text; Table 13. See 
also infra section VII.E.1.(a) for further discussion of alternative 
customer account thresholds.
---------------------------------------------------------------------------

    The Commission considered using the volume of broker-dealers' 
customer transactions, rather than the number of their customer 
accounts, for purposes of establishing a reporting threshold. Although 
establishing a reporting threshold using the number of customer 
transactions would likely capture a larger number of customer orders 
than the proposed customer account threshold, this approach would 
likely exclude broker-dealers that have a larger number of relatively 
inactive customer accounts and include broker-dealers that have a small 
number of customer accounts associated with large amounts of trading 
volume. In each respect, the reporting threshold would be less likely 
to capture individual investor orders and more likely to capture 
institutional investor orders, and therefore the threshold would be 
less likely to target the types of orders that may be most useful for 
consumers of Rule 605 reports. In addition, utilizing a threshold based 
on the number of customer transactions may result in a less stable set 
of broker-dealers that are subject to Rule 605's reporting 
requirements, because transaction volume is more likely than customer 
account numbers to vary significantly from month to month based on 
market conditions. Further, the number of their customer accounts is 
likely less costly for broker-dealers to calculate and track as 
compared to the volume of transactions associated with their customer 
accounts.\170\
---------------------------------------------------------------------------

    \170\ See infra section VII.E.1.(c) for further discussion about 
using a threshold based on the number of customer transactions.
---------------------------------------------------------------------------

    The Commission also considered EMSAC's recommendation to expand the 
scope of Rule 605 to cover all broker-dealers, which contemplated 
excluding only broker-dealers with de minimis order flow.\171\ The 
Commission is preliminarily concerned that subjecting a significantly 
larger number of broker-dealers to Rule 605's reporting requirements 
would substantially increase the costs of the proposal and that the 
increase in cost that would accompany the use of a de minimis threshold 
would not be justified by the corresponding benefit.\172\ This concern 
about requiring smaller broker-dealers to prepare Rule 605 reports is 
present with any de minimis threshold, whether based on order flow as 
the EMSAC suggested or on some other measure such as number of customer 
accounts.
---------------------------------------------------------------------------

    \171\ See supra notes 104-106 and accompanying text.
    \172\ See infra note 1011 and accompanying text and Table 13 
(showing that, for example, adjusting the customer account threshold 
from 100,000 customer accounts to 10,000 customer accounts would 
increase the estimated costs from approximately $5 million to 
approximately $13.9 million).
---------------------------------------------------------------------------

    The proposed customer account threshold would require brokers-
dealers to include in their calculations the public customer accounts 
that they introduce, as well as the customer accounts that they 
carry.\173\ Rule 605 reports that reflect orders received from customer 
accounts that a broker-dealer introduces or carries would provide 
useful information to market participants because both introducing and 
carrying broker-dealers make decisions about where to route those 
orders and it would be helpful for customers to be able to evaluate the 
execution quality received as a result of those decisions.\174\ An 
introducing broker-dealer may choose to utilize an omnibus clearing 
arrangement and not disclose certain information about its underlying 
customer accounts to the clearing firm.\175\ In such circumstances,

[[Page 3798]]

because the clearing broker may not have access to information about 
how many customer accounts a particular omnibus account represents, the 
proposal specifies that when an omnibus clearing arrangement is used 
the underlying customer accounts would be required to be counted as 
accounts carried by the introducing broker-dealer rather than by the 
clearing broker. Therefore, for purposes of Rule 605, a broker or 
dealer that utilizes an omnibus clearing arrangement for any of its 
underlying customer accounts would be considered to carry such 
underlying customer accounts when calculating the number of customer 
accounts that it introduces or carries.\176\
---------------------------------------------------------------------------

    \173\ See proposed Rule 605(a)(7).
    \174\ An introducing broker-dealer is a broker-dealer that has a 
contractual arrangement with another firm, known as the carrying or 
clearing firm, under which the clearing/carrying firm agrees to 
perform certain services for the introducing firm. Usually, the 
introducing firm transmits its customer accounts and customer orders 
to the clearing/carrying firm, which executes the orders and carries 
the account. See Securities Exchange Act Release No. 31511 (Nov. 24, 
1992), 57 FR 56973, 56978 (Dec. 2, 1992) (Net Capital Rule).
    \175\ Some broker-dealers utilize an ``omnibus clearing 
arrangement,'' where the clearing firm maintains one account for all 
of customer transactions of the introducing firm, rather than a 
``fully disclosed introducing relationship.'' In an omnibus 
arrangement, the clearing firm does not know the identity of the 
customers of the introducing firm, whereas in a fully-disclosed 
arrangement, the clearing/carrying firm knows the names, addresses, 
securities positions, and other relevant data as to each customer. 
See id. at 56978 n.16.
    \176\ See proposed Rule 605(a)(7). For example, an introducing 
broker-dealer that utilizes an omnibus clearing arrangement for 
100,000 customer accounts and separately carries 50,000 customer 
accounts would be considered, for purposes of proposed Rule 605, to 
carry 150,000 customer accounts. In contrast, a broker-dealer who 
introduces, on a fully-disclosed basis, 125,000 customer accounts 
would be considered, for purposes of proposed Rule 605, to introduce 
125,000 customer accounts. In both cases, the introducing broker-
dealers would exceed the proposed customer account threshold.
---------------------------------------------------------------------------

    Requiring both introducing broker-dealers and carrying broker-
dealers to prepare Rule 605 reports might result, in some instances, in 
the same underlying order being reflected on multiple broker-dealers' 
Rule 605 reports. However, Rule 605 does not require reports that 
reflect execution quality on an order-by-order basis and the separate 
reports would provide different views of execution quality specific to 
the group of orders handled by each broker-dealer. Moreover, the 
current structure of Rule 605 already contemplates that certain orders 
may be reflected on more than one report, in the case of orders that 
are received by one market center and then routed to another market 
center for execution.\177\
---------------------------------------------------------------------------

    \177\ See 17 CFR 242.605(a)(1).
---------------------------------------------------------------------------

    Proposed Rule 605(a)(7) states that any broker or dealer that meets 
or exceeds the customer account threshold and is also a market center 
shall produce separate reports pertaining to each function. Therefore, 
a broker-dealer that meets or exceeds the customer account threshold 
and is also a market center would be required to produce one report 
that includes all of the covered orders in NMS stocks that it received 
for execution when acting as a market center and a separate report that 
includes all of the covered orders in NMS stocks that it received for 
execution when acting as a broker-dealer. Requiring a firm to produce 
separate reports pertaining to its market center function and its 
broker-dealer function would allow market participants and other 
interested parties to view the firm's execution quality from the 
perspective of how it operates in each of these separate roles.
    This aspect of the proposal would not change how a firm should 
determine when it is acting as a market center, as that term is defined 
in Rule 600(b)(46).\178\ In particular, some firms that are larger 
broker-dealers also act as OTC market makers, which are a type of 
market center. Currently, to the extent that a dealer holds itself out 
as being willing to buy from and sell to its customers, or others, in 
the United States, an NMS stock for its own account on a regular or 
continuous basis otherwise than on a national securities exchange in 
amounts of less than a block size, that dealer is defined as an OTC 
market maker.\179\ For example, if a broker-dealer executes certain 
types of orders internally (e.g., fractional share orders, small-sized 
orders, or orders in particular symbols), that broker-dealer may be 
acting as an OTC market maker, and thus a market center, for those 
specific types of orders. Moreover, Rule 605 requires that any report 
pertaining to a market center include all covered orders that it 
received for execution from any person, whether executed at the market 
center or at any other venue.\180\ As is the case under Rule 605 
currently for market centers that route orders away, under the 
proposal, the fact that a larger broker-dealer has routed certain 
covered orders away for execution would not alone be the basis on which 
to determine that it did not act as a market center with respect to 
those orders.\181\
---------------------------------------------------------------------------

    \178\ See 17 CFR 242.600(b)(46). The Commission is proposing to 
renumber the definition of ``market center'' as proposed Rule 
600(b)(56).
    \179\ See supra note 28. See also Securities Exchange Act 
Release No. 37619A (Sept. 6, 1996), 61 FR 48290, 48318-19 (Sept. 12, 
1996) (Order Execution Obligations) (stating that dealers that 
internalize customer order flow in particular stocks by holding 
themselves out to customers as willing to buy and sell on an ongoing 
basis would fall within the definition of ``OTC market maker'' as 
defined in the predecessor to Rule 602 of Regulation NMS, even 
though they may not hold themselves out to all other market 
participants, and that dealers that hold themselves out to 
particular firms as willing to receive customer order flow, and 
execute those orders on a regular or continuous basis, also would 
fall within the definition of an OTC market maker); id. at 48319 
(stating that broker-dealers will not be considered to be holding 
themselves out as regularly or continuously willing to buy or sell a 
security if they occasionally execute a trade as principal to 
accommodate a customer's request, and that, in response to the 
suggestion of some commenters, the Commission has modified the 
proposed amendment to the definition of ``OTC market maker'' to make 
clear that more than an isolated transaction is necessary before a 
dealer is designated an OTC market maker).
    \180\ See 17 CFR 242.605(a)(1). We note that the staff has 
provided their views on a way that a firm might determine the scope 
of covered orders for which it acts as a market center, see Division 
of Market Regulation: Staff Legal Bulletin No. 12R (Revised), 
Question 4 (June 22, 2001), available at https://www.sec.gov/interps/legal/slbim12a.htm (``The Rule applies to broker-dealers 
insofar as they act as a `market center' with respect to orders 
received from other persons. Consequently, for orders in securities 
for which Firm X does not act as an OTC market maker, Firm X would 
not be acting as a market center in those securities and therefore 
need not report on orders in those securities that it receives as an 
agent and routes elsewhere for execution. Conversely, the orders 
that Firm X receives from any person in the 500 securities in which 
it acts as an OTC market maker (and therefore is a market center) 
generally must be included in Firm X's monthly reports, even if Firm 
X ultimately routes some of the orders to other market centers for 
execution.''). Staff reports, Investor Bulletins, and other staff 
documents (including those cited herein) represent the views of 
Commission staff and are not a rule, regulation, or statement of the 
Commission. The Commission has neither approved nor disapproved the 
content of these staff documents and, like all staff statements, 
they have no legal force or effect, do not alter or amend applicable 
law, and create no new or additional obligations for any person.
    \181\ See supra notes 143-144 and accompanying text.
---------------------------------------------------------------------------

    For a larger broker-dealer that is also a market center, the report 
pertaining to its broker-dealer function would cover all orders that 
the broker-dealer received for execution as part of its customer-facing 
line of business, whether executed internally or routed away. An order 
would need to be reflected on both the report regarding the firm's 
market center function and the report regarding its broker-dealer 
function, if the broker-dealer received the order from a customer and 
also acts as a market center for that type of order. Each report would 
provide a different view of the firm's execution quality based on a 
different aspect of its business, and because reports reflect orders 
grouped by symbol, order type, and size, would reflect different 
execution quality metrics to the extent that the group of orders 
covered by the different reports did not overlap completely.\182\
---------------------------------------------------------------------------

    \182\ For certain firms regarding certain symbols, order types, 
or order sizes, the group of orders for which the firm acts as a 
larger broker-dealer may overlap completely with the group of orders 
for which the firm acts as a market center. However, broker-dealer 
firms are structured in myriad different ways, and the degree of 
overlap among reports might not remain stable over time; therefore, 
requiring firms to produce reports according to the orders for which 
they act as a market center and the orders for which they act as a 
broker-dealer would help keep the reports consistent with firms' 
lines of business.
---------------------------------------------------------------------------

    As proposed, pursuant to Rule 605(a)(7), a broker-dealer would be 
excluded from Rule 605's reporting requirements only with respect to 
its customer-facing broker-dealer function (as opposed to its function 
as market center, if applicable) as long as the

[[Page 3799]]

number of customer accounts that it introduces or carries continues to 
be less than the customer account threshold. A broker-dealer would no 
longer be excluded from Rule 605 once and as long as it meets or 
exceeds the customer account threshold; however, a broker-dealer that 
meets or exceeds the customer account threshold for the first time 
would have a grace period before being required to comply with Rule 
605's reporting requirements, as described further below.
    Proposed Rule 605(a)(7) states that a broker or dealer that meets 
or exceeds the customer account threshold shall be required to produce 
reports pursuant to this section for at least three calendar months 
(``Reporting Period''). The Reporting Period would begin the first 
calendar day of the next calendar month after the broker or dealer met 
or exceeded the customer account threshold, unless it is the first time 
the broker-dealer has met or exceeded the customer account 
threshold.\183\ Any time after a broker or dealer has been required to 
produce reports pursuant to this proposed section for at least a 
Reporting Period, if a broker or dealer falls below the customer 
account threshold, the broker or dealer would not be required to 
produce a report pursuant to this paragraph for the next calendar 
month.\184\ The Reporting Period would start on the first day of the 
next calendar month after the customer account threshold has been 
crossed because this timing would align with Rule 605's monthly 
reporting period and avoid requiring broker-dealers to produce a report 
that covers a partial month, which would be less comparable with the 
monthly reports of other broker-dealers. Moreover, brokers-dealers that 
may at times fall below the customer account threshold would be 
required to produce reports pursuant to Rule 605 for at least three 
calendar months, because this minimum reporting period would help 
ensure a period of continuity in reporting. If instead a broker-dealer 
could fluctuate in and out of being required to comply with the 
reporting requirements from month-to-month, it would potentially be 
disruptive to the broker-dealer to have to coordinate compliance with 
the Rule on some months but not others and could interfere with 
customers' or market participants' ability to look at a broker-dealer's 
execution quality over time by analyzing historical data.\185\
---------------------------------------------------------------------------

    \183\ See proposed Rule 605(a)(7).
    \184\ See id.
    \185\ When discussing the 2018 amendments to Rule 605(a)(2) that 
required market centers to keep Rule 605(a) reports posted on a 
public website for a period of three years, the Commission stated 
that it expected customers and the public to use the historical 
information to compare information from the same time period. See 
2018 Rule 606 Amendments Release, 83 FR 58338 (Nov. 19, 2018) at 
58380 (also stating that, with respect to market centers voluntarily 
posting Rule 605(a) reports that were created prior to the amended 
rule's effectiveness, making historical data available to customers 
and the public could be useful to customers or market participants 
seeking to analyze such data).
---------------------------------------------------------------------------

    The Commission is proposing that, the first time a broker or dealer 
has met or exceeded the customer account threshold, there would be a 
grace period of three calendar months before the Reporting Period 
begins and the broker or dealer must comply with the reporting 
requirements of Rule 605.\186\ A limited three-month grace period is 
appropriate because it would provide a broker-dealer that crosses the 
customer account threshold for the first time with a period of time in 
which to come into compliance with Rule 605's reporting requirements. 
The three-month grace period would afford a broker-dealer adequate time 
to develop the systems and processes and organize the resources 
necessary to generate the reports pursuant to Rule 605, while still 
requiring the broker-dealer to begin reporting without an overly long 
delay. At the same time, should a broker-dealer subsequently fall below 
the customer reporting threshold, the Commission preliminarily believes 
that the broker-dealer should already have the necessary systems and 
processes in place and therefore a grace period would not be necessary 
if that broker-dealer again meets or exceeds the customer account 
threshold and becomes subject to Rule 605's requirements. The 
Commission notes that Rule 606 similarly provides for a three-month 
grace period for brokers or dealers subject to Rule 606(b)(3)'s 
reporting requirements for the first time only.\187\
---------------------------------------------------------------------------

    \186\ See proposed Rule 605(a)(7). After the three calendar 
month grace period, the Reporting Period would begin on the first 
calendar day of the fourth calendar month after the broker or dealer 
has met or exceeded the customer account threshold. See id. As 
described above, a broker-dealer that meets or exceeds the customer 
account threshold would be required to produce Rule 605 reports for 
at least a Reporting Period. See supra notes 183-184 and 
accompanying text. Therefore, a broker-dealer that crosses the 
customer account threshold for the first time would be required to 
comply with the reporting requirements of Rule 605 for at least a 
Reporting Period, even if that broker-dealer falls below the 
customer account threshold during the grace period.
    \187\ See 17 CFR 242.606(b)(4).
---------------------------------------------------------------------------

    Rule 605 requires that reporting entities calculate certain 
statistics based on the time of order receipt.\188\ Moreover, 
Regulation NMS defines ``time of order receipt'' based on the time an 
order was received by a market center for execution.\189\ In 
conjunction with the proposed expansion of Rule 605 to cover larger 
broker-dealers, it is necessary to modify this definition to specify 
how broker-dealers that are not acting as market centers would be 
required to calculate ``time of order receipt.'' The Commission has 
considered requiring broker-dealers to calculate the ``time of order 
receipt'' based on the time that the broker-dealer received the order 
or on the time that the broker-dealer transmitted the order to a market 
center for execution. Measuring ``time of order receipt'' based on when 
a broker-dealer received the order would provide a view of how that 
broker-dealer handled that order from the time the order was within its 
control, rather than limiting that view to what happened after the 
broker-dealer sent the order to a particular market center for 
execution. In this way, calculating execution quality statistics based 
on the time that a broker-dealer received the order could provide 
information about whether a broker-dealer's delay in sending the order 
to a market center for execution may have affected the execution 
quality obtained for that order, because the execution quality 
statistics would be measured based on the prevailing market prices at 
that time.\190\ Accordingly, the Commission is proposing 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

[[Page 3800]]

center, the time of order receipt is the time that the order was 
received by the broker or dealer for execution.\191\
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    \188\ See, e.g., 17 CFR 242.605(a)(1)(ii)(D) (measuring, for 
shares executed with price improvement, the share-weighted average 
period from the time of order receipt to the time of order 
execution).
    \189\ See 17 CFR 242.600(b)(92). See also Adopting Release, 65 
FR 75414 (Dec. 1, 2000) at 75423 (``The definition [of `time of 
order receipt'] is intended to identify the time that an order 
reaches the control of the market center that is expected, at least 
initially, to execute the order.''). The Commission is proposing to 
renumber the definition of ``time of order receipt'' as proposed 
Rule 600(b)(109).
    \190\ When adopting Rule 605, the Commission stated that a 
market center will use the time and consolidated BBO at the time it 
received the order, rather than the time and consolidated BBO when 
the venue to which an order was forwarded received the order, to 
calculate the required statistics. See Adopting Release, 65 FR 75414 
(Dec. 1, 2000) at 75423. The Commission stated that a market center 
should be held accountable for all orders that it receives for 
execution and should not be given an opportunity to exclude 
difficult orders by routing them to other venues, and that from the 
customer's perspective the fact that a market center chooses to 
route the order elsewhere does not reduce the customer's interest in 
a fast execution that reflects the consolidated BBO as close to the 
time of order submission as possible. See id. This same reasoning 
applies to orders that a broker-dealer receives and then routes to 
another venue for execution, and supports measuring the time of 
order receipt from the time that the broker-dealer receives the 
order.
    \191\ See proposed Rule 600(b)(109). The time that the order is 
received by the market center for execution should be the same as 
the time that the order is received by the broker-dealer for 
execution when the broker-dealer also acts as a market center for 
that order.
---------------------------------------------------------------------------

    The Commission is mindful that some of Rule 605's execution quality 
statistics may as a general matter differ for the larger broker-
dealers, as compared to market centers, to the extent that some of 
these larger broker-dealers generally or exclusively route orders away. 
However, it is appropriate for broker-dealers to report on the same 
execution quality statistics as market centers because the reported 
statistics can be understood in the context of the specific reporting 
entity, and the detailed execution quality statistics would allow 
customers and other market participants to parse the differences among 
the statistics for each reporting entity. For example, Rule 605 
requires statistics for the number of shares executed at the receiving 
market center and the number of shares executed at any other 
venue.\192\ As discussed above, broker-dealers that generally route the 
orders that they receive to other venues for execution, and thereby 
would report these shares as being executed at another venue, may 
execute certain portions of their order flow internally (e.g., 
fractional shares).\193\ While the Commission considered whether or not 
broker-dealers should be required to provide execution quality 
statistics for both shares executed at the receiving broker-dealer and 
shares executed at any other venue, the Commission decided to propose 
to keep both of these statistics in the Rule 605 reporting requirements 
for broker-dealers so as to capture all orders that broker-dealers 
receive for execution as part of their customer-facing broker-dealer 
function.\194\ Further, differences in certain statistics for broker-
dealers as compared to market centers may be more reflective of 
differences in business models rather than effectiveness in achieving 
execution quality for covered orders because of differences in order 
handling practices. The Commission understands that these differences 
are well-known and are taken into account by market participants when 
evaluating execution quality statistics. For example, broker-dealers 
that route customer orders may have consistently longer time to 
executions as compared to market centers for similar orders, because of 
the time it takes to route these orders, but this difference is well 
understood by market participants.
---------------------------------------------------------------------------

    \192\ See 17 CFR 242.605(a)(1)(i)(D) and (E). As discussed 
herein, the Commission is proposing to modify Rule 605(a)(1)(i)(D) 
to also cover the number of shares executed at the receiving broker 
or dealer. See supra note 155 and accompanying text.
    \193\ See supra note 34 and accompanying text.
    \194\ If a broker-dealer does not execute any covered orders 
internally, then that broker-dealer's Rule 605 report would not 
reflect any shares executed at the receiving broker-dealer. For 
discussion of what orders broker-dealers that are market centers 
would include in their reports pertaining to their market center 
function, see supra notes 178-180 and accompanying text.
---------------------------------------------------------------------------

    The Commission is also mindful that, for orders routed to other 
venues for execution, broker-dealers may not have all of the 
information needed to calculate the proposed statistics at the time of 
order execution. However, these broker-dealers should be able to obtain 
the needed information in time to prepare the required reports. Broker-
dealers would need to calculate their execution quality statistics, or 
engage a vendor to calculate the statistics on their behalf, on a 
monthly basis. At the time that the broker-dealer or its vendor would 
need to calculate the execution quality statistics, the broker-dealer 
would have received any needed information about the order's execution 
from the execution venue and be able to obtain any needed historical 
price information from publicly available data sources, such as the 
exclusive plan processors (``exclusive SIPs'').\195\ For example, a 
broker-dealer that routed an order away for execution would receive 
time of order execution and execution price as part of the trade 
confirmation provided by the execution venue. The broker-dealer could 
then use historical price information available via the exclusive SIPs 
to determine the NBBO at the time of order receipt and at the time of 
order execution, the number of shares displayed at the NBBO, and the 
best available displayed price, if such price is being disseminated, 
and use this data to calculate the required execution quality 
statistics.\196\
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    \195\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at 
18598-99 (describing that the exclusive SIPS, among other things, 
disseminate core data, which currently consists of: (1) the price, 
size, and exchange of the last sale; (2) each exchange's current 
highest bid and lowest offer and the shares available at those 
prices; and (3) the NBBO). A securities information processor 
(``SIP'') is defined in section 3(a)(22)(A) of the Exchange Act. See 
15 U.S.C. 78c(a)(22)(A). Further, an ``exclusive processor'' (also 
known as an exclusive SIP) is defined in section 3(a)(22)(B) of the 
Exchange Act. See 15 U.S.C. 78c(a)(22)(B).
    \196\ With respect to NMLOs, the broker-dealer could also use 
this historical price information available via the exclusive SIPs 
to determine when the order became executable, based on when the 
NBBO first reached the order's limit price.
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Request for Comment
    The Commission seeks comment generally on the proposed expansion of 
Rule 605 reporting requirements to include larger broker-dealers that 
meet or exceed the customer account threshold, as well as the other 
proposed changes to Rule 605 and Rule 600(b) discussed above. In 
particular, the Commission solicits comment on the following:
    1. Should Rule 605 be expanded to apply to broker-dealers? Why or 
why not? Do commenters agree that it would be useful for customers of 
certain broker-dealers to be able to access execution quality 
statistics that are specific to those broker-dealers, rather than 
needing to rely on the execution quality statistics reported by the 
market centers to which the broker-dealers route? Do commenters agree 
that market centers may provide different execution quality to orders 
based on the routing broker-dealer? Please explain and provide data.
    2. Do commenters agree that it would be useful for broker-dealers 
that are also market centers to produce separate reports pertaining to 
each function? Why or why not? Do commenters agree that broker-dealers 
that are also market centers should be required to include in the 
report pertaining to their market center function all covered orders 
for which they act as a market center, including as an OTC market 
maker, rather than only those covered orders executed at the market 
center? Do commenters agree that broker-dealers that are also market 
centers should be required to include in the report pertaining to their 
broker-dealer function all of the covered orders in NMS stocks that 
they received for execution from any customer, rather than only those 
orders that do not pertain to their market center function (i.e., those 
orders for which they do not act as a market center)? Would broker-
dealers that are also market centers encounter any specific 
difficulties when determining which orders to include in each report? 
Please explain.
    3. Is a numerical customer account threshold the proper criterion 
for determining whether a broker-dealer should be subject to the Rule 
605 reporting requirements? If so, is 100,000 or more customer accounts 
the appropriate amount? Why or why not? If not, should be it higher or 
lower (e.g., 500,000 or more customer accounts or 10,000 or more 
customer accounts)? If so, by what amount? Is it appropriate to 
consider both the number of customer accounts that the broker-dealer 
carries and the number of customer accounts

[[Page 3801]]

that the broker-dealer introduces? Why or why not? Do commenters 
believe that it would be more useful to consider the trading volume, 
either based on share volume or notional volume, or both, of a broker-
dealer's customers when setting the reporting threshold? Why are why 
not? Please explain and provide data to support your argument. Are 
there alternative approaches that the Commission should adopt in 
expanding Rule 605's reporting requirements to broker-dealers? If so, 
please explain the approach in detail, including the benefits and costs 
of the approach.
    4. Should the Commission require all broker-dealers to report 
pursuant to Rule 605 irrespective of the number of customer accounts 
that the broker-dealer carries or introduces? Or should such a 
requirement be subject to a de minimis exclusion? Why or why not? If 
so, what would be an appropriate de minimis exclusion? Please explain 
and provide data, if possible.
    5. Is three months an appropriate timeframe to use for the 
Reporting Period, i.e., the minimum length of time for which a broker-
dealer would need to comply with Rule 605's reporting requirements once 
its number of customer accounts meets or exceeds the customer account 
threshold? Would a shorter or longer time period (e.g., one, two or six 
months) be more appropriate? If so, by what amount? Does whether or not 
a broker-dealer uses or could use an outside vendor to prepare reports 
pursuant to Rule 605 affect this answer? Please explain.
    6. Is three months an appropriate grace period from Rule 605's 
reporting requirements for a broker-dealer that has met or exceeded the 
customer account threshold for the first time? Would a shorter or 
longer time period be more appropriate (e.g., one month, two months, or 
six months)? Do commenters agree that a grace period would not be 
necessary for broker-dealers that have previously equaled or exceeded 
the customer account threshold, but subsequently have fallen below the 
threshold and stopped reporting and then need to restart reporting? If 
not, what grace period do commenters think would be appropriate? Would 
one month be sufficient in this context? Are there any other 
circumstances in which a broker-dealer that has met or exceeded the 
customer account threshold would need an additional grace period from 
Rule 605's reporting requirements? Please explain.
    7. Should a broker-dealer that is not a market center be required 
to calculate time of order receipt based on when that broker-dealer 
received the order? Why or why not? Would it be more useful to 
customers or other market participants for a broker-dealer that 
generally routes customer orders to calculate time of order receipt 
based on when that broker-dealer sent the order to a market center for 
execution? Please explain and provide data, if possible.
    8. Should broker-dealers be required to produce all of the detailed 
execution quality statistics set forth in Rule 605? Why or why not? Do 
commenters agree that broker-dealers' customers and other market 
participants would be able to interpret differences in these execution 
quality statistics among reporting entities that may be attributable to 
the context of their different types of business? Do commenters believe 
that there are any additional execution quality statistics that would 
be useful to require of broker-dealers? Please explain and provide 
data, if possible.
    9. Would it be difficult for broker-dealers to obtain any of the 
information needed to calculate the Rule 605 statistics? Why or why 
not? If so, which statistics in particular? Would broker-dealers have 
some or all of the information needed to calculate their Rule 605 
statistics already, including to meet their obligations to assess 
whether they are providing best execution for these orders? Do 
commenters agree that broker-dealers would be able to obtain needed 
information from the execution venues to which they routed the orders 
or publicly available sources? Should the Commission exclude certain 
proposed execution quality statistics that are specific to certain 
order types, such as executable NMLOs? Why or why not? Please explain.

B. Qualified Auction Mechanisms

    Separately, the Commission is proposing 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.\197\ 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 meets certain requirements and is operated by an open competition 
trading center.\198\ An ``open competition trading center'' would be a 
national securities exchange or NMS Stock ATS that meets certain 
requirements, including being transparent and having a substantial 
trading volume in NMS stocks independent of qualified auctions.\199\ A 
``qualified auction'' would be an auction operated by an open 
competition trading center pursuant to specified requirements that are 
designed to achieve competition.\200\
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    \197\ For a full description and discussion of the order 
competition rule proposal, see Securities Exchange Act Release No. 
96495 (Dec. 14, 2022) (File No. S7-31-22) (Order Competition Rule) 
(``Order Competition Rule Proposal''); proposed Rule 615.
    \198\ See Order Competition Rule Proposal; proposed Rule 
600(b)(87) (defining ``restricted competition trading center''); 
proposed Rule 600(b)(91) (defining ``segmented order''); proposed 
Rule 615(a) (describing the order competition requirement).
    \199\ See Order Competition Rule Proposal; proposed Rule 
600(b)(64) (defining ``open competition trading center'').
    \200\ See Order Competition Rule Proposal; proposed Rule 
600(b)(81) (defining ``qualified auction''); proposed Rule 615(c) 
(setting forth requirements for operation of a qualified auction).
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    If the Commission adopts the Order Competition Rule Proposal and a 
national securities exchange or NMS Stock ATS that serves as an open 
competition trading center is required to prepare execution quality 
reports under current Rule 605, that national securities exchange or 
NMS Stock ATS would be required to include covered orders that it 
received for execution in a qualified auction within its blended 
executing quality statistics, which also would include trading activity 
outside of the qualified auctions.\201\
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    \201\ As discussed further below, the Commission is proposing to 
eliminate the separate reporting categories for inside-the-quote 
limit orders, at-the-quote limit orders, and near-the-quote limit 
orders, and create new reporting categories for executable NMLOs and 
beyond-the-midpoint limit orders. See infra sections IV.B.2.(a) and 
IV.B.2.(b). While, as proposed, orders submitted to qualified 
auctions may in many instances be classified as beyond-the-midpoint 
limit orders, this reclassification would not resolve the 
Commission's concern about blending execution quality statistics for 
orders executed in qualified auctions with orders executed outside 
of these auctions.
---------------------------------------------------------------------------

    The Commission is concerned that there may be differences in 
execution quality for orders executed within proposed qualified 
auctions, as compared to other orders executed by market centers 
outside of these qualified auctions, that would not be apparent in 
blended execution quality statistics. For example, orders submitted to 
a qualified auction may be more or less likely to receive price 
improvement, and may have systematically different fill rates, as 
compared to similar orders executed in other trading mechanisms. In 
addition, the Order Competition Rule Proposal would propose both a 
minimum and maximum time period for

[[Page 3802]]

the qualified auction.\202\ Therefore, the time to execution statistics 
for orders submitted to a qualified auction may be systematically 
different from the time to execution statistics of other orders 
executed at a market center. Further, if a market center receives 
covered orders for execution in a qualified auction, then that market 
center would not have discretion about whether to submit these orders 
into a qualified auction and therefore the distinction between orders 
executed by the market center within and outside of a qualified auction 
would not reflect any decision-making on the part of the market center. 
Thus, it would be more useful for market participants to be able to 
review execution quality statistics that are specific to covered orders 
submitted to a qualified auction.
---------------------------------------------------------------------------

    \202\ See Order Competition Rule Proposal; proposed Rule 
615(c)(2).
---------------------------------------------------------------------------

    Accordingly, the Commission is proposing to amend Rule 605(a)(1) to 
state that market centers that operate a qualified auction must prepare 
a separate report pursuant to Rule 605 pertaining only to covered 
orders that the market center receives for execution in a qualified 
auction.\203\ This proposed requirement for separate reports is limited 
to market centers that operate proposed qualified auctions, and would 
not extend to market centers or broker-dealers that route orders away 
for execution in a qualified auction. Therefore, a market center or 
broker-dealer that routes covered orders to an open competition trading 
center for execution within a proposed qualified auction would not be 
required to separately report on or otherwise distinguish orders routed 
to qualified auctions from other types of orders routed away for 
execution in its Rule 605 reports.\204\ In this way, the proposal would 
follow current Rule 605's focus on the overall execution quality that 
the reporting entity provided to all covered orders that it received 
for execution.\205\ Having market centers and broker-dealers report on 
the execution quality provided to orders, regardless of where they are 
executed, would inform market participants and other observers about 
overall execution quality that the market center or broker-dealer is 
able to obtain, including when the market center or broker-dealer 
decides whether and where to route orders to receive such executions. 
Further, distinctions between whether an order was routed to a 
qualified auction or not may depend on the characteristics of the 
order, such as whether it is a segmented order, rather than the 
performance of the market center or broker-dealer that routed the 
order. As such, it would be of more limited utility to have a market 
center or broker-dealer that routes orders to a qualified auction to 
produce a separate Rule 605 report specific to such orders.
---------------------------------------------------------------------------

    \203\ See proposed Rule 605(a)(1).
    \204\ If a larger broker-dealer is also a market center and its 
market center operates a qualified auction mechanism, that aspect of 
the market center would be subject to the separate reporting 
requirement.
    \205\ For example, currently Rule 605 does not require market 
centers to distinguish among covered orders routed to particular 
types of away market centers. Instead, a market center's execution 
quality statistics are blended statistics pertaining to all covered 
orders that the market center received for execution, with the 
limited exception of the statistics for cumulative number of shares 
of covered orders executed at the receiving market center and at any 
other venue. See 17 CFR 242.605(a)(1).
---------------------------------------------------------------------------

    Although market centers and broker-dealers would not be required to 
produce a separate Rule 605 report pertaining to orders that they route 
to a qualified auction, Rule 606 requires routing broker-dealers to 
disclose certain regularly-used execution venues to which they route 
orders, and a report prepared by a broker-dealer pursuant to Rule 606 
would be required to indicate that orders were routed to a particular 
qualified auction.\206\ A customer of a broker-dealer could then 
analyze whether and to what extent the broker-dealer routes to a 
particular market center's qualified auctions (using reports prepared 
pursuant to Rule 606), and evaluate the execution quality provided by 
that market center's qualified auctions (using reports prepared 
pursuant to Rule 605).
---------------------------------------------------------------------------

    \206\ See 17 CFR 242.606(a)(1). For example, if a broker-dealer 
operates an ATS and that ATS has qualified auctions and a continuous 
order book, the broker-dealer's Rule 606 report would be required to 
disclose information about orders that were routed to the ATS's 
qualified auctions separately from orders that were sent directly to 
the ATS's continuous order book.
---------------------------------------------------------------------------

    The Commission considered extending the proposed requirement for 
separate Rule 605 reports beyond proposed qualified auctions to include 
orders submitted to any trading mechanism that seeks to provide 
liquidity to the orders of individual investors. For example, several 
national securities exchanges operate retail liquidity programs.\207\ 
However, in the Order Competition Rule Proposal the Commission is 
proposing a prohibition on certain facilities that are limited, in 
whole or in part, to the execution of segmented orders and this 
prohibition would apply to many of the retail liquidity programs 
currently operated by national securities exchanges.\208\
---------------------------------------------------------------------------

    \207\ Retail liquidity programs are programs for retail orders 
seeking liquidity that allow market participants to supply liquidity 
to such retail orders by submitting undisplayed orders priced at 
least $0.001 better than the exchange's protected best bid or offer. 
Each program results from a Commission approval of a proposed rule 
change made on Form 19b-4 combined with a conditional exemption, 
pursuant to section 36 of the Exchange Act, from 17 CFR 242.612 (the 
``Sub-Penny Rule'') to enable the exchange to accept and rank (but 
not display) the sub-penny orders. See, e.g., Securities Exchange 
Act Release Nos. 85160 (Feb. 15, 2019), 84 FR 5754 (Feb. 22, 2019) 
(SR-NYSE-2018-28) (approving the NYSE retail liquidity program on a 
permanent basis and granting the exchange a limited exemption from 
the Sub-Penny Rule to operate the program); 86194 (June 25, 2019), 
84 FR 31385 (July 1, 2019) (SR-BX-2019-011) (approving Nasdaq BX, 
Inc.'s retail price improvement program on a permanent basis and 
granting the exchange a limited exemption from the Sub-Penny Rule to 
operate the program).
    \208\ See Order Competition Rule Proposal. The Commission 
discusses a number of alternatives in the Order Competition Rule 
Proposal. See id. To the extent that any retail liquidity program is 
retained, separate execution quality statistics specific to orders 
submitted to those programs may be useful to investors.
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment on the proposal to require a market 
center that operates a qualified auction to prepare a separate report 
under Rule 605 for covered orders that were submitted to a qualified 
auction if the Order Competition Rule Proposal is adopted. In 
particular, the Commission solicits comment on the following:
    10. Should market centers that operate a proposed qualified auction 
be required to prepare a separate Rule 605 report for covered orders 
that are submitted to their qualified auctions? Why or why not? Do 
commenters agree with limiting this separate reporting requirement to 
market centers that operate a proposed qualified auction, and not to 
either broker-dealers that are not market centers or market centers 
that do not operate a qualified auction? Please explain.
    11. Should this separate reporting requirement be limited to a 
trading mechanism that meets the proposed requirements for a 
``qualified auction''? Would it be more useful if a market center 
prepared a separate report for covered orders submitted to any trading 
mechanism that seeks to provide liquidity to the orders of individual 
investors (e.g., a national securities exchange's retail liquidity 
program), whether or not that trading mechanism operates a ``qualified 
auction''?
    12. Do commenters believe that there are any additional execution 
quality statistics that would be useful to require of a market center 
that operates a proposed qualified auction to facilitate comparison 
among different qualified auctions? For example, would it be useful for 
a market center that operates a proposed qualified auction to provide 
data on any price improvement provided in the qualified auction as

[[Page 3803]]

measured in relation to any additional price matching offered by the 
wholesaler that routed the order to the qualified auction? Please 
explain and provide data, if possible.

C. ATSs and Single-Dealer Platforms

    Currently under Rule 605, firms that operate two separate markets 
must prepare separate reports for each market center.\209\ For example, 
for a firm that acts both as an exchange market maker and as an OTC 
market maker, each function would be considered a separate market 
center and Rule 605 requires the firm to prepare separate reports. The 
requirement to produce separate Rule 605 reports for separate markets 
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.
---------------------------------------------------------------------------

    \209\ See 17 CFR 242.605(a)(1) (requiring ``every'' market 
center to produce a report). See also Plan, at n.1 (``An entity that 
acts as a market maker in different trading venues (e.g., as 
specialist on an exchange and as an OTC market maker) would be 
considered as a separate market center under the Rule for each of 
those trading venues. Consequently, the entity should arrange for a 
Designated Participant for each market center/trading venue (e.g., 
an exchange for its specialist trading and an association for its 
OTC trading).''). For a description of ``Designated Participant'' as 
defined in the Plan, see supra note 47.
---------------------------------------------------------------------------

    Regulation ATS requires each ATS to register as a broker-
dealer.\210\ Many broker-dealers that operate NMS Stock ATSs have 
separate lines of business that are distinct from their ATSs, yet also 
relate to the trading of NMS stocks.\211\ In addition, one EMSAC 
panelist suggested that the Commission require all ATSs and dark pools 
(i.e., ATSs that do not publish quotations) to report separately from 
their affiliated broker-dealers under Rule 605.\212\ The Commission 
believes there is a need to address directly what Rule 605 requires 
with respect to reporting by firms that operate ATSs. By specifying 
that a broker-dealer that operates an ATS must produce Rule 605 reports 
that are specific to the ATS and separate from the broker-dealer 
operator's other trading activity, the Commission intends to increase 
transparency and regulatory compliance. Accordingly, the Commission 
proposes to specify in Rule 605(a)(1) that ATSs (as defined in 
Regulation ATS \213\) shall prepare reports separately from their 
broker-dealer operators, to the extent such entities are required to 
prepare reports.\214\
---------------------------------------------------------------------------

    \210\ See 17 CFR 242.301(b)(1). 17 CFR 242.301 through 17 CFR 
242.304 is generally known as ``Regulation ATS.''
    \211\ See, e.g., Securities Exchange Act Release No. 83663 (July 
18, 2018), 83 FR 38768, 38771 (Aug. 7, 2018) (Regulation of NMS 
Stock Alternative Trading Systems) (stating that ATSs that trade NMS 
stocks are increasingly operated by multi-service broker-dealers 
that engage in significant brokerage and dealing activities in 
addition to operation of their ATS, and that, for instance, the 
broker-dealer operator of an NMS Stock ATS may also operate an OTC 
market making desk or principal trading desk, or may have other 
business units that actively trade NMS stocks on a principal or 
agency basis in the ATS or at other trading centers).
    \212\ See Healthy Markets II at 2. See also Healthy Markets III 
at 4 (recommending that the Commission modernize and mandate Rule 
605 disclosure for all NMS ATS operators separate and distinct from 
any affiliated broker-dealer). Additionally, a commenter to the 
Concept Release on Equity Market Structure recommended that the 
Commission require all ATSs and dark pools to report under Rule 605. 
See KOR Group I at 3.
    \213\ 17 CFR 242.300 et seq.
    \214\ See proposed Rule 605(a)(1).
---------------------------------------------------------------------------

    Some OTC market makers, such as wholesalers, operate SDPs through 
which they execute institutional orders in NMS stocks against their own 
inventory.\215\ Institutional customers often communicate their trading 
interest using immediate-or-cancel orders (``IOCs'') or IOIs on 
SDPs.\216\ SDPs account for a nontrivial amount of trading volume 
overall (for example, SDPs accounted for approximately 4% of total 
trading volume in Q1 2022) and a significant portion of trading volume 
executed by wholesalers.\217\ Co-mingling 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.\218\ It would be useful if SDPs reported execution 
quality statistics separately from those of their associated broker-
dealer under Rule 605, so that their customers and other market 
participants would be able to distinguish SDP activity from more 
traditional dealer activity. Separate statistics may be particularly 
useful if a dealer provides an SDP (i.e., a separate routing 
destination for the execution of orders) for a particular group of 
customers or type of orders. Therefore, the Commission is proposing 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.\219\
---------------------------------------------------------------------------

    \215\ Wholesalers and other OTC market makers either execute 
orders themselves or instead further route the orders to other 
venues. An SDP always acts as the counterparty to any trade that 
occurs on the SDP. See, e.g., Where Do Stocks Trade?, FINRA.org 
(Dec. 3, 2021), available at https://www.finra.org/investors/insights/where_do_stocks_trade for further discussion.
    \216\ See infra note 615 and accompanying text.
    \217\ See infra notes 618 and 769 and accompanying text.
    \218\ For example, IOC orders typically have different execution 
profiles than other types of orders, including lower fill rates, and 
therefore including orders submitted to a market center's SDP with 
its other orders will effect a downwards skew on the market center's 
fill rates. See infra note 723 and accompanying text; Table 6.
    \219\ See proposed Rule 605(a)(1). To the extent that a 
reporting firm produces more than one Rule 605 report, the firm 
could label each report with the type of business reflected on the 
report. As discussed above, the Commission proposes to expand the 
scope of Rule 605 to include larger broker-dealers. See supra 
section III.A. It is possible that firms would need to prepare 
several Rule 605 reports if they are both a larger broker-dealer and 
a market center and need to prepare more than one report as a market 
center, pursuant to proposed Rule 605(a)(1).
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment on the proposal to specify that an ATS 
must produce reports separately from its broker-dealer operator, and to 
require that any market center that provides a separate routing 
destination that allows persons to enter orders against the bids and 
offers of a single dealer must produce separate reports pertaining to 
orders submitted to that routing destination. In particular, the 
Commission solicits comment on the following:
    13. Is it useful for an ATS to produce reports pursuant to Rule 605 
that are specific to covered orders submitted to the ATS and separate 
from orders submitted in connection with other trading activity of its 
broker-dealer operator? Why or why not?
    14. Should a broker-dealer operating an SDP be required to produce 
reports pursuant to Rule 605 that are specific to orders sent to that 
routing destination and separate from other trading activity by that 
dealer, as proposed? Why or why not? Do commenters agree that the 
description of ``a 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'' accurately describes SDPs? If 
not, what is a more accurate description of an SDP? Please explain.

IV. Proposed Modifications to Scope of Orders Covered and Required 
Information

    Rule 605 reports group orders by both order size and order type, 
and require certain standardized information for all types of orders 
and additional information for market orders and marketable limit 
orders. The Commission is proposing to modify the order size and order 
type groupings, and is proposing to make changes to the required 
information for: all types of orders; market and marketable limit

[[Page 3804]]

order types; and nonmarketable order types. The modifications described 
below would apply to Rule 605 reports produced by all reporting 
entities, including larger broker-dealers.

A. Covered Order

    The Commission proposes to expand the definition of ``covered 
order'' in a number of ways.\220\ The Commission proposes to include 
certain orders received outside of regular trading hours and orders 
submitted with stop prices. Additionally, the Commission is addressing 
whether Rule 605 requires non-exempt short sale orders to be 
incorporated into Rule 605 reporting when a price test restriction is 
in effect for the security.
---------------------------------------------------------------------------

    \220\ See proposed Rule 600(b)(30).
---------------------------------------------------------------------------

1. Orders Submitted Pre-Opening/Post-Closing
    Currently, Rule 605 reports are required to include only orders 
received during regular trading hours \221\ at a time when an NBBO is 
being disseminated. 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.\222\ At the time of adoption, the Commission stated that 
there are substantial differences in the nature of the market between 
regular trading hours and after-hours, and orders executed at these 
times should not be blended together in the same statistics.\223\ 
Similarly, orders for which customers requested special handling, 
including orders to be executed at a market opening price, are excluded 
from Rule 605 reports because their inclusion would skew the general 
statistics.\224\
---------------------------------------------------------------------------

    \221\ ``Regular trading hours'' is defined as the time between 
9:30 a.m. and 4:00 p.m. Eastern Time, or such other time as is set 
forth in the procedures established pursuant to 17 CFR 
242.605(a)(2). See 17 CFR 242.600(b)(77). The Commission is 
proposing to renumber the definition of ``regular trading hours'' as 
proposed Rule 600(b)(91).
    \222\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75421.
    \223\ See id., text accompanying note 39. Specifically, the 
Commission stated that the average quoted spread, average effective 
spread, and trade price volatility increased significantly for 
certain securities after the close of regular trading hours. See id. 
at n.39.
    \224\ See id. at 75421.
---------------------------------------------------------------------------

    Market participants submit limit orders prior to market open, and 
these orders are not captured in current Rule 605 reports.\225\ 
Although NMLOs submitted outside of regular trading hours may represent 
a relatively small percentage of NMLO orders overall, pre-open NMLO 
submission volume includes a higher concentration of individual 
investor orders.\226\ In order to provide increased visibility into 
execution quality for individual investor orders, including those 
submitted outside of regular trading hours, the Commission proposes to 
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.\227\ The Commission is proposing to expand the definition of 
``covered order'' to include any NMLO received by a market center, 
broker, or dealer outside of regular trading hours or at a time when a 
national best bid and national best offer is not being disseminated 
and, if executed, is executed during regular trading hours.\228\ As 
discussed below, the Commission is proposing that NMLOs would be 
benchmarked from the time they become executable rather than the time 
of order receipt.\229\ The executability of limit orders that are 
received while an NBBO is not being disseminated would be determined 
with reference to the opening or re-opening price of the security. This 
would allow market participants to evaluate execution performance for 
NMLOs submitted outside of regular trading hours if they become 
executable during regular trading hours.
---------------------------------------------------------------------------

    \225\ See supra notes 123-125 and accompanying text (commenter 
to 2018 Rule 606 Amendments and petitioner for rulemaking 
recommending inclusion of orders submitted prior to market open).
    \226\ Analysis of CAT data found that NMLOs submitted prior to 
open and designated as only able to execute during regular hours 
make up only a small percentage of order flow when compared to a 
sample 10-minute window of NMLOs submitted during regular hours. 
However, the analysis shows that individual investor orders are 
relatively concentrated in order flow submitted outside of regular 
market hours. Specifically, pre-open submission volume contains a 
larger percentage of individual investor shares than the sample time 
window during regular trading hours, at least for off-exchange 
market centers. See infra notes 672-673 and accompanying text.
    \227\ See proposed Rule 600(b)(20) (defining ``categorized by 
order type'' to include executable NMLOs and executable orders 
submitted with stop prices).
    \228\ See proposed Rule 600(b)(30).
    \229\ See infra section IV.B.2.(a).
---------------------------------------------------------------------------

    The Commission proposes to 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. 
Specifically, the Commission proposes that an order received at a time 
when a national best bid and national best offer is not being 
disseminated would be a marketable limit order if it is a buy order 
with a limit price equal to or greater than the national best offer at 
the time that the national best offer is first disseminated during 
regular trading hours after the time of order receipt, or if it is a 
sell order with a limit price equal to or less than the national best 
bid time at the time that the national best bid is first disseminated 
during regular trading hours after the time of order receipt.\230\
---------------------------------------------------------------------------

    \230\ See proposed Rule 600(b)(57).
---------------------------------------------------------------------------

    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 
be a covered order for purposes of Rule 605.\231\ The Commission's 
proposed definition excludes market orders and marketable limit orders 
submitted prior to open or during a trading halt because such orders 
would generally execute at the opening or re-opening price. Therefore, 
their inclusion in general market and marketable limit order statistics 
would skew both time to execution statistics and other measures of 
execution quality if aggregated with market and marketable limit orders 
received during regular trading hours. While including market and 
marketable limit orders submitted prior to open or during a trading 
halt within the definition of covered order and requiring that the 
execution statistics for these types of orders be reported as a 
separate order type category would avoid the concern about skewed 
statistics, it would add to the complexity of the report.
---------------------------------------------------------------------------

    \231\ For example, a market or marketable limit order that is 
not received by a market center or broker-dealer during regular 
trading hours at a time when the NBBO is being disseminated would 
not be a covered order under proposed Rule 600(b)(30). In addition, 
the covered order definition would continue to exclude any order for 
which the customer requests special handling for execution, 
including orders to be executed at a market opening price, see 
proposed Rule 600(b)(30), and therefore market-on-open (``MOO'') 
orders and limit-on-open (``LOO'') orders would be excluded.
---------------------------------------------------------------------------

    The current definition of covered order includes orders received 
during regular trading hours while an NBBO is being disseminated but 
before the primary listing market has disseminated its first quotations 
in the security. Prior to a primary listing market disseminating its 
first quotations in a security, disseminated quotations often reflect 
spreads that vary significantly from the norm.\232\ To prevent such 
quotations from skewing the execution quality statistics, the 
Commission exempted orders from inclusion in Rule

[[Page 3805]]

605 reports that are received prior to the dissemination of the primary 
listing market's first firm, uncrossed quotations for a trading day 
(``Opening Exemption'').\233\ With respect to orders received during 
regular trading hours but before the primary listing market has 
disseminated its first firm, uncrossed quotation, the Commission 
continues to believe, for the same reasons it granted this exemption, 
that including such orders could distort execution quality statistics. 
Therefore, the Commission is proposing to incorporate this exemptive 
relief into the proposed 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.\234\ However, pursuant to the 
proposed amendments to Rule 605, NMLOs (including orders submitted with 
stop prices) received outside of regular trading hours or at a time 
when an NBBO is not being disseminated could be considered covered 
orders, provided the NMLOs were not executed outside of regular trading 
hours.\235\ Inclusion of these orders in Rule 605 reports would be 
useful to market participants, even though such orders necessarily 
would be received before the primary listing market has disseminated 
its first firm, uncrossed quotation and thus fall within the scope of 
the Opening Exemption. Because the Commission is proposing to 
incorporate the exemptive relief reflected in the Opening Exemption 
into the Rule with respect to market or limit orders received during 
regular trading hours, but believes it would be useful to include the 
NMLOs described above in Rule 605 reports, the Commission is also 
proposing to rescind the Opening Exemption.\236\
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    \232\ See Letter from Annette L. Nazareth, Director, Division of 
Market Regulation to Theodore Karn, President, Market Systems, Inc., 
dated June 22, 2001 (``Market Systems Exemptive Letter'') at 2.
    \233\ See id. (exemption from reporting under Rule 11Ac1-5, the 
predecessor to Rule 605). In addition to the Opening Exemption, the 
Market Systems Exemptive Letter included a separate exemption from 
the Rule for orders received during a time when the consolidated BBO 
reflects a spread that exceeds $1 plus 5% of the midpoint of the 
consolidated BBO (``Spread Width Exemption'').
    \234\ See proposed Rule 600(b)(30).
    \235\ See id.
    \236\ Because the Spread Width Exemption is not inconsistent 
with the proposed amendments to Rule 605, the Commission would not 
rescind the Spread Width Exemption. The Commission continues to 
believe that 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.'' 
Market Systems Exemptive Letter at 2. The Commission may adopt an 
updated or modified exemption under Rule 605(b) to further refine 
the exemption if, for example, additional factors could be 
considered reliable indicators of orders that could be the result of 
erroneous quotes or abnormal trading conditions. See 17 CFR 
242.605(b).
---------------------------------------------------------------------------

    As a result of the proposed inclusion of limit orders submitted 
after closing and the proposed changes to the categorization of NMLOs 
described in section IV.B.2, limit orders could be received for 
execution and fall within the scope of Rule 605 on a day other than the 
day of order receipt. Under current Rule 605(a)(1), a reporter must 
prepare a monthly report on the covered orders in NMS stocks that it 
received for execution from any person. In order to address this 
scenario, the Commission proposes that a covered order would be 
required to be included in the report for the month in which it becomes 
executable if the day of receipt and the day it initially becomes 
executable occur in different calendar months. Therefore, the 
Commission proposes to amend 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.\237\
---------------------------------------------------------------------------

    \237\ See proposed Rule 605(a)(1).
---------------------------------------------------------------------------

2. Stop Orders
    The definition of ``covered order'' excludes orders with special 
handling instructions, including orders submitted with stop 
prices.\238\ Therefore, orders submitted with stop prices are excluded 
from Rule 605 reports.
---------------------------------------------------------------------------

    \238\ See 17 CFR 242.600(b)(22). Generally, a limit order 
submitted with a stop price becomes a market order when the stop 
price is reached. A stop order to buy becomes a market order when 
the security is bid or trades at or above the specified stop price; 
a stop order to sell becomes a market order when the security is 
offered or trades at or below the specified stop price.
---------------------------------------------------------------------------

    The Commission preliminarily understands that market centers and 
broker-dealers may differ in how they handle stop orders, and the 
current lack of consistent information regarding executions of such 
orders may prevent investors from comparing the execution quality of 
such orders. Further, stop orders are likely to hit their stop prices, 
and are often executed, during periods of price volatility or downwards 
market momentum, which may entail less than favorable execution 
conditions. Given the potential for variation across market centers and 
broker-dealers, as well as the market conditions under which stop 
orders may execute, the Commission believes including stop orders 
within the scope of the Rule would benefit market participants by 
allowing them to analyze these variations in execution quality. 
Further, as stated by the petitioner, including stop orders within the 
Rule's scope would provide a more complete view of the orders certain 
broker-dealers may use when assessing the execution quality market 
centers provide.\239\
---------------------------------------------------------------------------

    \239\ See supra note 123 and accompanying text.
---------------------------------------------------------------------------

    Orders submitted with stop prices are often submitted well before 
their stop prices are reached. In order to provide an ``apples-to-
apples'' comparison of stop orders, the Commission is proposing to 
measure the execution quality of orders submitted with stop prices from 
the time their stop prices are reached, i.e., when such orders become 
executable. As part of the proposed definition of ``executable,'' the 
Commission is proposing to specify 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 orders submitted with a stop price, that the stop price is 
equal to or less than the national best offer during regular trading 
hours.\240\ Incorporation of the ``executable'' concept would have two 
effects. First, stop orders would be reported as part of a Rule 605 
report only if they become executable.\241\ Second, the point that a 
stop order first becomes executable would be used as a benchmark for 
several execution quality metrics, including average effective spread, 
average effective over quoted spread, average realized spread, and 
average time to execution statistics.\242\ The Commission is proposing 
to use the time an order becomes executable rather than the time of 
order receipt based on the understanding that customers, at least for 
purposes of evaluating execution quality of stop orders, would 
generally expect such orders to be executed close in time to when their 
stop prices are triggered. Including executable orders submitted with 
stop prices within the scope of the Rule would help investors compare 
the performance of market centers and broker-dealers from a point in 
time when such orders could reasonably be expected to execute. 
Accordingly, the Commission proposes to rescind the exclusion of orders 
submitted with stop prices within the definition of covered

[[Page 3806]]

order.\243\ As proposed, these orders would comprise a separate order 
type category to help ensure comparability of execution quality 
statistics since, as stated above, stop orders more often may execute 
under volatile or downward-trending market conditions.\244\
---------------------------------------------------------------------------

    \240\ See proposed Rule 600(b)(42). See also infra note 303 and 
accompanying text (discussing the definition of ``executable'' as it 
relates to other non-marketable order types).
    \241\ See proposed Rule 600(b)(20) (defining ``categorized by 
order type'' to include a category for ``executable orders submitted 
with stop prices'') (emphasis added).
    \242\ For further discussion of these metrics, see infra 
sections IV.B.3, IV.B.4.(a), IV.B.4.(b), IV.B.4.(d), and IV.B.6.
    \243\ See proposed Rule 600(b)(30) (eliminating the express 
carve out of orders submitted with stop prices from the definition 
of ``covered order'').
    \244\ See also infra section IV.B.2.a below for more detailed 
description of the changes to categorization by order type, 
including a new category for executable orders with stop prices.
---------------------------------------------------------------------------

3. Non-Exempt Short Sale Orders
    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'' in Rule 600(b)(15).\245\ Non-exempt short sale orders are 
subject to a price test under Rule 201 of Regulation SHO (``Rule 201'') 
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.\246\ In 2013, Commission staff stated that because in certain 
circumstances non-exempt short sale orders are subject to a price test 
under Rule 201, and the circumstances could vary for different 
securities and different days throughout the month, staff would view 
all non-exempt short sale orders as subject to special handling.\247\
---------------------------------------------------------------------------

    \245\ 17 CFR 242.600(b)(15). See ``Responses to Frequently Asked 
Questions Concerning Rule 605 of Regulation NMS'' (Feb. 22, 2013) 
(``2013 FAQs'').
    \246\ 17 CFR 242.201. Rule 201 generally requires trading 
centers to establish, maintain, and enforce written policies and 
procedures that are reasonably designed to prevent the execution or 
display of a short sale at an impermissible price when a stock has 
triggered a circuit breaker by experiencing a price decline of at 
least ten percent in one day. Once the circuit breaker in Rule 201 
has been triggered, the price test restriction will apply to short 
sale orders in that security for the remainder of the day and the 
following day, unless an exception applies. See 17 CFR 
242.201(b)(1). One exception is for the execution or display of a 
short sale order marked ``short exempt.'' See 17 CFR 
242.201(b)(1)(iii)(B); 17 CFR 242.201(c).
    \247\ See 2013 FAQs.
---------------------------------------------------------------------------

    The Commission preliminarily believes that for purposes of this 
proposal, not all non-exempt short sale orders should be excluded from 
the scope of Rule 605 reporting. 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 best 
bid.\248\ These tick-sensitive orders could be ``orders to be executed 
only on a particular type of tick or bid,'' which is one of the types 
of special handling orders specified in the definition of covered 
order.\249\ However, excluding all non-exempt short sale orders from 
Rule 605 reporting, regardless of whether or not a Rule 201 price test 
restriction is in effect, excludes a significant portion of short sale 
orders that are not tick-sensitive. Non-exempt short sale orders do not 
appear to be tick-sensitive the majority of the time because they are 
infrequently subject to a price test restriction. Analysis shows that, 
between April 2015 and March 2022, an event that triggered the Rule 201 
circuit breaker only occurred on 1.7% of trading days for an average 
stock.\250\ The analysis also found that around 18% of trigger events 
occurred the day after a previous trigger event, and around 46% of 
trigger events occurred within a week after a previous trigger event, 
implying that these trigger events tend to be relatively infrequent and 
clustered around a small number of isolated events. Moreover, because 
non-exempt short sale orders are not tick sensitive when a short sale 
price test is not in effect, the inclusion of these orders would not 
skew execution quality statistics.\251\
---------------------------------------------------------------------------

    \248\ See 17 CFR 242.201(b)(1)(i).
    \249\ See 17 CFR 242.600(b)(22).
    \250\ See infra note 662 and accompanying text.
    \251\ In adopting Rule 605, the Commission stated that the 
definition of covered order excludes orders (including short sales 
that must be executed on a particular tick or bid) for which the 
customer requested special handling for execution and that, if not 
excluded, would skew general statistical measures of execution 
quality. See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75421.
---------------------------------------------------------------------------

    In addition, including non-exempt short sale orders for which a 
price test restriction is not in effect for the security within Rule 
605 statistics would lead to a more complete picture of reporting 
entities' execution quality, because there is evidence that short sales 
compose a large segment of trades, and likely also order flow. Analysis 
of short volume data shows that, between August 2009 and February 2021, 
short selling constituted an average of 47.3% of trading volume for 
non-financial common stocks.\252\ As discussed further below, evidence 
suggests that hedge funds make up the majority of the short selling 
market, while an academic working paper found that, between January 
2010 and December 2016, around 10.92% of retail trading was made up of 
short sales.\253\
---------------------------------------------------------------------------

    \252\ See infra note 820 and accompanying text.
    \253\ See infra notes 821-827 and accompanying text. See also 
supra note 123 and accompanying text (petitioner recommending 
inclusion of short sales in Rule 605).
---------------------------------------------------------------------------

    Therefore, under the proposal, non-exempt short sale orders would 
not be considered special handling orders unless a price test 
restriction is in effect for the security. Unless another exclusion 
applies, non-exempt short sale orders would fall within the definition 
of covered order and thus within the scope of Rule 605 reporting.\254\ 
Conversely, during a short sale price test, a short sale order not 
marked ``exempt'' would be subject to special handling and would be 
excluded from the definition of covered order and thus from Rule 605 
reporting.
---------------------------------------------------------------------------

    \254\ If an order is otherwise subject to special handling it 
would not be a covered order. See proposed Rule 600(b)(30).
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment generally on the proposed expansion of 
Rule 605 reporting requirements to include certain orders received 
outside of regular trading hours and orders submitted with stop prices, 
as well as the proposal to incorporate non-exempt short sale orders 
into Rule 605 unless a price test restriction is in effect for the 
security. In particular, the Commission solicits comment on the 
following:
    15. Should the security's opening or re-opening price be required 
to be used as a benchmark to determine whether a limit order submitted 
outside of regular trading hours is marketable or non-marketable? If 
not, what would be an alternative benchmark? Please explain.
    16. Should the definition of ``covered order'' include NMLOs 
submitted outside of regular trading hours or when the NBBO is not 
being disseminated (i.e., limit orders that are not marketable based on 
the security's opening or re-opening price)? Should market orders and 
marketable limit orders submitted outside of regular trading hours or 
when the NBBO is not being disseminated be included within the 
definition of ``covered order''? Why or why not? Should these orders be 
grouped with other market or marketable limit orders or as new order 
type categories?
    17. Do commenters agree that requiring orders submitted with stop 
prices to be included in Rule 605 reports, and segregating them into 
their own order type category, would avoid distorting execution quality 
statistics? If not, why not?
    18. Do commenters agree that periods when a short sale price test 
is in effect are relatively infrequent and clustered around a small 
number of isolated events? Why or why not?
    19. Should other types of orders be included within the scope of 
covered orders? For example, currently intermarket sweep orders 
(``ISOs'') with a limit price inferior to the NBBO may

[[Page 3807]]

be viewed to be subject to special handling and are excluded from Rule 
605 reports. Should these or other orders types be included within the 
scope of covered orders? If so, please explain any additional 
requirements or conditions that would help ensure comparability of 
order execution quality statistics across reporting entities. For 
example, if a new order type should be within the scope of covered 
orders, should it be a new order type category or be added to an 
existing or proposed order type category (as described in part IV.B.2 
below)?

B. Required Information

    The categories in Rule 605 reports are intended to strike a balance 
between sufficient aggregation of orders to produce statistics that are 
meaningful on the one hand, and sufficient differentiation of orders to 
facilitate fair comparisons of execution quality across market centers 
on the other hand.\255\ When adopting the Rule, the Commission stated 
that its experience with the categories prescribed by the Rule may 
indicate ways in which they could be improved in the future.\256\
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    \255\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75423.
    \256\ See id.
---------------------------------------------------------------------------

1. Categorization by Order Size
    Rule 600(b)(13) defines ``categorized by order size'' as dividing 
orders into separate categories based on the number of shares composing 
an order.\257\ For the purposes of Rule 605 reports, the largest size 
category has been limited to include only orders greater than 5,000 
shares and less than 10,000 shares.\258\ The Commission proposes to 
amend the definition of ``categorized by order size'' to provide 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.\259\
---------------------------------------------------------------------------

    \257\ 17 CFR 242.600(b)(13). See supra note 40.
    \258\ See infra note 281 and accompanying text.
    \259\ See proposed Rule 600(b)(19).
---------------------------------------------------------------------------

    The reasons for these changes are discussed below.
(a) Round Lot Multiple Characterization
    Currently, Rule 605 reports utilize 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 current Rule 605 reflects this.
    In recent years, the prices of some of the most widely held stocks 
have increased significantly,\260\ and differences in price affect how 
stocks trade. For example, a 100-share order of a $1,200 stock would 
likely have very different execution quality statistics than a 100-
share order of a $10 stock because more capital is at risk in the 
former. But under current Rule 605, these orders are reported in the 
same order size category.
---------------------------------------------------------------------------

    \260\ See supra note 16.
---------------------------------------------------------------------------

    Further, many of Rule 605's execution quality measures rely on the 
NBBO as a benchmark.\261\ In adopting the Market Data Infrastructure 
rules (the ``MDI Rules''), the Commission stated that the new 
definition of round lot will improve certain Rule 605 statistics. The 
Commission stated that the definition of round lot would allow 
additional orders of meaningful size to determine the NBBO, and, 
therefore, the execution quality and price improvement statistics 
required under Rule 605 would be based upon an NBBO that the Commission 
believes is a more meaningful benchmark for these statistics.\262\ As a 
result of the new round lot definition,\263\ the NBBO in higher-priced 
NMS stocks is based on smaller, potentially better-priced orders.\264\ 
The newly adopted definition of round lot is tiered based on the NMS 
stock's prior month closing price.\265\ Upon implementation, the NBBO 
will be calculated based on the new definition of round lot.\266\
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    \261\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75421 
(stating that nearly all of the statistical measures included in the 
Rule depend on the availability of a consolidated BBO at the time of 
order receipt).
    \262\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at 
18621.
    \263\ Specifically, the Commission re-defined ``round lot'' as: 
100 shares for stocks priced at $250 or less, 40 shares for stocks 
priced at $250.01 to $1,000, ten shares for stocks priced at 
$1,000.01 to $10,000, and one share for stocks priced at $10,000.01 
or more. See 17 CFR 242.600(b)(82).
    \264\ As described in the MDI Adopting Release, orders currently 
defined as odd-lots often reflect superior pricing. See MDI Adopting 
Release, 86 FR 18596 (Apr. 9, 2021) at 18616 (describing analysis 
that made similar findings using data from May of 2020). A recent 
working paper analyzed the effect of the new round lot definition 
and found that for sample stocks in the 40-share round lot category 
the incidence of better-priced odd-lot quotes fell by approximately 
4.8% and for sample stocks in the 10-share round lot category the 
incidence fell by approximately 22%. See Bartlett, et al. at 5.
    \265\ The round lot definition, together with the increased 
availability of better priced odd-lot information, was designed to 
provide investors with valuable information about the best prices 
available and help to facilitate more informed order routing 
decisions and the best execution of investor orders. See MDI 
Adopting Release, 86 FR 18596 (Apr. 9, 2021) at 18602.
    \266\ See id. The Commission is separately proposing to 
accelerate the implementation of the round lot definition. See 
Securities Exchange Act Release No. 96494 (Dec. 14, 2022) (File No. 
S7-30-22) (Regulation NMS: Minimum Pricing Increments, Access Fees, 
and Transparency of Better Priced Orders) (``Minimum Pricing 
Increments Proposal''). The Commission established a phased 
transition plan for the implementation of the MDI Rules, which 
provided for the implementation of the round lot definition as part 
of the final phase of implementation. See MDI Adopting Release, 86 
FR 18596 (Apr. 9, 2021) at 18698-18701. At a minimum, round lot 
implementation will be two years after the Commission's approval of 
the plan amendment(s) required by Rule 614(e). Until the round lot 
definition adopted pursuant to the MDI Rules is implemented, round 
lots continue to be defined in exchange rules. See id. at 16738. For 
most NMS stocks, a round lot is defined as 100 shares. According to 
TAQ Data, as of April 2022, eleven stocks had a round lot size other 
than 100. Nine stocks had a round lot of ten and two stocks had a 
round lot of one.
---------------------------------------------------------------------------

    The Commission proposes to modify the order size categories to 
utilize the new definition of round lot and include odd-lots, 
fractional shares, and larger order sizes. Because the new definition 
of round lot incorporates the current market price of the security, the 
Commission believes that notional buckets and caps suggested by 
commenters are not necessary.\267\ The proposed order size categories 
would correspond to the existing share-based order size categories to 
reflect that round lots historically had been viewed as groups of 100 
shares. For example, the category for 100 to 499 shares would instead 
be 1 round lot to less than 5 round lots. Because the current exemptive 
relief \268\ effectively caps the existing order size category of 5,000 
or more shares to 9,999 shares, the second largest order size category 
would be 50 round lots to less than 100 round lots. The Commission is 
also proposing to add new order size categories for odd-lots, 
fractional shares, and larger-sized orders as discussed below.\269\
---------------------------------------------------------------------------

    \267\ See supra notes 128-132 and accompanying text.
    \268\ See Large Order Exemptive Letter.
    \269\ See infra section IV.B.1.(b)(1) and (2). The largest order 
size category would be 100 round lots or more. See proposed Rule 
600(b)(19)(vii).
---------------------------------------------------------------------------

    Additionally, 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. In particular, with 
the NBBO to be calculated based on the new definition of round lot, 
updating the order size categories to be based on round lots should 
allow for better comparisons of statistics that rely on the NBBO as a 
benchmark, including price improvement statistics. The NBBO is used as 
a benchmark throughout Rule 605 to determine marketability of orders, 
effective and realized spread, and price improvement/dis-improvement 
statistics. If the order size category were not based on the round lot 
size for that stock, Rule 605 statistics

[[Page 3808]]

would show, for example, larger amounts of price improvement for high-
priced stocks based on the presumably wider NBBO. However, the 
statistics would still be comparable across market centers and broker-
dealers since they would all be utilizing the same benchmark.
(b) New Sizes Within Scope
(1) Odd-Lots and Orders Less Than a Share
    Currently, Rule 605 does not require reporting for orders smaller 
than 100 shares, including odd-lot orders or fractional share orders 
(i.e., orders for less than one share).\270\ Commenters suggested 
amending the scope of the Rule to include odd-lot orders.\271\ One 
commenter offering suggestions regarding enhancements to Rule 605 and 
Rule 606 from a retail perspective stated that, while ``odd lots may 
not represent a high percentage of executed share volume, they do 
represent a high percentage of incoming executed order volume.'' \272\ 
Market participants stated that odd-lots make up a majority of all 
trades.\273\ Particularly as stock prices have risen,\274\ odd-lots 
have come to represent an increased percentage of orders.\275\ Analysis 
using TAQ data found that odd-lots increased from around 15% of trades 
in January 2014 to more than 55% of trades in March 2022.\276\ An 
analysis of data from the SEC's MIDAS analytics tool shows that, in Q1 
2022, odd-lots made up 81.2% of on-exchange trades (40% of volume) for 
stocks in the highest price decile and 25% of on-exchange trades (2.72% 
of volume) for stocks in the lowest price decile.\277\ Based on changes 
the Commission has observed in the market, the observations of 
commenters and other market participants, as well as its analysis, the 
Commission preliminarily believes the exclusion of order sizes smaller 
than 100 shares excludes an important segment of order flow. Therefore, 
the Commission is proposing a new order size category for odd-lots.
---------------------------------------------------------------------------

    \270\ There are a variety of circumstances in which an order for 
an NMS stock submitted to a broker-dealer results in a fractional 
share. Examples include customer orders to buy: (1) a fraction of a 
share (e.g., order to buy 0.5 shares); (2) shares with a fractional 
component (e.g., order to buy 10.5 shares); and (3) a dollar amount 
that leads to the purchase of a fractional share (e.g., order to buy 
$1,223 worth of XYZ stock at $50 per share or 24.46 shares).
    \271\ See Healthy Markets IV (discussing recommended reforms to 
Rule 605 and Rule 606) at 3; IHS Markit Letter (responding to the 
2018 Rule 606 Amendments) at 5, text accompanying n.15; EMSAC III 
(recommendations regarding modifications to Rule 605 and Rule 606) 
at 2.
    \272\ FIF I at 1. The commenter also stated that retail 
investors account for a notable portion of odd-lot trades. See FIF I 
at 1. Later, the commenter stated that odd-lots represent close to 
50% of self-directed orders. See FIF III at 4.
    \273\ See ``Effective Spreads, Payment for Order Flow, and Price 
Improvement'', RBC Capital Markets (Mar. 2022) at 5. Cf., Virtu 
Petition at 4, n.13 and accompanying text (odd-lots make up 70% of 
all trades in high priced stocks).
    \274\ See supra note 16.
    \275\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at 
18616 (describing analyses confirming observations made in the MDI 
Proposing Release that a significant proportion of quotation and 
trading activity occurs in odd-lots, particularly for frequently 
traded, high-priced stocks).
    \276\ See supra note 91.
    \277\ See dataset ``Summary Metrics by Decile and Quartile'' 
available at https://www.sec.gov/marketstructure/downloads.html.
---------------------------------------------------------------------------

    Similarly, fractional share orders have become increasingly popular 
with individual investors as certain stock prices have risen and 
certain broker-dealers have made fractional shares available to their 
customers.\278\ Analysis of CAT data from March 2022 found that 
executed orders with a fractional share component originated from over 
5 million unique accounts. Orders for less than a single share 
represent a significant portion of fractional orders executions.\279\ 
In order to capture execution quality information for these orders, the 
Commission is proposing a new size category for orders less than a 
share. To the extent an order with a fractional share component is for 
more than a single share, it would not be included in this size 
category to help ensure comparability of order execution quality 
statistics.\280\
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    \278\ See infra note 642. Orders with a fractional share 
component may be executed in a number of ways: a broker-dealer may 
(i) internalize the entire order as principal using its own 
inventory; (ii) create a representative order that rounds up the 
order to the nearest whole number using its own inventory and route 
it for execution, then fill the original customer's fractional order 
after the representative order is executed; (iii) internalize the 
fractional component of the order (e.g., 0.5 shares) and send the 
whole share component (e.g., 2 shares) away for execution; or (iv) 
aggregate different fractional orders to make one large 
representative order and then route it for execution, and fill the 
original fractional orders post-execution.
    \279\ Analysis of CAT data from March 2022 found that almost 68% 
percent (31.67 million) of the 46.63 million executed orders with a 
fractional component were for less than a single share. See infra 
note 644 and accompanying text.
    \280\ For example, a covered order for 10.5 shares in a security 
with a 100-share round lot would be categorized as an odd-lot. See 
proposed Rule 600(b)(19).
---------------------------------------------------------------------------

(2) Larger-Sized Orders
    Currently, Rule 605 does not require reports that include orders 
with a size of 10,000 shares or greater pursuant to exemptive relief 
provided by the Commission in 2001.\281\ In granting the exemption, the 
Commission stated that a primary objective of the Rule is to ``generate 
statistical measures of execution quality that provide a fair and 
useful basis for comparisons among different market centers,'' and 
reasoned that the exclusion of such orders would help assure greater 
comparability of statistics in the largest size category of 5,000 or 
more shares.\282\
---------------------------------------------------------------------------

    \281\ See Large Order Exemptive Letter.
    \282\ Id. at 2.
---------------------------------------------------------------------------

    Commenters have advocated for the Commission to include larger-
sized orders in Rule 605 reports. One commenter responding to the 2018 
Rule 606 Amendments stated that the exclusion of certain types of 
marketable limit orders, including those of 10,000 shares or more, 
undermines the utility of Rule 605 reports.\283\ The entity that 
petitioned for rulemaking in this area stated that because of the 
variation in stock prices (e.g., a 5,000 share order with a notional 
value of $17.3 million and a 5,000 share order with a notional value of 
$76,000), categorizing orders by share size is no longer 
effective.\284\ The petitioner recommended the Commission include both 
odd-lots and orders of 10,000 or more shares, and add notional size 
categories to the metrics, with a notional cap.\285\
---------------------------------------------------------------------------

    \283\ See IHS Markit Letter at 34. See also KOR Group I at 4 
(responding to the Commission's Concept Release on Equity Market 
Structure, suggesting elimination of a share size cap on Rule 605 
reporting).
    \284\ See Virtu Petition at 4-5.
    \285\ See id. at 5.
---------------------------------------------------------------------------

    The Commission proposes to rescind the exemptive relief for orders 
of 10,000 or more shares and include these orders within the scope of 
Rule 605 reports. The Commission believes that including such larger-
sized orders would improve execution quality statistics in Rule 605 
reports by including information about an important segment of order 
flow. Analysis of TAQ data shows that the number of shares associated 
with trades that were for 10,000 or more shares as a percent of total 
executed shares was 11.3% in March 2022.\286\ In addition, analysis of 
the distribution of NMLO sizes in order submission data from MIDAS for 
the month of March 2022, shows that, while NMLOs of 10,000 or more 
shares made up only 0.09% of order flow in terms of number of orders, 
they made up nearly 7.8% of order flow in terms of share volume.\287\ 
Although

[[Page 3809]]

the Commission had concerns about the comparability of execution 
quality statistics for larger-sized orders when adopting the Rule, the 
Commission expects that the proposed inclusion of two additional 
categories for larger order sizes \288\ (i.e., corresponding to 5,000-
9,999 shares and 10,000 or more shares in the case of a 100 share round 
lot) would allow for better comparability of statistics. The proposed 
amended definition of ``categorized by order size'' that aligns with 
the new definition of round lot would enhance such comparability.
---------------------------------------------------------------------------

    \286\ See infra note 649 and accompanying text. The percentage 
of larger-sized trades has fluctuated over time, in part due to 
broker-dealers' use of Smart Order Routers (``SORs'') to break up 
their institutional investor customers' large parent orders into 
smaller-sized child orders along with other market changes, such as 
the overall increase in stock prices. The rate of larger-sized 
trades has declined from a rate of more than 25% in late 2003, but 
has increased from 6.7% in August 2011. See id.
    \287\ See infra Figure 4. While larger-sized orders comprise a 
non-negligible percent of order flow, some or possibly most of these 
large orders may be not held to the market, in which case they would 
not be included in Rule 605 reports even without the exemptive 
relief.
    \288\ See supra text following note 267, notes 268-269 and 
accompanying text. The two largest buckets in proposed Rule 
600(b)(19)(vi) and (vii) group together orders of between 50 round 
lots to less than 100 round lots and orders of 100 round lots or 
greater, respectively.
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment on the proposed changes to the 
definition of ``categorized by order size.'' In particular, the 
Commission solicits comment on the following:
    20. Should fractional share orders be required to be included in 
Rule 605 reports? Why or why not?
    21. Should odd-lot orders be required to be included in Rule 605 
reports? Why or why not?
    22. Should orders of 10,000 or more shares be required to be 
included in Rule 605 reports? Why or why not? Do commenters believe 
that including such orders would skew the statistics for the largest 
order size category? Would commenters support one or more notional caps 
for share size buckets (such as 10,000 shares or greater), and if so, 
why? Please explain and provide data.
    23. Do commenters agree with the proposed modification of order 
size categories? If not, why not? Would categories based on number of 
shares--or the following categories based exclusively on notional 
value: $1 to less than $10,000.00, $10,000.01 to less than $25,000.00, 
$25,000 to less than $100,000, and over $100,000--be more useful, less 
burdensome, or more cost-effective as either a permanent or an 
alternative measure until such time as the new definition of round lot 
has been implemented? Do commenters recommend different size or 
notional value categories? If so, please describe such categories.
2. Categorization by Order Type
    Under Rule 605(a)(1), monthly reports are categorized by order 
type. Currently, ``categorized by order type'' means 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.\289\ As discussed below, the Commission proposes to 
modify this definition to mean dividing orders into separate categories 
for market orders, marketable limit orders (excluding immediate-or-
cancel orders), marketable immediate-or-cancel orders, beyond-the-
midpoint limit orders, executable non-marketable limit orders 
(excluding beyond-the midpoint limit orders and orders submitted with 
stop prices), and executable orders submitted with stop prices.\290\ 
The following compares the order type categories under the current Rule 
to the proposed new order type categories:
---------------------------------------------------------------------------

    \289\ See 17 CFR 242.600(b)(14). The Commission is proposing to 
renumber the definition of ``categorized by order type'' as proposed 
Rule 600(b)(20).
    \290\ See proposed Rule 600(b)(20). Market orders and marketable 
limit orders are existing categories under the current definition of 
``categorized by order type.'' See 17 CFR 242.600(b)(14).

------------------------------------------------------------------------
      Existing order type category       Order type category as proposed
------------------------------------------------------------------------
Market.................................  Market, Marketable IOC.
Marketable Limit.......................  Marketable Limit, Marketable
                                          IOC.
Inside-the-Quote Limit.................  Beyond-the-Midpoint Limit,
                                          Executable NMLO.
At-the-Quote Limit.....................  Executable NMLO.
Near-the-Quote Limit...................  Executable NMLO.\291\
[Not Included] \292\...................  Executable NMLO, Executable
                                          Stop.
------------------------------------------------------------------------

    The Commission believes that the proposed categories will improve 
execution quality information within Rule 605 reports and better group 
comparable orders.
---------------------------------------------------------------------------

    \291\ Under the proposal, near-the-quote limit orders would fall 
outside the scope of the order type categories if they do not become 
executable. See infra section IV.B.2.(a) for discussion of the 
definition of executable.
    \292\ The following orders fall outside the scope of the current 
order type categories: (1) non-marketable buy orders and non-
marketable sell orders with limit prices that are more than $0.10 
lower than the national best bid or higher than the national best 
offer, respectively, at the time of order receipt; and (2) stop 
orders. Under the proposal, such orders, if they become executable, 
would fall within the order types for executable NMLOs or executable 
stop orders. However, these orders would fall outside the scope of 
the order type categories as proposed if they do not become 
executable.
---------------------------------------------------------------------------

(a) NMLOs and Orders Submitted With Stop Prices
    The Commission proposes to eliminate the three separate categories 
for types of 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: non-marketable limit orders that become executable 
(excluding orders submitted with stop prices and beyond-the-midpoint 
limit orders) and beyond-the-midpoint limit orders.\293\ Current Rule 
605 reports group NMLOs as inside-the-quote, at-the-quote, and near-
the-quote, and exclude NMLOs that are more than ten cents away from the 
quote at the time of order receipt.\294\ When proposing to exclude 
NMLOs with a limit price more than ten cents away from the NBBO, the 
Commission reasoned that the execution quality statistics for these 
types of orders may be less meaningful because executions of these 
types of orders depend more on the order's limit price and price 
movement in the market than on handling by the market center.\295\
---------------------------------------------------------------------------

    \293\ See supra text accompanying note 290. Beyond-the-midpoint 
limit orders, discussed in more detail in section IV.B.2.(b) infra, 
are a type of NMLO that is priced more aggressively than the 
midpoint.
    \294\ See 17 CFR 242.600(b)(14). Inside-the-quote limit order, 
at-the-quote limit order, and near-the-quote limit order mean non-
marketable buy orders with limit prices that are, respectively, 
higher than, equal to, and lower by $0.10 or less than the national 
best bid at the time of order receipt, and non-marketable sell 
orders with limit prices that are, respectively, lower than, equal 
to, and higher by $0.10 or less than the national best offer at the 
time of order receipt. See 17 CFR 242.600(b)(37). The Commission is 
proposing to eliminate this definition of inside-the-quote limit 
order, at-the-quote limit order, and near-the-quote limit order. 
These defined terms would no longer be used with the changes to 
order type categories proposed herein. The proposed new order type 
categories for NMLOs would focus on whether a NMLO becomes 
executable rather than on how a NMLO's limit price compares to the 
quote, as discussed further below.
    \295\ See Proposing Release, 65 FR 48406 (Aug. 8, 2000) at 
48414.
---------------------------------------------------------------------------

    Commenters supported including NMLOs further away from the quote in

[[Page 3810]]

Rule 605 reports but noted the difficulty of providing meaningful 
execution quality statistics for such orders. One commenter to the 2018 
Rule 606 Amendments observed: ``With non-marketable limit orders, what 
matters is the skill of the broker in choosing the venue with the 
highest probability of filling the order. Measuring execution quality 
is difficult in that some limit orders are placed far away from the 
NBBO and are unlikely to be filled. Others are cancelled after varying 
lengths of time for any number of reasons. It may be difficult to tell 
whether a cancelled order would have been filled later had it not been 
cancelled.'' \296\ In offering suggestions to modernize Rule 605, 
another commenter recommended including an additional ``away-from-the-
quote'' bucket for NMLOs, which the commenter stated would capture a 
significantly greater number of self-directed orders from individual 
investors.\297\
---------------------------------------------------------------------------

    \296\ Angel Letter at 7. See also Blackrock Letter at 3 (stating 
in response to the Commission's Concept Release on Equity Market 
Structure that revised Rule 605 disclosures should provide greater 
transparency on NMLOs).
    \297\ See FIF III at 4.
---------------------------------------------------------------------------

    The Commission recognizes that more meaningful measures of 
execution quality for NMLOs, as well as orders submitted with stop 
prices,\298\ would assist investors in measuring execution quality. A 
large number of NMLOs are not captured because they are more than ten 
cents away from the NBBO or submitted outside of regular market 
hours.\299\ The Commission believes that it would be informative to 
calculate execution quality statistics for those NMLOs and orders 
submitted with a stop price that become ``executable.'' \300\ Because 
execution quality for orders placed further away from the quote depends 
heavily on prevailing market conditions,\301\ adding the concept of 
``executable'' allows execution quality statistics to be measured from 
a point where an order could be executed.\302\
---------------------------------------------------------------------------

    \298\ See supra section IV.A.2.
    \299\ An analysis of 80 stocks in March 2022 finds that away-
from-the-quote orders (i.e., NMLOs that are more than $0.10 away 
from the NBBO) represent 23.8% of non-marketable share volume). See 
infra section VII.C.2.(c)(1).
    \300\ As discussed above, the Commission is proposing to modify 
the definition of ``covered order'' to include NMLOs submitted 
outside of regular trading hours or when an NBBO is not being 
disseminated and orders submitted with a stop price. See supra 
sections IV.A.1 and IV.A.2.
    \301\ For example, even if a limit order is placed $0.05 away 
from the quote, if the market moves away and only 25 minutes later 
returns to a price level where the limit order executes, the time to 
execution for that order is less reflective of execution quality 
than of prevailing market conditions.
    \302\ As discussed above (see supra section IV.A.2.), the 
Commission also believes it would be helpful to investors to measure 
the execution quality of orders submitted with stop prices. 
Therefore, it is proposing to add a separate order type category of 
``executable orders submitted with stop prices'' to the definition 
of ``categorized by order type.'' See proposed Rule 600(b)(20).
---------------------------------------------------------------------------

    As proposed, Rule 605 statistics would be collected for 
``executable'' NMLOs. The Commission proposes 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.\303\ This definition is 
designed to capture NMLOs (including beyond-the-midpoint limit orders) 
that, during their time in force, ``touched'' a price where they could 
have been executed. For example, if the market is $10.05 x $10.10, a 
limit order to buy at $10.02 would not be an executable NMLO unless the 
market moved to a price at which that limit order could be executed--
for example, $10.02 x $10.06. As is the case for orders submitted with 
stop prices, incorporation of the ``executable'' concept would have two 
effects. First, NMLOs would only be reported as part of a Rule 605 
report if they become executable during regular trading hours.\304\ 
Because there are substantial differences in the nature of the market 
between regular trading hours and after-hours, this would provide a 
basis for more comparable execution quality measures. Second, the point 
that a NMLO first becomes executable would be used as an input for 
several execution quality metrics: average time to execution 
statistics,\305\ average effective spread,\306\ average percentage 
effective and realized spread,\307\ and average effective over quoted 
spread.\308\ The Commission is proposing to use the time an order first 
becomes executable rather than the time of order receipt in order to 
measure execution quality from a point in time when a liquidity-
providing order is priced at or better than the quote. Including 
executable NMLOs within the scope of the Rule would help investors 
compare the performance of market centers and broker-dealers from a 
point in time when such orders could reasonably be expected to execute 
and provides a more informative measure of execution quality by 
controlling for market conditions.
---------------------------------------------------------------------------

    \303\ See proposed Rule 600(b)(42). See also supra note 240 and 
accompanying text (discussing the definition of ``executable'' as it 
relates to orders submitted with stop prices).
    \304\ See proposed Rule 600(b)(20) (defining ``categorized by 
order type'' to include a category for ``executable non-marketable 
limit orders'') (emphasis added).
    \305\ See infra section IV.B.3.
    \306\ See infra section IV.B.4.(b).
    \307\ See infra section IV.B.4.(c).
    \308\ See infra section IV.B.4.(d).
---------------------------------------------------------------------------

(b) Beyond-the-Midpoint Limit Orders
    Under current Rule 605, inside-the-quote limit orders are a 
separate order type category.\309\ Because they are not a marketable 
order type (i.e., they do not fully cross the spread),\310\ current 
Rule 605 does not require price improvement statistics to be calculated 
for inside-the-quote limit orders.\311\
---------------------------------------------------------------------------

    \309\ See 17 CFR 242.600(b)(14).
    \310\ Cf. id. (marketable limit orders separated from inside-
the-quote limit orders).
    \311\ Rule 605(a)(1)(i) specifies execution quality statistics 
to be provided for all order types, and Rule 605(a)(1)(ii) specifies 
execution quality statistics to be provided for marketable order 
types. See 17 CFR 242.605(a)(1)(i) and (ii). For a discussion of the 
changes that the Commission is proposing to make to the execution 
quality statistics to be provided for all order types and for 
marketable order types, see infra sections IV.B.4 and IV.B.5, 
respectively. The Commission is also proposing to require additional 
execution quality statistics to be provided for non-marketable order 
types. See infra section IV.B.6.
---------------------------------------------------------------------------

    Limit orders priced more aggressively than the midpoint may have 
different execution quality statistics than other types of NMLOs 
because market centers and broker-dealers may treat beyond-the-midpoint 
limit orders as marketable limit orders in certain circumstances and as 
NMLOs in others. An analysis of a sample of orders executed by the six 
most active wholesalers for the period of Q1 2022 \312\ shows that 
beyond-the-midpoint NMLOs executed by wholesalers tend to have much 
faster time-to-executions and higher fill rates than other types of 
inside-the-quote NMLOs, and are also somewhat more likely to be given 
price improvement, indicating wholesalers often treat limit orders 
priced more aggressively than the midpoint more like marketable limit 
orders and may offer price improvement to these orders.\313\
---------------------------------------------------------------------------

    \312\ See infra note 689 and accompanying text; Table 5.
    \313\ See infra section VII.C.2.(c)(3).
---------------------------------------------------------------------------

    The Commission is proposing to label those limit orders priced more 
aggressively than the midpoint as ``beyond-the-midpoint limit orders.'' 
Because beyond-the-midpoint limit orders are a type of NMLO and could 
therefore be covered orders even if received outside of regular trading 
hours

[[Page 3811]]

or during a time when the NBBO is not being disseminated, the 
Commission is proposing to define a beyond-the-midpoint limit order 
with respect to orders received both when an NBBO is being disseminated 
and when it is not. If the NBBO is being disseminated, ``beyond-the-
midpoint limit order'' would mean: (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.\314\ If the NBBO is not being disseminated, it would 
mean: (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.\315\
---------------------------------------------------------------------------

    \314\ See proposed Rule 600(b)(16). See also proposed Rule 
600(b)(20) (modifying the definition of ``categorization by order 
type'' to add beyond-the-midpoint limit orders to the list of order 
types).
    \315\ See proposed Rule 600(b)(16).
---------------------------------------------------------------------------

    In addition, the Commission proposes to require that the execution 
quality statistics for beyond-the-midpoint limit orders include the 
additional information required of both marketable \316\ and non-
marketable \317\ order types. If beyond-the-midpoint orders instead 
were treated solely as a non-marketable order type, similar to inside-
the-quote limit orders, then market centers and broker-dealers would 
not be required to provide the types of execution quality statistics 
specific to marketable orders for these orders. Because beyond-the-
midpoint limit orders may participate in the proposed qualified 
auctions \318\ or be treated as marketable orders in certain 
circumstances, it would be informative if reporting entities provided 
these types of statistics for these orders, especially given the 
increased likelihood that these types of orders may receive price 
improvement in certain circumstances.\319\ However, because beyond-the-
midpoint limit orders may execute more like inside-the-quote limit 
orders in other circumstances, the additional statistics required for 
the non-marketable order types would also be required to be reported 
for beyond-the-midpoint limit orders. This would facilitate comparisons 
of beyond-the-midpoint limit orders with other types of NMLOs. 
Therefore, the Commission proposes to add beyond-the-midpoint limit 
orders to both the list of marketable order categories and the list of 
non-marketable order categories for which those execution quality 
statistics are required, as provided in proposed Rules 605(a)(1)(ii) 
and 605(a)(1)(iii), respectively.
---------------------------------------------------------------------------

    \316\ See proposed Rule 605(a)(1)(ii) (specifying additional 
required information for market orders, marketable limit orders, 
marketable immediate-or-cancel orders, and beyond-the-midpoint limit 
orders).
    \317\ See proposed Rule 605(a)(1)(iii) (specifying additional 
required information for beyond-the-midpoint limit orders, 
executable non-marketable limit orders, and executable orders with 
stop prices).
    \318\ See supra section III.B.
    \319\ See infra note 689 and accompanying text; Table 5.
---------------------------------------------------------------------------

    Unlike market, marketable limit, and marketable IOC orders, beyond-
the-midpoint limit orders may be covered orders even if received 
outside of regular trading hours or when an NBBO is not being 
disseminated.\320\ However, because beyond-the-midpoint limit orders 
are priced more aggressively than the midpoint of the NBBO when 
received, they are by definition executable from the time of order 
receipt unless submitted prior to market open or during a trading halt. 
In that case, they would be executable at the time the NBBO is first 
disseminated after the time of order receipt during regular trading 
hours. Therefore, the Commission proposes to modify the time to order 
execution statistics to state, with respect to beyond-the-midpoint 
limit orders, these time-based statistics should be measured from the 
time such orders become executable to the time of order execution.\321\
---------------------------------------------------------------------------

    \320\ The time-based execution quality statistics that would be 
required for marketable order types other than beyond-the-midpoint 
limit orders would be measured from the time of order receipt to the 
time of order execution. See proposed Rule 605(a)(1)(ii)(C), (D), 
(E), (G), (H), (I), (L), (M), and (N).
    \321\ See proposed Rule 605(a)(1)(ii)(C), (D), (E), (G), (H), 
(I), (L), (M), and (N).
---------------------------------------------------------------------------

(c) Marketable IOCs
    Rule 605 reports group marketable IOCs together with other 
marketable orders.\322\ The Commission included IOC orders in the scope 
of the Rule, reasoning that IOC orders are functionally the same as 
orders that are submitted and cancelled almost immediately 
thereafter.\323\
---------------------------------------------------------------------------

    \322\ Rule 600(b)(14) defines ``categorized by order type'' and 
includes ``marketable limit orders'' within the listed categories of 
order types. See 17 CFR 242.600(b)(14).
    \323\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75421.
---------------------------------------------------------------------------

    The EMSAC, as well as commenters on the 2010 Equity Market 
Structure Concept Release and the 2018 Rule 606 Amendments, suggested 
separating IOCs within the categorization by order type.\324\ While the 
Commission continues to believe that information regarding IOCs is 
useful to measure execution quality, marketable IOCs may have a 
different submitter profile (typically, institutional investors) \325\ 
and different execution quality characteristics.\326\ Analysis of Tick 
Size Pilot data indicates that IOCs typically have much lower fill 
rates than other market and marketable limit orders (on average 3.22% 
as compared to 15.94%), particularly with respect to larger-sized 
orders and orders received by wholesalers.\327\ This data also shows 
that IOCs make up more than 90% of executed market and marketable share 
volume.\328\ As a result, including them with other market and 
marketable limit orders may be skewing fill rates downwards, especially 
for larger-sized orders and orders handled by wholesalers.
---------------------------------------------------------------------------

    \324\ See IHS Markit Letter at 11; EMSAC III at 2; FIF I at 2.
    \325\ Analysis of CAT data of retail orders received at broker-
dealers with 10,000 or more individual accounts during June 2021 
indicates that approximately only 0.02% of retail orders are 
submitted with an IOC instruction. See infra note 722 and 
accompanying text.
    \326\ In offering recommendations to modernize Rule 605, a 
commenter who supported separating IOC orders within Rule 605 
statistics stated that such orders have a different profile and can 
skew statistics. See FIF III at 5.
    \327\ See infra note 723 and accompanying text; Table 6. This 
analysis shows that wholesaler fill rates range between 60% to 90% 
for non-IOC orders, but are mostly below 30% for IOC orders, and 
even smaller with respect to larger order sizes. See id.
    \328\ See infra note 723 and accompanying text; Table 6.
---------------------------------------------------------------------------

    To address this issue, the Commission proposes to assign marketable 
IOCs to a separate order type category so that they no longer would be 
commingled with other order types. Specifically, the Commission 
proposes to add a category for ``marketable immediate-or-cancel 
orders'' and indicate that the category for ``marketable limit orders'' 
excludes IOC orders.\329\ Rule 605(a)(1)(i) and (ii) specify execution 
quality statistics required for enumerated categories of orders, 
including marketable limit orders. The Commission proposes to add 
marketable immediate-or-cancel orders to the enumerated order 
categories for those sets of execution quality statistics so that the 
Rule would continue to require the same information for marketable IOCs 
that is

[[Page 3812]]

required for other marketable order types.\330\
---------------------------------------------------------------------------

    \329\ See proposed Rule 600(b)(20).
    \330\ See proposed Rule 605(a)(i) and (ii). Additional 
information that is currently calculated for market and marketable 
limit orders (e.g., price improvement statistics) would continue to 
be calculated for marketable IOCs.
---------------------------------------------------------------------------

Request for Comments
    The Commission seeks comment on the proposed changes to the 
definition of ``categorized by order type.'' In particular, the 
Commission solicits comment on the following:
    24. Should the proposed concept of executability be required to be 
used as a benchmark for NMLO and stop order statistics? Why or why not? 
Is another benchmark more appropriate, and if so why? Please explain 
and provide data, if available.
    25. Should beyond-the-midpoint limit orders have different 
execution quality statistics than other types of NMLOs or marketable 
limit orders? Why or why not?
    26. Should marketable IOCs be required to be broken out into a 
separate order type category? Why or why not? Do commenters agree that 
marketable IOCs may have a different submitter profile and different 
execution quality characteristics than market orders and marketable 
limit orders? Please explain.
3. Timestamp Conventions
    Rule 605 reports are required to include information on the number 
of shares of covered orders executed within certain timeframes, 
measured by seconds after the time of order receipt.\331\ Rule 600 
definitions for ``time of order execution'' and ``time of order 
receipt'' require that time be measured ``to the second.'' \332\ 
Further, the smallest time-to-execution category in current Rule 605 
includes those covered orders executed from 0 to 9 seconds after the 
time of order receipt. The Commission proposes to update the timestamp 
conventions used for the time of order receipt \333\ and time of order 
execution \334\ definitions to require that such times be measured ``in 
increments of a millisecond or finer.'' The Commission also is 
proposing to specify that the average time-to-execution statistics 
currently required for marketable order types should be expressed in 
increments of a millisecond or finer.\335\ Similarly, the proposed 
definition of ``executable'' provides that the time an order becomes 
executable ``shall be measured in increments of a millisecond or 
finer.'' \336\ The equities markets now operate at much greater speeds 
than they did in 2000 when timestamps were adopted with second 
granularity. For example, an analysis of data from the SEC's MIDAS 
analytics tool shows that in Q1 2022 more than half (51.6%) of on-
exchange NMLOs executed in less than one second in large market cap 
stocks.\337\ Changes in technology have made more granular timestamp 
information more cost effective and practicable and timestamp 
information ``in increments of a millisecond or finer'' would result in 
more informative reports.
---------------------------------------------------------------------------

    \331\ See 17 CFR 242.605(a)(1)(i)(F)-(J).
    \332\ See 17 CFR 242.600(b)(91) and (92). The Commission is 
proposing to renumber the definitions of ``time of order execution'' 
and ``time of order receipt'' as proposed Rule 600(b)(108) and 
(109), respectively.
    \333\ See proposed Rule 600(b)(109).
    \334\ See proposed Rule 600(b)(108).
    \335\ For shares executed with price improvement, executed at 
the quote, or executed outside the quote, respectively, see proposed 
Rules 605(a)(1)(ii)(C), 605(a)(1)(ii)(G), and 605(a)(1)(ii)(L). 
Current Rule 605 does not specify a level of granularity for the 
existing time-to-execution statistics. However, the Plan requires 
these fields to be expressed in number of seconds and carried out to 
one decimal place. See Rule 605 NMS Plan section VI.a(21), (23), and 
(26).
    \336\ Proposed Rule 600(b)(42). As discussed above, the 
Commission is also proposing to expand the scope of Rule 605 
reporting to include certain NMLOs submitted outside of regular 
trading hours, specifically NMLOs that become executable during 
regular trading hours. See supra section IV.A.1.
    \337\ See dataset ``Conditional Cancel and Trade Distribution'' 
available at https://www.sec.gov/marketstructure/downloads.html. See 
also infra note 692 and accompanying text.
---------------------------------------------------------------------------

    Numerous commenters have raised concerns about the Rule's timestamp 
conventions, especially given the increases in the speed of the 
market.\338\ One commenter stated that current time bucketing is 
outdated and the Rule should provide average execution time for 
marketable orders, measured in milliseconds (or microseconds).\339\ 
Another commenter suggested that Rule 605 should be re-written to 
include statistics at a granular number of milliseconds from order 
receipt time to either fill or cancel time.\340\
---------------------------------------------------------------------------

    \338\ See, e.g., KOR Group I at 2, FIF I at 2.
    \339\ See FIF III, Appendix 1 at 4.
    \340\ See IHS Markit Letter at 26-27.
---------------------------------------------------------------------------

    The proposed amendments would not require the use of reporting 
increments finer than milliseconds for reports generated under Rule 
605. The CAT NMS Plan requires CAT reporters to report CAT data to the 
CAT in milliseconds and, to the extent a CAT reporter's order handling 
or execution systems utilize timestamps in increments finer than 
milliseconds, such CAT reporter is required to utilize such finer 
increments up to nanoseconds when reporting CAT data to the CAT.\341\ 
CAT requires the use of such finer increments, when available, to 
assist in the accurate sequencing of reportable events on an order-by-
order basis.\342\ In contrast, the order and execution quality 
statistics under Rule 605 utilizing timestamp information are reported 
in the aggregate. Timestamp information in millisecond increments would 
allow for meaningful points of comparison between market centers or 
broker-dealers for both aggregate data that utilizes timestamp 
information and time-to-execution statistics such as average time to 
execution. There would be limited additional utility in requiring Rule 
605 reporting using increments finer than a millisecond.
---------------------------------------------------------------------------

    \341\ See Securities and Exchange Commission File No. 4-698 
(National Market System Plan Governing the Consolidated Audit 
Trail), section 6.8(b). See also Securities Exchange Act Release No. 
79318 (Nov. 15, 2016), 81 FR 84696 (Nov. 23, 2016).
    \342\ See 17 CFR 242.613(d)(3) (requiring the use of timestamp 
increments finer than the minimum so that all reportable events 
``can be accurately sequenced'').
---------------------------------------------------------------------------

    In conjunction with the proposed requirement to use the more 
granular timestamps, the Commission is proposing to eliminate the 
current time-to-execution buckets.\343\ Average time to execution is 
already required to be reported for market orders and marketable limit 
orders,\344\ and generally provides a more informative metric for those 
order types than the existing time-to-execution buckets given the speed 
with which those order types typically execute. The vast majority of 
market orders and marketable limit orders that execute are executed in 
less than a second,\345\ an increment that results in almost all market 
and marketable limit orders being contained in the smallest of the 
existing time-to-execution buckets.\346\ As a result, the existing 
time-to-execution buckets do not generally provide meaningful time-to-
execution differentiation for market orders and marketable limit 
orders. The existing time-to-execution buckets only generally provide 
meaningful information for non-marketable order

[[Page 3813]]

types. The Commission believes that requiring average time to execution 
for all order types, in addition to statistics that would provide 
information about the distribution of execution times within each order 
type, would provide more meaningful information because these 
statistics could be used to compare the average time to execution for a 
particular order type, while still providing information about the 
extent to which outlier values do or do not skew the average.
---------------------------------------------------------------------------

    \343\ See 17 CFR 242.605(a)(1)(i)(F) through (J) (detailing 
time-to-execution buckets of 0 to 9 seconds, 10 to 29 seconds, 30 to 
59 seconds, 60 to 299 seconds and 5 to 30 minutes after the time of 
order receipt).
    \344\ See 17 CFR 242.605(a)(1)(ii)(D), (F), and (I), requiring 
share-weighted average period from the time of order receipt to the 
time of order execution for shares executed with price improvement, 
at the quote, and outside the quote, respectively.
    \345\ Analysis of Tick Size Pilot data shows more than 95% of 
market and marketable limit orders that executed did so within 1 
second. See analysis in infra Figure 12. See also infra section 
VII.E.3.(b)(1) (analyzing execution speeds of market and marketable 
limit orders, along with the three categories of NMLOs currently 
required in Rule 605 (inside-the-quote, at-the-quote, and near-the-
quote)).
    \346\ See 17 CFR 242.605(a)(1)(i)(F) (requiring the reporting of 
the cumulative number of shares of covered orders executed from 0 to 
9 seconds after the time of order receipt).
---------------------------------------------------------------------------

    Although average time to execution is currently required for 
marketable order types,\347\ the Commission believes it would be both 
feasible and useful to measure average time to execution for non-
marketable order types from the point in time they become executable. 
As stated above, this would provide a control for prevailing market 
conditions and benchmark orders from a point when such orders could 
reasonably be expected to execute. Therefore, the proposal would 
require the share-weighted average time to execution for non-marketable 
order types, calculated from the time such orders become 
executable.\348\
---------------------------------------------------------------------------

    \347\ See 17 CFR 242.605(a)(1)(ii)(D), (G), and (H) for shares 
executed with price improvement, executed at the quote, or executed 
outside the quote, respectively.
    \348\ See proposed Rule 605(a)(1)(iii)(C), (D), and (E).
---------------------------------------------------------------------------

    Because orders may execute near-instantaneously or over a number of 
minutes, average time to execution within a category could be skewed by 
outlier values. Given this, information about the distribution of 
execution speeds in addition to the average would still be useful. 
However, the existing time-to-execution buckets are of limited utility, 
especially for the fastest executions, given that the smallest time-to-
execution bucket encompasses all orders executed between zero and nine 
seconds. Although finer increments could be added below one second, it 
would still be important to retain information for those orders that 
take longer to execute. Rather than adding additional buckets to 
provide this distribution information, the Commission proposes 
requiring both share-weighted median and 99th percentile time-to-
execution statistics in order to provide additional descriptive 
statistical information for executions of all covered order types.\349\ 
These two measurements would provide additional information to allow 
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 time to execution within a particular category 
is affected by outlier values.
---------------------------------------------------------------------------

    \349\ See proposed Rule 605(a)(1)(ii)(D), (E), (H), (I), (M), 
and (N), and proposed Rule 605(a)(1)(iii)(D) and (E), requiring 
share-weighted median and share-weighted 99th percentile time to 
execution information. These measures would represent the time at or 
below which 50 percent of executions occur, weighted by number of 
shares (in the case of the share-weighted median) and the time at or 
below which 99 percent of executions occur, weighted by number of 
shares (in the case of the share-weighted 99th percentile).
---------------------------------------------------------------------------

    For these reasons, the Commission proposes to require share-
weighted median and 99th percentile time to execution for all order 
types. Average time to execution statistics for marketable order types 
(market orders, marketable limit orders, marketable IOCs, and beyond-
the-midpoint limit orders) would be required for each of: shares 
executed with price improvement,\350\ at the quote,\351\ and outside 
the quote.\352\ For the marketable order types, the Commission is 
similarly proposing to require: (i) the share-weighted median period 
from the time or order receipt to the time of order execution; \353\ 
and (ii) the share-weighted 99th percentile period from the time of 
order receipt to order execution.\354\ For non-marketable order types 
(beyond-the-midpoint limit orders, executable NMLOs, and executable 
orders with stop prices NMLOs), the Commission proposes to require, for 
executed orders: (i) the share-weighted average period from the time 
the order becomes executable to the time of order execution; \355\ (ii) 
the share-weighted median period from the time the order becomes 
executable to the time of order execution; \356\ and (iii) the share-
weighted 99th percentile period from the time the order becomes 
executable to the time of order execution.\357\
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    \350\ See 17 CFR 242.605(a)(1)(ii)(C).
    \351\ See 17 CFR 242.605(a)(1)(ii)(G).
    \352\ See 17 CFR 242.605(a)(1)(ii)(L).
    \353\ For shares executed with price improvement, executed at 
the quote, or executed outside the quote, respectively, see proposed 
Rules 605(a)(1)(ii)(D), 605(a)(1)(ii)(H), and 605(a)(1)(ii)(M).
    \354\ For shares executed with price improvement, executed at 
the quote, or executed outside the quote, respectively, see proposed 
Rules 605(a)(1)(ii)(E), 605(a)(1)(ii)(I), and 605(a)(1)(ii)(N).
    \355\ See proposed Rule 605(a)(1)(iii)(C).
    \356\ See proposed Rule 605(a)(1)(iii)(D).
    \357\ See proposed Rule 605(a)(1)(iii)(E). As a result, the use 
of time-to-execution buckets would no longer be necessary. Rule 
605(a)(1)(i)(F) through (J) requires statistics for the cumulative 
number of shares of covered orders executed in separate time-to-
execution buckets. Those requirements would be eliminated.
---------------------------------------------------------------------------

    The Commission considered compressing the current time-to-execution 
buckets to a sub-second level (i.e., less than 50 milliseconds, 50-500 
milliseconds, 500 milliseconds to 1 second, and greater than 1 second). 
One commenter suggested that even more granular timestamps be 
used.\358\ The proposed rule would not require the use of microsecond 
timestamps, for the reasons discussed above. The Commission solicits 
comment below on whether requiring the use of timestamps more granular 
than a millisecond would be appropriate.
---------------------------------------------------------------------------

    \358\ See Healthy Markets II at 3 (suggesting use of the 
following execution time categories: less than 500 microseconds; 500 
microseconds-1 millisecond; 1-10 milliseconds; 10-100 milliseconds; 
100 milliseconds-1 second; and current categories).
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment generally on the changes to the 
timestamp conventions within Rule 605. In particular, the Commission 
solicits comment on the following:
    27. Should Rule 605 require timestamps to be recorded at 
millisecond level granularity? Why or why not? Would it be preferable 
in Rule 605 for timestamps to be recorded at microsecond granularity 
(as suggested by one commenter) or nanosecond granularity? Please 
explain and provide data, if available. Should Rule 605 require market 
centers and larger broker-dealers to utilize timestamps in increments 
finer than milliseconds to the extent such entities' order handling or 
execution systems utilize finer increments? Why or why not? Would 
allowing some market centers and broker-dealers to utilize timestamps 
in increments finer than milliseconds affect the comparability of their 
execution quality statistics?
    28. Do commenters believe the proposed level of timestamp 
granularity would enhance the usefulness of execution quality 
statistics? Why or why not?
    29. Do commenters believe that the proposed statistical measures 
that would be required for time to execution (i.e., average, median, 
and 99th percentile) are appropriate? If not, what statistics should be 
used?
    30. Should the Commission require share-weighted average time to 
execution for non-marketable order types, measured from the time the 
order becomes executable? Should the Commission require share-weighted 
median and 99th percentile time-to-execution statistics, measured from 
the time an order becomes executable?
    31. Should the Commission retain the required time-to-execution 
buckets for all order types, with revisions to the time intervals used? 
If so, should the Commission use the time buckets proposed by a 
commenter (i.e., less than

[[Page 3814]]

500 microseconds; 500 microseconds-1 millisecond; 1-10 milliseconds; 
10-100 milliseconds; 100 milliseconds-1 second; in addition to the 
current categories)?
4. Changes to Information Required for All Types of Orders
(a) Realized Spread
    Rule 605 requires calculation of average realized spread for 
executions of all covered orders and is calculated by comparing the 
execution price of an order and the midpoint of the NBBO as it stands 
five minutes after the time of order execution.\359\ The smaller the 
average realized spread, the more prices have moved adversely to 
liquidity providers after the order was executed, which shrinks the 
spread ``realized'' by the liquidity providers.\360\ A low average 
spread indicates that a liquidity provider was providing liquidity even 
though prices were moving against it.\361\ In the Adopting Release, the 
Commission also stated that the realized spread statistic ``can 
highlight the extent to which market centers receive uninformed orders 
(as indicated by higher realized spreads than other market centers), 
thereby potentially helping to spur more vigorous competition to 
provide the best prices to these orders to the benefit of many retail 
investors.'' \362\ 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.\363\
---------------------------------------------------------------------------

    \359\ See 17 CFR 242.600(b)(9). For buy orders, realized spread 
is double the amount of difference between the execution price and 
the midpoint of the NBBO five minutes after the time of order 
execution. For sell orders, realized spread is double the amount of 
difference between the midpoint of the NBBO five minutes after the 
time of order execution and the execution price. See id. The 
Commission is proposing to renumber the definition of ``average 
realized spread'' as proposed Rule 600(b)(13).
    \360\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75424.
    \361\ See id.
    \362\ Id. See also Securities Exchange Act Release No. 84875 
(Dec. 19, 2018), 84 FR 5202, n.587 (Feb. 20, 2019) (``The realized 
spread is the portion of the spread that market makers `realize' 
after adverse selection costs are taken into account.'').
    \363\ See, e.g., Larry Harris, Trading and Exchanges: Market 
Microstructure for Practitioners (Oxford University Press 2003) at 
286 (``Informed traders buy when they think that prices will rise 
and sell otherwise. If they are correct, they profit, and whoever is 
on the other side of their trade loses. When dealers trade with 
informed traders, prices tend to fall after the dealer buys and rise 
after the dealers sell. These price changes make it difficult for 
dealers to complete profitable round-trip trades. When dealers trade 
with informed traders, their realized spreads are often small or 
negative. Dealers therefore must be very careful when trading with 
traders they suspect are well informed.'')
---------------------------------------------------------------------------

    In order to proxy for this, realized spread measures the difference 
between the execution price and a future price. An ideal measurement 
horizon would be one that aligns with the amount of time an average 
liquidity provider holds onto its inventory positions and must be 
sufficiently long so that it captures a price reversal rather than a 
series of trades representing the same demand as the initial trade but 
not so long as to introduce unnecessary noise.\364\
---------------------------------------------------------------------------

    \364\ See, e.g., Roger Huang & Hans Stoll, Dealer Versus Auction 
Markets: A Paired Comparison of Execution Costs on NASDAQ and the 
NYSE, 41 J. Fin. Econ. 313-357 (1996).
---------------------------------------------------------------------------

    The equities market moves much faster than it did in 2000,\365\ and 
correspondingly any changes in market maker or liquidity provider 
positions and inventory occur much more quickly in the contemporary 
market environment. There is academic literature that argues that the 
current five-minute horizon has become inappropriate for a high-
frequency environment.\366\ One study posits that the five-minute time 
horizon should be replaced with a horizon of no more than 15 seconds 
for large cap stocks and 60 seconds for small cap stocks.\367\
---------------------------------------------------------------------------

    \365\ See supra note 98.
    \366\ See, e.g., Maureen O'Hara, High Frequency Market 
Microstructure, 116(2) J. Fin. Econ. 257-270 (2015) (``O'Hara 
2015''); Maureen O'Hara, Gideon Saar, & Zhuo Zhong, Relative Tick 
Size and the Trading Environment, 9(1) Rev. of Asset Pricing Stud. 
47-90 (2019) (``O'Hara et al.''); Jennifer S. Conrad & Sunil Wahal, 
The Term Structure of Liquidity Provision, 136(1) J. Fin. Econ. 239-
259 (2020) (``Conrad and Wahal'').
    \367\ See Conrad and Wahal.
---------------------------------------------------------------------------

    Selecting an appropriate time horizon to calculate the realized 
spread is important, as realized spreads vary significantly as the time 
horizon is changed.\368\ In order to examine this issue, the Commission 
analyzed how realized spreads vary when calculated over time horizons 
ranging from one second to five minutes, as well as how they differ 
based on market capitalization size, using TAQ data from February 2021 
for a sample of 400 stocks from four different market capitalization 
groups (less than $100 million, $100 million to $1 billion, $1 billion 
to $10 billion, and over $10 billion).\369\
---------------------------------------------------------------------------

    \368\ See infra Figure 13.
    \369\ See infra note 706 for dataset description. This analysis 
uses data from prior to the implementation of the MDI Rules and the 
specific numbers may be different following the implementation of 
the MDI Rules. In particular, for certain stocks, the NBBO midpoint 
may change, though the Commission is uncertain of the direction of 
this effect. This may impact statistics that are based on these 
values, including realized spreads. See infra section VII.C.1.(d). 
While specific numbers might change, the Commission does not expect 
the relative variation in realized spreads across different time 
horizons to change as a result of the implementation of the MDI 
Rules.
---------------------------------------------------------------------------

    The results are presented in Figure 1, and show that realized 
spreads tend to decrease as the time horizon increases, and 
additionally show that they tend to decline as market capitalization 
size increases. Echoing results from the academic literature, the 
persistence of these systematic differences in realized spreads across 
market capitalization sizes implies that a time horizon that may be 
ideal for large cap stocks may be too short for small cap stocks.\370\ 
As a result, the Commission believes that including multiple different 
time horizons for realized spreads would make this measure more 
relevant across a wider range of stocks.
---------------------------------------------------------------------------

    \370\ See Conrad and Wahal.
---------------------------------------------------------------------------

Figure 1: Average Realized Spreads by Market Capitalization, February 
2021

[[Page 3815]]

[GRAPHIC] [TIFF OMITTED] TP20JA23.000

    Further, the analysis of different time horizons and market 
capitalization shows that most of the difference in realized spread 
\371\ is captured for the largest stocks at 15 seconds, but less than a 
third is captured for smaller cap stocks, as shown in Table 1 
below.\372\ However, at least half of the difference is captured for 
smaller cap stocks at one minute.\373\ Therefore, the proposed time 
horizons of 15 seconds and one minute would capture most of the 
realized spread information, in particular for the largest stocks.\374\
---------------------------------------------------------------------------

    \371\ Generally, if most of the difference between realized 
spreads is captured at a particular time horizon, then this implies 
that most of the relevant information has been incorporated into the 
realized spreads.
    \372\ Specifically, analysis shows the 15-second horizon 
captures over 66.2% of the overall decline in realized spreads for 
the group corresponding to the largest stocks, but captures less 
than a third of this decline in the two groups corresponding to 
smaller stocks. Analysis also shows that the 15-second horizon 
captures almost 50% of the overall decline in realized spreads for 
those stocks with a market capitalization of between $1 billion and 
$10 billion.
    \373\ By the one-minute horizon, realized spreads have captured 
more than 50% of the overall decline in realized spreads for all 
stocks, and a substantial majority for the two groups of larger 
stocks (79% and 94.9%).
    \374\ For the two smaller-stock groups, a sizeable proportion of 
the overall decline (37%) does not occur until the five-minute 
horizon. See infra section VII.E.3.(c)(1) for a discussion of 
including additional time horizons, including the five-minute 
horizon, for calculating realized spreads.

                         Table 1--Variation in Average Realized Spread, by Time Horizon
----------------------------------------------------------------------------------------------------------------
                                                                                      Horizon
                Market cap group                    1 sec-5 min  -----------------------------------------------
                                                        ($)         15 sec (%)       1 min (%)       5 min (%)
----------------------------------------------------------------------------------------------------------------
<$100 million...................................           0.021            22.5            40.2            37.3
$100 million-$1 billion.........................           0.019            33.2            29.7            37.1
$1 billion-$10 billion..........................           0.017            48.5            30.5            21.0
>$10 billion....................................           0.013            66.2            28.7             5.1
----------------------------------------------------------------------------------------------------------------
Table 1: Variation in Average Realized Spread, by Time Horizon. This table presents the difference between
  dollar realized spreads calculated using a 1-second time horizon and realized spreads calculated using a 5-
  minute time horizon, along with the percentage of variation in this difference that is captured at various
  time horizons (15 seconds, 1 minute, and 5 minutes), using data from TAQ. See infra note 722 for dataset
  description. This analysis uses data from prior to the implementation of the MDI Rules and numbers may be
  different following the implementation of the MDI Rules. See supra note 369 and infra section VII.C.1.(d).

    Based on this analysis, for executions of covered orders, the 
Commission proposes that the average realized spread be calculated at 
specified intervals of 15 seconds and one minute after the time of 
execution.\375\ The Commission believes that these timeframes are 
appropriate for liquid stocks and for thinly traded stocks because, as 
suggested by available academic literature and supported by the 
analysis in this release, realized spreads are likely to be most 
impacted during the first 15 seconds, for large stocks, and one minute, 
for small stocks, following a trade.\376\ The Commission is proposing 
to require realized spreads to be calculated at both intervals in order

[[Page 3816]]

to provide relevant information for symbols with different liquidity 
characteristics. While commenters supported moving away from the 
current five-minute calculation, they suggested different time 
horizons.\377\ Although both shorter (50ms, 100ms) and longer (three 
minute, five minute) \378\ time horizons would provide useful 
information for certain groups of stocks, each additional time horizon 
adds to the computational burden of preparing the reports and increases 
the size and complexity of the reports, adding to the costs that market 
participants face when collecting, interpreting, and evaluating Rule 
605 reports. Additional time horizons would likely only provide 
additional benefits for smaller subsets of stocks, while the 15-second 
and one minute time horizons would generally provide informative 
average realized spread metrics across the universe of stocks with 
different market capitalization and different liquidity 
characteristics.
---------------------------------------------------------------------------

    \375\ See proposed Rule 605(a)(1)(i)(G) and(I). In order to 
accommodate calculation of ``average realized spread'' at two 
different time intervals, the Commission proposes to modify the 
existing definition of ``average realized spread'' to replace the 
reference to five minutes with a ``specified interval.'' See 
proposed Rule 600(b)(13).
    \376\ See Conrad and Wahal.
    \377\ Two commenters suggested expanding realized spread into 
50ms, 100ms, and three minute buckets to better identify adverse 
selection. See KOR Group I at 4; Healthy Markets II at 3. One 
commenter suggested that if the realized spread statistic is to 
remain, the Commission should either determine an appropriate time-
scale for the measurement or re-affirm the current five minutes 
duration. See FIF III at 10.
    \378\ Analysis shows that retaining a five-minute horizon, in 
addition to the proposed one-minute and 15-second horizon, would 
capture additional information about realized spreads, particular 
for the smallest stocks. See infra section VII.D.1.(b)(1)(c)(ii). 
However, as stated above, the one-minute time horizon would still 
capture more than 50% of the variation in realized spreads for the 
smallest cap stocks. See supra note 373.
---------------------------------------------------------------------------

    Finally, in connection with both the average realized spread and 
average effective spread \379\ statistics, the Commission has also 
considered, but is not including in the proposed rule text, an updated 
method by which the spread is calculated by incorporating a weighted 
midpoint.\380\ However, as is discussed in section VII.E.3.(c)(3) 
below, the midpoint requires data only on the best available bid and 
ask price.\381\ In contrast, calculating the weighted midpoint would 
require that reporting entities additionally collect data on the depth 
available at the NBBO.\382\ Furthermore, the midpoint may be easier to 
compute and interpret, as it is more familiar to market participants 
than the weighted midpoint.
---------------------------------------------------------------------------

    \379\ See infra section IV.B.4.b).
    \380\ The weighted midpoint is calculated using the following 
formula: weighted midpoint = ((bid price x quantity at the ask 
price) + (ask price x quantity at the bid price))/(quantity at the 
ask price + quantity at the bid price). See, e.g., Bj[ouml]rn 
Hagstr[ouml]mer, Bias in the Effective Bid-Ask Spread, 142(1) J. 
Fin. Econ. 314-337 (2021).
    \381\ See infra section VII.E.3.(c)(3).
    \382\ This might not be a significant additional cost, as 
reporting entities would be required to collect information on NBBO 
depth for computing the size improvement benchmark measure under the 
proposed amendments. See infra section IV.B.4.(e).
---------------------------------------------------------------------------

(b) Average Effective Spread
    Rule 600(b)(8) defines ``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.\383\ Currently, average effective spread is required to be 
calculated only for market and marketable limit order types and doing 
so requires the comparison of the execution price of an order with the 
midpoint of the NBBO at the time of order receipt. The Commission 
proposes to expand effective spread reporting requirements to include 
all covered orders, and to modify the methodology for calculating this 
metric for executable NMLOs, beyond-the-midpoint limit orders, and 
executable stop orders.
---------------------------------------------------------------------------

    \383\ See 17 CFR 242.600(b)(8). All orders that require 
reference to a consolidated BBO that has been crossed for 30 seconds 
or more are exempt. See Letter from Annette L. Nazareth, Director, 
Division, Commission, to Stuart J. Kaswell, Senior Vice President 
and General Counsel, Securities Industry Association (Mar. 12, 2001) 
(``SIA Exemption Letter'').
---------------------------------------------------------------------------

    Average effective spread provides a measure of spread actually paid 
by investors at a particular market center.\384\ Generally, for 
marketable order types, average effective spread provides a measure of 
the price paid for the immediacy of execution. However, because they 
are less aggressively priced, NMLOs are not typically submitted with 
the expectation that they will be executed immediately. Instead, they 
are submitted with the expectation that they rest and provide liquidity 
(if executed). Therefore, average effective spread for NMLOs and orders 
submitted with stop prices provides a measure of the amount a liquidity 
provider could expect to earn for providing liquidity. The Commission 
proposes to revise the definition of ``average effective spread'' to 
specify that, for order executions of NMLOs \385\ and orders submitted 
with stop prices, average effective spread be calculated from the time 
the order becomes executable.\386\ Because the concept of 
``executable'' controls for prevailing market conditions, benchmarking 
average effective spread statistics for these non-marketable order 
types from the time such orders become executable would permit average 
effective spread statistics for these order types to be more 
informative of execution quality received.
---------------------------------------------------------------------------

    \384\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75415.
    \385\ As noted above, beyond-the-midpoint limit orders are a 
type of NMLO.
    \386\ See proposed Rule 600(b)(10).
---------------------------------------------------------------------------

    The Commission proposes to prescribe the collection of this data 
point for executable NMLOs, beyond-the-midpoint limit orders, and 
executable stop orders by adding proposed Rule 605(a)(1)(i)(K) to 
require the calculation of average effective spread for executions of 
covered orders, which includes executable NMLOs and executable stop 
orders.\387\
---------------------------------------------------------------------------

    \387\ See proposed Rule 605(a)(1)(i). The Commission also 
proposes to delete the current average effective spread calculation 
requirement in Rule 605(a)(1)(ii)(A), which previously applied only 
to market and marketable limit orders, because this measurement, 
with the inclusion of marketable IOCs, beyond-the-midpoint limit 
orders, executable NMLOs, and executable orders with stop prices, 
would be included in proposed Rule 605(a)(1)(i)(K).
---------------------------------------------------------------------------

(c) Percentage Spreads (Effective and Realized)
    Currently, Rule 605 statistics include the average realized spread 
and average effective spread for executions of covered orders. To 
compare these dollar-based statistics across the data population while 
taking into account the wide range of stock prices, dollar-based 
statistics need to be converted into percentages. While obtaining 
historical price information for individual securities is possible, in 
the Commission's experience since the implementation of Rule 605, such 
calculations are time- and resource-intensive, especially across 
multiple time periods and securities. Furthermore, the Commission 
believes that using percentage-based spread measures could provide 
additional information at the individual stock level if a stock's price 
changes significantly during a month.
    Therefore, the Commission proposes requiring dollar-based spread 
statistics (i.e., effective spread and realized spread) to also be 
reported as percentages because a percentage measure would account for 
differing underlying stock prices and better facilitate comparisons of 
spread statistics across different time periods and securities.\388\ 
The proposed definitions for ``average percentage effective spread'' 
and ``average percentage realized spread'' would provide the same 
calculation as the dollar-based effective and realized spread 
statistics for the numerator.\389\

[[Page 3817]]

The denominator for dollar-based spread percentages would be 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) in order to provide a consistent 
measure of the prevailing stock price from the point when an order 
could reasonably be expected to execute. This would then be averaged on 
a share-weighted basis for the month.
---------------------------------------------------------------------------

    \388\ See proposed Rule 605(a)(1)(i)(H), (J), and (L).
    \389\ See proposed Rule 600(b)(11) and (12).
---------------------------------------------------------------------------

    Specifically, average percentage effective spread would be 
calculated for each transaction as double the amount of the difference 
between the execution price and the midpoint divided by the midpoint. 
The midpoint used would be at either the time of order receipt \390\ or 
the time of executability.\391\ Then the percentage would be averaged 
on a share-weighted basis.\392\
---------------------------------------------------------------------------

    \390\ The time of order receipt would be used for market orders, 
marketable limit orders, and marketable IOCs. See proposed Rule 
600(b)(11).
    \391\ The time an order becomes executable would be used for 
NMLOs, beyond-the-midpoint limit orders, and orders submitted with 
stop prices. See proposed Rule 600(b)(11).
    \392\ See proposed Rule 600(b)(11).
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    Similarly, average percentage realized spread would be calculated 
as the realized spread for an order, divided by the midpoint of the 
NBBO at the time of order receipt (for marketable order types) or 
executability (for non-marketable order types).\393\ For each buy 
transaction, realized spread would be double the amount of difference 
between the execution price and the midpoint of the NBBO at both 15 
seconds and one minute after the time of order execution.\394\ For each 
sell transaction, realized spread would be double the amount of 
difference between the midpoint of the NBBO at both 15 seconds and one 
minute after the time of order execution and the execution price.\395\ 
Then the percentage would be averaged on a share-weighted basis for the 
month to calculate that month's average 15-second and one-minute 
realized spread percentage for each category.
---------------------------------------------------------------------------

    \393\ See proposed Rule 600(b)(12).
    \394\ Proposed Rule 600(b)(12) provides that the midpoint would 
be calculated at a ``specified interval'' after the time of order 
execution. Proposed Rule 605(a)(1)(i)(H) and (J) would require 
average percentage realized spread to be calculated at 15 seconds 
and one minute, respectively, after the time of execution. The 
Commission is proposing the use of the 15 second and one minute time 
period for the reasons discussed in supra section IV.B.4.(a).
    \395\ See proposed Rule 600(b)(12) and proposed Rule 
605(a)(1)(i)(G) and (I).
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(d) Effective Over Quoted Spread (E/Q)
    The Commission understands that market participants often use 
effective over quoted spread (``E/Q'') \396\ as a measure of execution 
quality.\397\ E/Q is generally expressed as a percentage that 
represents how much price improvement an order received.\398\ An E/Q of 
100% means a buy order was executed at the national best offer or a 
sell order was executed at the national best bid. An E/Q of 0% means an 
order was executed at the midpoint of the NBBO.
---------------------------------------------------------------------------

    \396\ Quoted spread is the difference between the national best 
bid and the national best offer at the time an order is received.
    \397\ See, e.g., Bill Alpert ``Who Makes Money on Your Stock 
Trades,'' Barron's, Feb. 28, 2015 (retrieved from Factiva database) 
(stating ``the industry's acid-test [execution] quality measure is 
the ratio of effective spread over the quoted spread, or E/Q''); 
https://investor.vanguard.com/about-us/brokerage-order-execution-
quality#:~:text=Effective%20over%20quoted%20spread*,in%20our%20low%20
E%2F. A commenter stated that E/Q is a commonly used metric of 
execution quality that measures how effectively a market maker 
prices a customer's order relative to the prevailing NBBO. See Citi 
Letter at 3.
    \398\ See, e.g., https://us.etrade.com/trade/execution-
quality#:~:text=Effective%20spread%20over%20quoted%20spread,between%2
0the%20bid%20and%20offer.
---------------------------------------------------------------------------

    Rule 605 does not require quoted spreads to be reported, although 
average quoted spread can be derived from existing Rule 605 
statistics.\399\ However, along with the proposed requirement to 
include percentage-based realized and effective spread statistics, it 
would improve the comparability of price improvement statistics across 
symbols to include share-weighted average E/Q. Further, the Commission 
understands E/Q is already often-used and well-understood by industry 
participants. Currently, although average E/Q can be derived under Rule 
605, E/Q is a relatively simple metric to capture contemporaneously 
with an execution. Given the common usage of the metric, requiring a 
separate field for E/Q would 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.
---------------------------------------------------------------------------

    \399\ Average quoted spread can be derived on a per symbol basis 
by adding average effective spread and double the amount of total 
average per share price improvement or dis-improvement (i.e., amount 
of price improvement times price improved share count, less amount 
of price dis-improvement times price dis-improved share count, 
divided by total number of executed shares).
---------------------------------------------------------------------------

    Deriving average quoted spread from the existing reports involves 
additional computational burdens. Further, there are likely to be 
differences in E/Q on a per transaction basis that may yield a 
different average E/Q than extrapolating an average quoted spread for 
the month and using that to calculate an average monthly E/Q, which is 
a noisier measure of E/Q.\400\ Therefore, the Commission proposes to 
require, for executions of all covered orders, a statistic for the 
average effective over quoted spread, expressed as a percentage.\401\ 
Share-weighted average E/Q would be calculated by dividing effective 
spread by quoted spread \402\ for each transaction and then averaging 
that over the month (weighted by number of shares). The quoted spread 
would be 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).\403\ This would provide a consistent measure 
of the prevailing quoted spread at the point when an order could 
reasonably be expected to execute. Expressing share-weighted average E/
Q as a percentage would provide an additional data point that could be 
used to evaluate price improvement across symbols or the entire data 
population.
---------------------------------------------------------------------------

    \400\ See infra note 878 and accompanying text.
    \401\ See proposed Rule 605(a)(1)(i)(M).
    \402\ See proposed Rule 600(b)(9) (defining ``average effective 
over quoted spread'').
    \403\ See id.
---------------------------------------------------------------------------

(e) Size Improvement
    Rule 605 reports are required to include price improvement metrics 
but do not indicate whether orders received an execution of more than 
the displayed size at the quote. The Commission considered whether to 
add a measure of ``size improvement'' or ``liquidity enhancement'' when 
adopting Rule 605, but did not add this type of measure in part to 
minimize the complexity and quantity of statistics, and in part because 
certain measures, such as effective spread, already reflected a market 
center's ability to execute above the displayed size.\404\ Share-
weighted effective spread metrics may provide information about size 
improvement, since effective spread will be larger for orders that have 
to ``walk the book'' (i.e., consume available depth beyond the best 
quotes). However, effective spread combines both price and size 
information; therefore, it is difficult to distinguish whether, for 
example, a low effective spread arises because the market center 
consistently offered better prices to small orders, or was able to 
offer better prices to several very large orders. Market participants 
have expressed support for a size improvement measure,\405\ and orders 
are

[[Page 3818]]

often larger than the displayed size at the NBBO.\406\ The Commission 
also stated in the MDI Adopting Release that the decimalization of 
securities pricing in 2001, and the resulting shift away from the 
larger fractional quoting and trading increments, had significant 
implications for the amount of liquidity available at the top of 
book.\407\ Market participants have raised concerns about reduced price 
transparency and difficulty executing large transactions at the best 
prices due to lower concentrations of trading interest at the top of 
book.\408\ The Commission believes that the use of size improvement 
statistics could help address these concerns by providing users of the 
statistics with information relating to which market centers and 
broker-dealers are more likely to be able to fill larger-sized orders 
at or better than the NBBO.
---------------------------------------------------------------------------

    \404\ See Adopting Release, 65 FR at 75425.
    \405\ See, e.g., FIF III, at 2; Virtu Petition at 3-4. The 
petitioner states that the ``single biggest shortcoming'' of Rule 
605 is that it does not reflect any benefits received by retail 
investors on orders that outsize the NBBO, including size 
improvement. See Virtu Petition at 3. The petitioner states that 
retail investors deserve more complete execution quality reports 
that provides transparency about the amount of size improvement that 
their orders are receiving. See id. at 4. The petitioner 
specifically states that Rule 605 reporting would be more complete 
if market participants could assess execution quality by comparing 
the fill prices on their orders to a reference benchmark that 
includes all displayed liquidity on exchanges, including resting 
odd-lots that are visible in market data feeds. See id.
    \406\ For example, the petitioner stated that ``approximately 
45% of shares (and 54% of the value traded) filled by [the 
petitioner] in 2020 were from orders that outsized the NBBO.'' Virtu 
Petition at 3.
    \407\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at 
18606.
    \408\ See id. at 16751 n.278 and accompanying text (citing the 
Investment Company Institute letter describing the difficulty of 
institutional investors' ability to execute large orders). Shortly 
after decimalization became a reality, the GAO noted that the 
average executed trades size declined by 67% on NYSE and 41% on 
NASDAQ. See GAO Report, ``Decimal Pricing Has Contributed to Lower 
Trading Cost and a More Challenging Trading Environment,'' May 2005, 
at 37.
---------------------------------------------------------------------------

    The Commission proposes adding a benchmark metric that would, in 
combination with information about execution sizes, indicate the level 
of size improvement, i.e., whether orders received an execution greater 
than the displayed size at the quote. Analysis of a sample of 100 
symbols during March of 2019 indicates only a moderate level of 
correlation between standard price improvement metrics and a measure of 
size improvement, indicating that these measures may contain different 
information about execution quality.\409\ Given that existing execution 
quality metrics do not include metrics for size improvement, nor any 
metrics that serve as an adequate proxy for a size improvement 
statistic, the Commission proposes to include a benchmark metric for 
all executions of covered orders. Specifically, proposed Rule 
605(a)(1)(i)(F) requires, for executions of all covered orders, 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 for the full displayed size of the 
protected offer at the time of execution, in the case of a market or 
limit order to buy. This would capture the full displayed size at the 
quote on the side of the NBBO against which a buy or sell order would 
be expected to execute. Pursuant to the proposed rule, for each order, 
the share count shall be capped at the order size if the full displayed 
size of the national best bid or national best offer is larger than the 
order. This would prevent skewing of the size improvement benchmark if 
the national best bid or national best offer outsized any particular 
order. By limiting this measure to only the full displayed size of the 
protected bid or offer that would have been available to a particular 
order, the benchmark would represent what could be have been executed 
at the protected bid or offer.
---------------------------------------------------------------------------

    \409\ See infra section VII.E.3.(d)(1). See infra notes 882-883 
for a description of the sample selection and analysis.
---------------------------------------------------------------------------

    This benchmark metric can be combined with information about the 
number of shares that a market center or broker-dealer 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 an 
order's full size at the quote is not available. For example, if a 
market center executes a 500 share order to buy at a price at or better 
than the national best offer, and there are currently 200 shares 
displayed at the national best offer, the associated benchmark metric 
for the order would be 200 shares because there were only 200 shares 
available to fill the order at the best displayed quote. This benchmark 
share count could then be compared to the number of shares executed at 
the best displayed quote (in this case, 500 shares) to capture whether 
the market center filled any part of the customer order at the national 
best offer (or better), even when there was no depth available at the 
national best offer (``size improvement share count''). To continue the 
preceding example, the size improvement share count would be 500-200 = 
300 shares, since the market center was able to offer the best 
displayed quote to 300 shares more than the depth available at the 
best-displayed quote.\410\
---------------------------------------------------------------------------

    \410\ Note that capping the benchmark metric at the order size 
prevents the size improvement share count from turning negative in 
situations when depth at the best displayed quote exceeds the 
customer-requested order size. For example, consider a case in which 
a market center executes an order for 200 shares when there are 
currently 500 shares displayed at the national best offer. If the 
benchmark share count were not capped at the order size, the size 
improvement share count would be 200-500 = -300 and would become 
more negative the more depth there is available at the NBBO, which 
would reduce a market center's total monthly size improvement share 
count, simply for fulfilling the customer's request to only execute 
200 shares and not the full 500 shares that were available at the 
national best offer. Instead, the benchmark share count would be 
capped at the order size, and the benchmark share count would still 
be 200 shares. The size improvement share count would be 200-200 = 0 
shares, capturing the fact that the market center did not offer the 
national best offer price (or better) to any shares over and above 
the depth available at the best displayed quote.
---------------------------------------------------------------------------

    The petitioner suggested an alternative metric: real price 
improvement (``RPI''), which combines price improvement (i.e., trades 
at prices better than the NBBO price) and size improvement (i.e., 
transactions executed for share quantities greater than shares 
displayed at the NBBO and at prices at or better than the NBBO 
price).\411\ The petitioner stated that RPI reflects the true benefits 
received by retail investors.\412\ RPI would use as its benchmark a 
price that ``reflects the equivalent size of shares--including depth of 
book quotes and odd lot quotes.'' \413\ Because the calculation of RPI 
takes into account the complete set of information related to the 
consolidated depth of book, RPI may be a more informative measure of 
size improvement than a measure that can be calculated using the size 
improvement benchmark metric proposed. However, because the complete 
set of consolidated depth of book information is not available from 
public data sources, the RPI would require market centers and reporting 
broker-dealers to subscribe to all exchanges' proprietary depth-of-book 
data feeds, which would entail a significant cost for those reporting 
entities that do not already subscribe to these feeds.\414\ The

[[Page 3819]]

proposed rule would not require an RPI benchmark or measure, as the 
Commission preliminarily believes the benefits to market participants 
from having access to a potentially more accurate measure of size 
improvement are not justified by these potentially significant 
additional costs to reporting entities.\415\
---------------------------------------------------------------------------

    \411\ See Virtu Petition at 3.
    \412\ See id. Additionally, the EMSAC suggested a similar 
measure--Enhanced Liquidity--designed to indicate for the proportion 
of shares greater than the available shares displayed at NBBO that 
were executed at or better than the NBBO. See EMSAC III at 2, n.3 
and accompanying text.
    \413\ Virtu Petition at 5.
    \414\ In a white paper, one market center estimated its costs 
related to subscribing to depth of book data feeds for 11 exchanges 
to be between $51,480 and $226,320 per exchange per year. See IEX, 
Jan. 2019, ``The Cost Of Exchange Services,'' available at https://iextrading.com/docs/The%20Cost%20of%20Exchange%20Services.pdf.
    \415\ See also infra section VII.E.3.(d)(1) for a more detailed 
discussion of the potential benefits and costs of RPI.
---------------------------------------------------------------------------

(f) Riskless Principal
    In effecting riskless principal transactions, a market center 
submits a principal order to another market center in order to fulfill 
a customer order. Upon execution at the away market center, the 
receiving market center executes the customer transaction on the same 
terms as the principal execution.\416\ Generally, under the current 
Rule, a market center that executes 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) reports 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).\417\ However, because the away market 
center is also reporting execution of the principal order as part of 
its shares executed at the receiving market center, this results in 
both of these legs of the transaction being counted as executed at the 
receiving market center, which could obscure information about how 
often a market center internalizes orders. Wholesalers may choose 
between internalizing orders or executing orders on a riskless 
principal basis. This choice has an effect on execution quality because 
internalized orders are not exposed to competition, whereas the 
principal order associated with a riskless principal transaction may be 
exposed to trading interest from other market participants. Therefore, 
it would be useful for investors to be able to observe what percentage 
of orders a wholesaler internalizes.
---------------------------------------------------------------------------

    \416\ See Securities Exchange Act Release No. 47364 (Feb. 13, 
2003), 68 FR 8686, n. 33 (Feb. 24, 2003) (generally describing 
riskless principal transactions ``as trades in which, after 
receiving an order to buy (or sell) from a customer, the broker-
dealer purchases (or sells) the security from (or to) another person 
in a contemporaneous offsetting transaction'').
    \417\ We note that Commission staff has taken the position that 
the market center executing an order as riskless principal should 
reflect the order on its monthly report as executed at such market 
center, and not at another venue, using the time that the order was 
executed at such market center. See Staff Legal Bulletin No. 12R, 
``Frequently Asked Questions About Rule 11Ac1-5'' (June 22, 2001).
---------------------------------------------------------------------------

    Accordingly, Rule 605's execution quality statistics would be more 
informative to market participants and other users of the Rule 605 
reports if riskless principal orders were reported as executed at 
another venue, rather than as executed at the market center. The 
Commission proposes to carve riskless principal orders out from 
proposed 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.\418\ As a result, the market 
center that executes the riskless principal order would include these 
shares as part of the cumulative number of shares executed at any other 
venue under Rule 605(a)(1)(i)(E), and only the market center that 
executes the corresponding principal order would include those shares 
as part of the cumulative number of shares executed at the receiving 
market center under proposed Rule 605(a)(1)(i)(D).
---------------------------------------------------------------------------

    \418\ See proposed Rule 605(a)(1)(i)(D).
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment generally on the changes to the 
information required for all order types, including the calculation of 
average realized spread for executed orders, the calculation of average 
effective spread for NMLOs, percentage-based spread statistics, E/Q 
statistics, size improvement measures, and the treatment of riskless 
principal transactions. In particular, the Commission solicits comment 
on the following:
    32. Should realized spread be required to be calculated 15 seconds 
and one minute after execution? Why or why not? If not, what 
alternative interval(s) do commenters recommend and why? Please explain 
and provide data, if available.
    33. Some academic research suggests that the use of a weighted 
midpoint would be more appropriate when calculating realized and 
effective spreads.\419\ Do commenters believe a weighted midpoint would 
be more appropriate? If so, why? Would additional costs be associated 
with utilizing a weighted midpoint?
---------------------------------------------------------------------------

    \419\ See supra note 380.
---------------------------------------------------------------------------

    34. Should average effective spread be required to be calculated 
for NMLOs and orders submitted with stop prices? Do commenters agree 
with the proposed average effective spread calculation methodology that 
would be required for executable NMLOs and executable stop loss orders?
    35. Should dollar-based spread statistics (i.e., effective and 
realized spread) also be required to be reported as a percentage? Do 
commenters believe there are other ways to represent spread statistics 
that could be helpful? If so, how should spread statistics also be 
reported?
    36. Should share-weighted average E/Q expressed as a percentage be 
required to be calculated for all order types? Do commenters agree that 
share-weighted average E/Q expressed as a percentage would improve the 
comparability of price improvement statistics across symbols? If not, 
why?
    37. With respect to proposed Rule 605(a)(1)(i)(F), do commenters 
support adding a requirement to include the proposed metric designed 
to, in combination with execution metrics, indicate whether orders 
received an execution greater than the displayed size at the quote 
(i.e., size improvement)? Why or why not?
    38. The Commission seeks comment on whether the addition of the 
proposed metric for size improvement would be sufficient to indicate 
whether orders received an execution greater than the displayed size of 
the quote. Should the Commission require a comparison of fill prices to 
a reference benchmark that includes depth of book and odd-lot 
information (i.e., RPI), or some other liquidity measurement? \420\ If 
so, why?
---------------------------------------------------------------------------

    \420\ As is noted above, the petitioner specifically states that 
Rule 605 reporting would be more complete if market participants 
could assess execution quality by comparing the fill prices on their 
orders to a reference benchmark that includes all displayed 
liquidity on exchanges, including resting odd-lots that are visible 
in market data feeds. See Virtu Petition at 4.
---------------------------------------------------------------------------

    39. Should riskless principal orders not be required to be counted 
as orders executed at the receiving market center, broker, or dealer 
for the purpose of computing Rule 605 statistics and instead be 
classified as orders executed away? Why or why not?
5. Additional Required Information for Market, Marketable Limit, 
Marketable IOC, and Beyond-the-Midpoint Limit Orders
    The MDI Rules expanded the data that will be made available for 
dissemination within the national market system (``NMS data'').\421\ 
One goal of the expansion of NMS data is to increase transparency about 
the best-priced quotations available in the market. To further increase 
transparency about the

[[Page 3820]]

availability of the best priced odd-lot orders in the market, the 
Commission also included certain odd-lot information in NMS data as 
part of the MDI Rules.\422\ The Commission is proposing to add a 
definition for ``best available displayed price,'' which would include 
the best priced odd-lot if that price is inside the NBBO in order to 
provide additional price improvement statistics.\423\
---------------------------------------------------------------------------

    \421\ See MDI Adopting Release.
    \422\ See 17 CFR 242.600(b)(59); MDI Adopting Release, 86 FR 
18596 (Apr. 9, 2021) at 18613. The Commission outlined a phased 
transition plan for the implementation of the MDI Rules, including 
the implementation of odd-lot order information. See MDI Adopting 
Release, 86 FR at 18698-701.
    \423\ The Commission is separately proposing to, among other 
things, amend the definition of odd-lot information to include a new 
data element to identify the best odd-lot orders available in the 
market inside the NBBO. See Minimum Pricing Increments Proposal. The 
Commission encourages commenters to review that proposal to 
determine whether it might affect their comments on this proposing 
release.
---------------------------------------------------------------------------

    Odd-lot information is defined as (1) odd-lot transaction data 
disseminated pursuant to the effective national market system plan or 
plans required under 17 CFR 242.603(b) as of April 9, 2021,\424\ and 
(2) odd-lots at a price greater than or equal to the national best bid 
and less than or equal to the national best offer, aggregated at each 
price level at each national securities exchange and national 
securities association.\425\ The Commission stated that making the best 
priced quotations available in core data is consistent with the 
Commission's goal in expanding the content of NMS information--
enhancing the availability and usefulness of the information.\426\
---------------------------------------------------------------------------

    \424\ Odd-lot transaction information is currently collected, 
consolidated, and disseminated by the exclusive SIPs. See Securities 
Exchange Act Release Nos. 70793 (Oct. 31, 2013), 78 FR 66788 (Nov. 
6, 2013) (order approving Amendment No. 30 to the UTP Plan to 
require odd-lot transactions to be reported to consolidated tape); 
70794 (Oct. 31, 2013), 78 FR 66789 (Nov. 6, 2013) (order approving 
Eighteenth Substantive Amendment to the Second Restatement of the 
CTA Plan to require odd-lot transactions to be reported to 
consolidated tape).
    \425\ See 17 CFR 242.600(b)(59); MDI Adopting Release, 86 FR 
18596 (Apr. 9, 2021) at 18613. The Commission is separately 
proposing to, among other things, accelerate the implementation of 
the round lot and the odd-lot information definitions. See Minimum 
Pricing Increments Proposal.
    \426\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at 
18613.
---------------------------------------------------------------------------

    The Commission is proposing to add a definition for ``best 
available displayed price'' which shall mean, 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.\427\ In each case, an order to buy or an order to sell 
would be benchmarked against the best price on the side of the market 
against which it could expect to receive an immediate execution. 
Because a beyond-the-midpoint limit order may be a covered order even 
if received outside of regular trading hours or when an NBBO is not 
being disseminated, the Commission proposes 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.\428\ Generally, the time of order receipt 
and the time the order is considered executable would be the same for a 
beyond-the-midpoint-limit order, except in those cases where it is 
received outside of regular trading hours or when an NBBO is not being 
disseminated. Therefore, measuring from the point of executability 
would ensure that a best available displayed price can be determined.
---------------------------------------------------------------------------

    \427\ See proposed Rule 600(b)(14). Because the best odd-lot 
order to buy or sell would be inside the NBBO, the national best bid 
or national best offer would only be used if there is not a best 
odd-lot price on the same side of the market as the order.
    \428\ See id.
---------------------------------------------------------------------------

    The Commission is further proposing to add two definitions relating 
to the best available displayed price in order to add price improvement 
statistics. ``Executed outside the best available displayed price'' 
shall mean, for buy orders, execution at a price higher than best 
available displayed price; and, for sell orders, execution at a price 
lower than the best available displayed price.\429\ ``Executed with 
price improvement relative to the best available displayed price'' 
shall mean, for buy orders, execution at a price lower than the best 
available displayed price and, for sell orders, execution at a price 
higher than the best available displayed price.\430\ Similar to the 
existing definitions for ``executed outside the quote'' \431\ and 
``executed with price improvement,'' \432\ these definitions would 
classify order executions based on their execution price relative to 
the best available displayed price.
---------------------------------------------------------------------------

    \429\ See proposed Rule 600(b)(44).
    \430\ See proposed Rule 600(b)(47).
    \431\ See 17 CFR 242.600(b)(35). The Commission is proposing to 
renumber the definition of ``executed outside the quote'' as 
proposed Rule 600(b)(45).
    \432\ See 17 CFR 242.600(b)(36). The Commission is proposing to 
renumber the definition of ``executed with price improvement'' as 
proposed Rule 600(b)(46).
---------------------------------------------------------------------------

    The Commission also proposes to add to Rule 605(a)(1)(ii) 
additional price improvement statistics specifically related to the 
best available displayed price. These statistics mirror the existing 
price improvement statistics for marketable order types executed better 
than, at, and outside the quote. Specifically, for each category, these 
additional price improvement statistics would provide a cumulative 
share count and a share-weighted average amount per share that prices 
were improved as compared to the best available displayed price. The 
Commission is proposing Rule 605(a)(1)(ii)(O), which would require the 
reporting of the cumulative number of shares of covered orders executed 
with price improvement relative to the best available displayed price. 
Proposed Rule 605(a)(1)(ii)(P) would require, 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. Proposed Rule 
605(a)(1)(ii)(Q) would require the reporting of the cumulative number 
of shares of covered orders executed at the best available displayed 
price. Proposed Rule 605(a)(1)(ii)(R) would require the reporting of 
the cumulative number of shares of covered orders executed outside the 
best available displayed price. Finally, proposed Rule 605(a)(1)(ii)(S) 
would require, 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. These five metrics, in 
conjunction with each other, 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.
    The Commission outlined a phased transition plan for the 
implementation of the MDI Rules, including the implementation of odd-
lot order information.\433\ The Commission stated that competing 
consolidators could offer a product that contains only information on 
the best priced odd-lot on each exchange.\434\ The Commission is 
separately proposing to, among other things: (1) accelerate the 
implementation of the round lot and the odd-lot information 
definitions; and (2) amend the definition of odd-lot

[[Page 3821]]

information to include a new data element to identify the best odd-lot 
orders available in the market inside the NBBO.\435\
---------------------------------------------------------------------------

    \433\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at 
18698-701.
    \434\ See id. at 18753.
    \435\ See Minimum Pricing Increments Proposal.
---------------------------------------------------------------------------

    As is discussed above \436\ and in the MDI Adopting Release, orders 
currently defined as odd-lots often reflect superior pricing.\437\ 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.\438\ The Commission believes it would be beneficial to require 
price improvement statistics relative to the best available displayed 
price for marketable order types (i.e., market, marketable limit, 
marketable IOC, and beyond-the-midpoint limit orders). In some cases, 
this may be equal to the national best bid or national best offer. 
However, in some cases, the best price available may be reflected in an 
odd-lot price. Under the current 605 reporting requirements, an order 
executed inside the NBBO would be an order executed with price 
improvement. Currently, there is no way for market participants to 
evaluate the performance of broker-dealers and market centers relative 
to the best inside the NBBO odd-lot when such better-priced orders are 
present. The Commission believes 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, would 
enhance the ability of market participants to evaluate order 
performance.
---------------------------------------------------------------------------

    \436\ See supra section IV.B.1.
    \437\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at 
18729 (describing analysis that found, among other things, that in 
May 2020, ``40% of [odd-lot] transactions (representing 
approximately 35% of all odd-lot volume) occurred at a price better 
than the NBBO'').
    \438\ See Bartlett et al. (2022). The authors found that this 
percentage increases monotonically in the stock price, for example, 
for bid prices, increasing from 5% for the group of lowest-price 
stocks in their sample, to 42% for the group of highest-priced 
stocks.
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment generally on changes to information 
required for market, marketable limit, marketable IOC, and beyond-the-
midpoint limit orders, including time-to-execution statistics and price 
improvement statistics relative to the best available displayed price. 
In particular, the Commission solicits comment on the following:
    40. Do commenters agree with the proposed definition of ``best 
available displayed price''? Do commenters believe this definition 
would be helpful in the calculation of the price improvement 
statistics? Why or why not?
    41. Should the execution quality statistics be required to include 
price improvement relative to the best available displayed price? Why 
or why not? What additional statistics would be beneficial?
    42. If odd-lot price information is not disseminated pursuant to an 
effective transaction reporting plan, what do commenters believe would 
be a viable substitute for a best odd-lot price for purposes of 
calculating price improvement statistics relative to the best available 
displayed price? Would use of substitute data provide a sufficiently 
standardized benchmark? Please explain.
6. Additional Required Information for Executable NMLOs, Executable 
Stop Orders, and Beyond-the-Midpoint Limit Orders
    As discussed above,\439\ the Commission recognizes the need for 
more meaningful measures of execution quality for NMLOs and orders 
submitted with stop prices.
---------------------------------------------------------------------------

    \439\ See supra section IV.B.2.
---------------------------------------------------------------------------

    First, proposed Rule 605(a)(1)(iii)(A) would require the reporting 
of the number of orders that received either a complete or partial 
fill. Although the cumulative number of shares executed is required to 
be reported for all order types,\440\ the Commission believes the 
number of orders filled would provide important additional information 
about the nature of a market center or broker-dealer's NMLO and stop 
order executions--e.g., whether a high executed cumulative share count 
represents, on average, larger execution sizes or a higher count of 
orders receiving executions.
---------------------------------------------------------------------------

    \440\ See proposed Rule 605(a)(1)(i)(D) and (E) (for shares 
executed at the receiving market center or broker-dealer and shares 
executed away, respectively).
---------------------------------------------------------------------------

    Second, the Commission is proposing Rule 605(a)(1)(iii)(B) 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.\441\ The 
Commission believes that market participants would benefit from more 
information about the number of shares that executed while an 
executable NMLO or executable order submitted with a stop price was in 
force. If a market center or broker-dealer is unable to execute NMLOs 
or stop orders despite a large number of shares executing in the market 
at large, market participants may want to take that into account when 
selecting a market center or broker-dealer. One commenter suggested a 
new execution quality metric called a ``non-marketable benchmark.'' 
\442\ The commenter's benchmark would ``provide a reference for 
evaluating the extent to which an NMLO could have been filled'' and 
considers shares executed on national market system exchanges as well 
as regular way off-exchange executions reported to the FINRA trade 
reporting facility.\443\ Under the proposal, the share count for each 
order would be capped at the order size. This would allow market 
participants to see how much activity took place while executable NMLOs 
and executable orders submitted with stop prices were in force and 
could give market participants an indication of how effective the 
market center or broker-dealer is at executing NMLOs and stop orders. 
This is similar to the benchmark metric suggested by the commenter 
(i.e., including both exchange and TRF trades), but is qualified by 
whether or not the NMLO or stop order is executable (not merely that it 
was in force). The Commission believes that by proposing to restrict 
the benchmark metric to only those NMLOs or stop orders that are 
executable would give a more realistic view of the opportunities 
available to that order. If a NMLO or stop order is never actually 
executable, inclusion of the order in the metrics could distort the 
overall view of a market center or broker-dealer's performance. When 
combined with execution information, the metric should provide 
information about how many trades executed while a NMLO or stop order 
could have been filled. This metric could then be combined with 
information on total executions in order to estimate a fill rate that 
is conditional on whether market prices reached levels at which NMLOs 
or stop order could have been filled (``conditional fill rate'').
---------------------------------------------------------------------------

    \441\ Generally, ``regular way'' refers to bids, offers, and 
transactions that embody the standard terms and conditions of a 
market whereas a non-regular way transaction refers to one executed 
other than pursuant to standardized terms and conditions, such as a 
transaction that has extended settlement terms. See, e.g., 
Regulation NMS Adopting Release, 70 FR 37496 (Jun. 29, 2005) at 
37537 n.326.
    \442\ See FIF III, Appendix 1 at 8-10.
    \443\ Id.
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    For example, if a NMLO for 200 shares becomes executable and the 
tape reveals that subsequently 100 consolidated shares were executed at 
the NMLO's limit price, then the benchmark metric would be 100 shares. 
If a market center partially executed 50 shares of the NMLO, the 
conditional fill rate would be 50 shares/100 shares =

[[Page 3822]]

50%.\444\ If the market center does not execute the NMLO, the 
conditional fill rate would be 0 shares/100 shares = 0%.
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    \444\ The unconditional fill rate (i.e., the number of executed 
shares divided by the number of submitted shares) in this case would 
be 50 shares/200 shares = 25%, revealing that only a quarter of the 
NMLO was executed. The conditional fill rate adjusts for the fact 
that available market depth was insufficient to fill the entire 
order, and only compares the number of executed shares to the number 
of shares that are available at the limit price.
---------------------------------------------------------------------------

    On the other hand, if the tape reveals that 500 consolidated shares 
were executed at the 200-share NMLO's limit price subsequent to the 
limit order becoming executable, the benchmark metric would be capped 
at the order size to be 200 shares, since the market center would have 
been able to fully execute the 200-share order. If the NMLO executes, 
the conditional fill rate would be 200 shares/200 shares = 100%.\445\ 
If the NMLO does not execute, the conditional fill rate would be 0 
shares/200 shares = 0%. If the market center has two such NMLOs, one 
that executes and one that does not, the total conditional fill rate 
would be (0 + 200)/(200 + 200) = 50%.
---------------------------------------------------------------------------

    \445\ Note that, if the metric were not capped at the order 
size, the conditional fill rate would be 200 shares/500 shares = 
40%, which reflects that the order size was smaller than the 
cumulative number of shares executed during the NMLO's lifespan. 
Capping at the order size therefore will result in the metric only 
capturing whether broker-dealers were able to fill order sizes as 
given.
---------------------------------------------------------------------------

Request for Comment
    The Commission seeks comment generally on the reporting of certain 
information for beyond-the-midpoint limit orders, executable NMLOs, and 
executable orders with stop prices. In particular, the Commission 
solicits comment on the following:
    43. Should market centers and broker-dealers be required to report 
the number of orders that received either a complete or partial fill? 
Why or why not?
    44. Should the Commission also require these entities to report the 
cumulative number of shares executed regular way at prices that could 
have filled the order while the order was in force? Do commenters 
believe this statistic would provide a meaningful point of comparison 
for execution quality for non-marketable order types? Why or why not? 
Should the Commission require an alternative metric? Why or why not?

V. Proposed Summary Execution Quality Reports

    Rule 605 requires market centers to prepare detailed execution 
quality statistics and, as required by the Rule 605 NMS Plan, make this 
data available via large electronic data files.\446\ The required 
format for the reports makes them machine-readable and suitable for 
further processing and analysis.\447\ However, the sheer number of rows 
needed to provide symbol-by-symbol data and the fact that human-
readable formatting is not required means that Rule 605 reports are not 
readily usable by market participants and other interested parties that 
may prefer to review summary statistics, rather than conducting further 
analysis on the data. Furthermore, some market participants and other 
interested parties do not have access to software or possess 
programming skills necessary to conduct such analysis. Accordingly, the 
Commission is proposing to require all market centers and broker-
dealers that are subject to Rule 605's reporting obligations to produce 
summary execution quality statistics, in addition to the more detailed 
reports required by Rule 605(a)(1).\448\
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    \446\ See 17 CFR 242.605(a)(1) and (2); Rule 605 NMS Plan, at V 
and VI.
    \447\ See Rule 605 NMS Plan, at V (``Files shall be prepared in 
standard, pipe-delimited (`[bond]') ASCII format and compressed 
using standard Zip compression.'').
    \448\ While current Rule 605 applies to market centers only, the 
Commission also is proposing to expand Rule 605's reporting 
obligations to broker-dealers, subject to a customer account 
threshold for reporting. See supra section III.A. Requiring broker-
dealers to produce summary reports would align those entities that 
would be required to produce detailed execution quality statistics 
with those entities that would be required to produce the summary 
reports.
---------------------------------------------------------------------------

    As recognized by several commenters to the 2018 Rule 606 
Amendments, in recent years a working group associated with the 
Financial Information Forum \449\ developed a standardized template 
that firms may use when publicly disclosing summary information about 
execution quality for retail investor orders in exchange-listed stocks 
(``FIF Template'').\450\ Although the reports produced using the FIF 
Template may be useful, given that this disclosure is voluntary, only a 
few firms are making or have made such disclosures.\451\ Commenters 
have suggested that the Commission require broker-dealers to produce a 
similar summary report.\452\ For example, one commenter on the 2018 
Rule 606 Amendments \453\ stated that this proposal ``neglect[ed] to 
include any meaningful retail disclosure requirements relating to 
execution quality, either on a customer-specific or publicly aggregated 
basis,'' and that the type of disclosure provided in the FIF Template 
``must be added to enable investors, third-party analysts, academic

[[Page 3823]]

researchers, and regulators to examine the extent to which retail 
brokers are best serving their clients.'' \454\
---------------------------------------------------------------------------

    \449\ According to the Financial Information Forum, the 
organization was formed in 1996 to provide a centralized source of 
information on the implementation issues that impact financial 
services and technology firms, and its participants include trading 
and back office service bureaus, broker-dealers, market data 
vendors, and exchanges. See FIF II at 1 n.1.
    \450\ See Financial Services Roundtable Letter at 4 (stating 
that the Financial Information Forum has established a Rule 605/606 
working group that has sought to improve the execution quality 
statistics for retail investors and that the FIF Template includes 
order size, average order size, shares executed at the market quote 
or better, price improvement percentage, average savings per order, 
and execution speed); Fidelity Letter at 8 (identifying the 
commenter as one of the few firms that voluntarily publishes these 
industry-standardized statistics); IHS Markit Letter at 30 (stating 
that the introduction of voluntary reporting of execution quality 
metrics, under the auspices of the Financial Information Forum, has 
demonstrated improvement in execution quality). See also Financial 
Information Forum, Retail Execution Quality Statistics, available at 
https://fif.com/tools/retail-execution-quality-statistics.
    \451\ See EMSAC I at 0099:10-12 (Bill Alpert, Barron's) (``These 
are selective disclosures. Only a few brokers and market makers are 
making them, so a mandate would be nice.''); Healthy Markets I at 7 
n.17 (stating that this information provided is ``incredibly 
valuable,'' even if participation is very limited, with just three 
retail brokers and three wholesale market-making firms providing 
data). See also infra notes 553-555 and accompanying text 
(discussing the limited number of firms that have produced reports 
utilizing the FIF Template at various points in time).
    \452\ See Healthy Markets I at 7 (suggesting that the Commission 
mandate at least the same level of disclosure for retail orders as 
was provided pursuant to the FIF Template); Fidelity Letter at 7-8 
(suggesting that the Commission require brokers to make publicly 
available on their website execution statistics, such as price 
improvement, execution price, execution speed, and effective 
spread); Financial Services Forum at 5 (stating that although the 
disclosed metrics do not have to mirror the FIF Template, the 
Commission should consider requiring similar metrics that are output 
driven). See also Fidelity Letter at 9 (stating that dividing data 
between S&P 500 stocks and other exchange-listed stocks is a 
standard metric that is used to break down execution quality 
statistics in the FIF Template).
    \453\ Rule 606(b)(1) requires broker-dealers to produce to 
customers, upon request, a human-readable report with high-level 
customer-specific order routing information, but these reports do 
not contain any execution quality information. See supra note 54 and 
accompanying text. Although the 2018 Rule 606 Amendments modified 
the orders covered by Rule 606(b)(1), the required disclosures under 
Rule 606(b)(1) did not change. See 2018 Rule 606 Amendments Release, 
83 FR 58338 (Nov. 19, 2018) at 58340 n.24.
    \454\ Consumer Federation II at 1 (suggesting that the 
Commission add to the FIF Template information about the NBBO at the 
time a marketable order is received, the NBBO at the time the order 
is executed, and any difference between them, and stating that these 
metrics would give additional information about whether any delays 
in routing and execution affect the ultimate price the investor 
pays). See also Angel Letter at 3-7 (suggesting that brokerage firms 
be required to display summary execution quality statistics on their 
websites, providing several alternative formats as samples, and 
suggesting that the statistics include information about the number 
of customer complaints received); Angel Letter at 2 (stating that 
the Rule 605 reports are too raw for most investors and few 
investors have the expertise to interpret the reports).
---------------------------------------------------------------------------

    When adopting Rule 605, the Commission made a decision to require 
market centers to produce detailed reports in order to avoid the 
dangers of overly general statistics.\455\ The Commission stated that 
``[a]ssigning a single `execution quality' score to market centers, for 
example, would hide major differences in execution quality, potentially 
creating far more problems than it solved.'' \456\ The large volume of 
statistical data in the Rule 605 reports allows market participants and 
other interested parties to select the order characteristics that they 
find are most appropriate to use to compare execution quality, and 
their ability to conduct analyses would be enhanced by the 
modifications to Rule 605 proposed herein.\457\ Yet many commenters 
have observed that also requiring firms to produce summary reports of 
the voluminous Rule 605 statistics would be useful,\458\ and some 
market centers have voluntarily posted summary statistics based on the 
detailed execution quality statistics in their Rule 605 reports.\459\ 
These voluntary reports have some utility, but the practice of 
producing summary statistics is not uniform and, even where summary 
statistics are provided, different formats may inhibit comparisons 
across firms.
---------------------------------------------------------------------------

    \455\ See supra note 161 and accompanying text.
    \456\ Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75419.
    \457\ See supra note 164 and accompanying text.
    \458\ See supra notes 134-135 and 452-454 and accompanying text.
    \459\ See supra notes 450-454 and accompanying text.
---------------------------------------------------------------------------

    Requiring market centers and broker-dealers to produce summary 
execution quality reports, in addition to the more detailed reports, 
would allow market participants and other interested parties to have 
more ready access to high-level data that would allow them to compare 
some of the more significant aspects of the execution quality provided 
by specific market centers and broker-dealers. In particular, it is 
currently challenging for individual investors to use Rule 605 reports, 
and these individual investors would be more readily able to use a 
summary report to make a more informed choice than they can currently 
about selection of a broker-dealer. Because these reports would be 
human-readable, individual investors could assess the data by reviewing 
and comparing summary reports without needing technical expertise or 
relying on an intermediary. The proposed summary reports would contain 
significantly more detail than a ``single `execution quality' score'' 
\460\ and thus would contain quantitative data for interested parties 
to assess, rather than imposing a single metric that might require a 
subjective judgement or obscure meaningful differences about a market 
center's or broker-dealer's execution quality. Moreover, by requiring 
reporting entities to produce summary reports in addition to, rather 
than instead of, the more detailed statistics called for by the current 
Rule, those market participants or other observers that would like to 
perform a more detailed or specific analysis would be able to download 
the more granular underlying data files and perform such analysis.\461\
---------------------------------------------------------------------------

    \460\ See supra note 456 and accompanying text.
    \461\ Those market participants or other observers that perform 
their own analyses using data from Rule 605 reports might find it 
useful also to review firms' summary reports to obtain quick access 
to an overview of the data or assess information outside the scope 
of their own data analyses. Conversely, even if consumers of the 
summary reports do not review the more detailed Rule 605 data 
themselves, they might benefit from the detailed Rule 605 reports if 
independent analysts, consultants, broker-dealers, the financial 
press, and market centers analyze the disclosures and produce more 
digestible information using the data, which analysis might include 
details not present in the summary reports.
---------------------------------------------------------------------------

    Proposed Rule 605(a)(2) would require 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 and marketable limit orders that it received for execution 
from any person.\462\ Individual investors trading NMS stocks primarily 
use marketable orders (including market orders and marketable limit 
orders) that seek to trade immediately at the best available price in 
the market. Individual investors would be the most likely consumers of 
the summary reports, and therefore it would provide significant benefit 
for the summary reports to cover the types of orders that individual 
investors use most frequently.\463\ Other order types, such as NMLOs, 
would not be included in the summary reports because including these 
types of orders would increase the amount of information contained in 
the summary report, and thus detract from its summary nature, and the 
summary execution quality information about these types of orders would 
be less likely to be useful to individual investors. In addition to 
representing a smaller share of trades by individual investors, a 
significant risk of including NMLOs is that they may be more likely to 
not be executed during the time period that they are executable and 
have a time lag before they become executable again, and therefore it 
would become more difficult to assess other aspects of execution 
quality, particularly at an aggregate level.
---------------------------------------------------------------------------

    \462\ See proposed Rule 605(a)(2).
    \463\ Similarly, the FIF Template covers standard market orders. 
See Fidelity Brokerage Services LLC, Retail Execution Quality 
Statistics, available at https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/FIF-FBS-retail-execution-quality-stats.pdf. But see Angel Letter, at 7 (recommending summary 
statistics specific to NMLOs).
---------------------------------------------------------------------------

    The proposed summary report would include 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.\464\ Rule 606(a)(1) similarly 
separates the required quarterly report on order routing into a section 
for securities that are included in the S&P 500 Index and a section for 
other NMS stocks.\465\ When adding this provision to Rule 606 in the 
2018 Rule 606 Amendments, the Commission stated that the handling of 
NMS stocks may vary based on their market capitalization value and 
trading volume, and thus customers that place held orders could benefit 
from a delineation based on the S&P 500 Index.\466\ The same reasoning 
applies to the proposed summary reports pertaining to execution quality 
statistics under Rule 605. Moreover, within each section, each symbol 
would be equally weighted based on share volume.\467\ 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.\468\ Further, 
equal weighting by share volume could be calculated using data 
collected to produce the Rule 605(a)(1) reports and would not require 
the collection of additional data.
---------------------------------------------------------------------------

    \464\ See proposed Rule 605(a)(2).
    \465\ See 17 CFR 242.606(a)(1). The FIF Template also segregates 
the reported execution quality statistics based on whether or not 
the securities are in the S&P 500 Index, and one commenter stated 
that this is a standard metric. See supra note 452.
    \466\ See 2018 Rule 606 Amendments Release, 83 FR 58338 (Nov. 
19, 2018) at 58378.
    \467\ See proposed Rule 605(a)(2).
    \468\ For example, without equal weighting, differences in 
summary-level execution quality statistics between a market center 
that receives more high-priced stocks for execution and market 
center that receives more low-priced stocks for execution may be 
more attributable to the different mix of stocks, rather than 
differences in the behavior of the market center.
---------------------------------------------------------------------------

    Each section of the report would include, for market orders and 
marketable limit orders, the following

[[Page 3824]]

summary statistics for executed orders: (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.\469\ Together, the proposed summary-level 
statistics are intended to provide an overview of price-based 
information and execution speed. The Commission notes that these 
categories of statistics are very similar to those used in the FIF 
Template, and that both the summary statistics in proposed Rule 
605(a)(2) and the statistics reflected in the FIF Template focus on 
statistics that are most relevant to evaluating what type of pricing 
orders received and how quickly orders were executed.\470\ The proposed 
summary report would include average percentage of price improvement 
per order, average percentage effective spread, and average E/Q, 
expressed as a percentage, whereas the FIF Template includes average 
savings per order, expressed in dollars. The three statistics that 
would be in the proposed summary report each provide a different view 
of the pricing provided to orders, and, if anything, provide a more 
robust picture of this pricing than the single metric in the FIF 
Template. For example, average effective spread is a comprehensive 
statistic that is a useful single measure of the overall liquidity 
premium paid by those submitting orders for execution.\471\
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    \469\ See proposed Rule 605(a)(2)(i)-(vii).
    \470\ See supra note 450 and accompanying text. The categories 
in the FIF Template for average order size (shares); shares executed 
at current market quote or better (%); price improvement (%); and 
average execution speed (seconds) appear to be directly comparable 
to the categories in proposed Rule 605(a)(2) for the average order 
size, the percentage of shares executed at the quote or better, the 
percentage of shares that received price improvement, and the 
average execution speed, in milliseconds. Moreover, the proposed use 
of milliseconds, rather than seconds, to measure average execution 
speed is consistent with proposed changes to the timestamp 
conventions, as discussed above. See supra section IV.B.3.
    \471\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75424. 
The statistics proposed to be included in the summary report are 
also generally consistent with commenters' suggestions that the 
summary report either follow the FIF Template or provide similar 
metrics. See supra notes 452-454 and accompanying text. One 
commenter suggested that the summary report include information 
about the NBBO at the time of order receipt and at the time of order 
execution to give information about whether delays in routing and 
execution affect the execution price. See supra note 454. This 
effect would likely also be evident in the average effective spread 
and average E/Q.
---------------------------------------------------------------------------

    The Commission is proposing to require that the summary reports 
must be made available using the most recent version of the XML schema 
and the associated PDF renderer published on the Commission's 
website.\472\ The requirement to use the Commission's XML schema is 
intended to ensure that the data is provided in a format that is 
structured and machine-readable, and this would allow users to more 
easily process and analyze the data, as well as provide consistency of 
format across reports. Further, the requirement that the same data 
should be provided through the use of a PDF renderer is intended to 
ensure that the reports are also available in a human-readable format 
and consistently presented across reports. A human-readable format 
would be a format that can be naturally read by an individual. 
Preparing reports in a human-readable format allows users that prefer 
only to review individual reports, and not necessarily aggregate or 
conduct large-scale data analysis on the data, to access the data 
easily. The Commission notes that Rule 606 similarly provides that the 
required reports on order routing shall be made available using the 
most recent versions of the Commission's XML schema and associated PDF 
renderer.\473\ In addition, although the FIF Template is a general 
template and does not specify a particular format for the reports, 
market participants choose to voluntarily prepare reports using the FIF 
Template. The number of reporting entities that would be required to 
prepare summary reports under proposed Rule 605(a)(2) would be much 
greater than the number of entities that have chosen to produce reports 
voluntarily using the FIF Template, and requiring a uniform format 
would facilitate users' ability to compare information across reports.
---------------------------------------------------------------------------

    \472\ See proposed Rule 605(a)(2). The Commission's schema would 
be a set of custom XML tags and XML restrictions designed by the 
Commission to reflect the disclosures in proposed Rule 605(a)(2). 
XML enables data to be defined, or ``tagged,'' using standard 
definitions. The tags establish a consistent structure of identity 
and context. This consistent structure can be automatically 
recognized and processed by a variety of software applications, such 
as databases, financial reporting systems, and spreadsheets, and 
then made immediately available to the end-user to search, 
aggregate, compare, and analyze. In addition, the XML schema could 
be easily updated to reflect any changes to the open standard. XML 
and PDF are ``open standards,'' which is a term that is generally 
applied to technological specifications that are widely available to 
the public, royalty-free, at no cost.
    \473\ See 17 CFR 242.606(a)(1), (b)(1)(iii), and (b)(3). When 
adopting the 2018 Rule 606 Amendments, the Commission stated that 
the XML schema was designed to ensure that the data is provided in 
an XML format that is structured and machine-readable, so that the 
data can be more easily processed and analyzed, and that by 
requiring use of the associated PDF renderer, the XML data would be 
instantly presentable in a human-readable PDF format and 
consistently presented across reports. See 2018 Rule 606 Amendments 
Release, 83 FR 58338 (Nov. 19, 2018) at 58364. The Commission shares 
the same goals in proposing that the Rule 605(a)(2) reports be 
produced according to an XML schema and associated PDF renderer.
---------------------------------------------------------------------------

    Rule 605 requires 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.\474\ The 
Commission is proposing to amend this provision, which would be 
reorganized into proposed Rule 605(a)(3), so that the proposed summary 
reports would also be made available in accordance with the procedures 
established by the Plan.\475\ Rule 605 also specifies 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.\476\ As proposed, 
these same requirements would be reorganized into proposed Rule 
605(a)(5) and would be extended to the summary reports for the same 
reasons expressed when these requirements were adopted for the Rule 
605(a)(1) reports and because it would be useful to users of the 
reports for the Rule 605(a)(1) reports and proposed

[[Page 3825]]

Rule 605(a)(2) reports to be available for the same period of 
time.\477\
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    \474\ See 17 CFR 242.605(a)(2). As discussed above, the 
Commission is proposing to expand this requirement, and the other 
procedural requirements in proposed Rule 605(a)(2) and (3), to cover 
broker-dealers. See supra note 155 and accompanying text.
    \475\ See proposed Rule 605(a)(3). Among other things, the Plan 
requires each market center to arrange with a single plan 
participant to act as the market center's Designated Participant. 
See Plan, at section VIII. Inclusion of proposed Rule 605(a)(2)'s 
summary reports within the scope of the Plan would 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 proposed Rule 605(a)(2). 
The Plan also establishes the formats and fields for the reports 
currently required under Rule 605(a)(1). Because proposed Rule 
605(a)(2) requires the use of the Commission's XML schema and 
associated PDF renderer, the Plan would not establish the formats 
and fields for the summary reports. Further, as proposed, the 
existing provision that states that, in the event there is no 
effective 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 
would be reorganized as proposed Rule 605(a)(4) and modified to 
explicitly refer to the requirements in Rule 605(a)(1). See proposed 
Rule 605(a)(4). As proposed, this provision would not apply to the 
summary reports that would be required by proposed Rule 605(a)(2). 
The proposed summary reports would not need to be included in 
proposed Rule 605(a)(4) because the XML schema and associated PDF 
renderer would specify the necessary format for the reports and 
proposed Rule 605(a)(5) would contain the requirement for internet 
posting.
    \476\ 17 CFR 242.605(a)(2).
    \477\ See proposed Rule 605(a)(5). See also 2018 Rule 606 
Amendments Release, 83 FR at 58380 (stating that the requirement to 
keep Rule 605(a)(1) reports posted on a website that is free and 
readily accessible for three years is appropriate because a three-
year retention period is consistent with the requirement under Rule 
17a-4(b) that broker-dealers preserve certain documents for a period 
of not less than three years; the reports will be useful and not 
lead to misleading analyses because the Commission expects customers 
and the public to use historical information to compare information 
from the same time period; and the public information will provide a 
historical record of a market center's order execution information).
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    Further, Rule 605 specifies that the detailed reports required by 
Rule 605(a)(1) must be made available within one month after the end of 
the month addressed in the report.\478\ The Commission is proposing to 
renumber this provision as proposed Rule 605(a)(6) and to extend this 
requirement to the Rule 605(a)(2) reports.\479\ The Commission believes 
that firms could produce the proposed Rule 605(a)(2) report alongside 
the Rule 605(a)(1) report, which must be produced monthly, because both 
reports are based on the same underlying data. Additionally, it would 
be useful for users of the reports to have access to the detailed 
reports and summary reports at the same time so that they could review 
the aggregated data in the summary reports and then conduct further 
analysis using the detailed reports, as needed.
---------------------------------------------------------------------------

    \478\ 17 CFR 242.605(a)(3).
    \479\ See proposed Rule 605(a)(6).
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Request for Comment
    The Commission seeks comment generally on the proposed requirement 
that market centers and brokers-dealers that are required to produce 
detailed execution quality statistics also provide a summary report. In 
particular, the Commission solicits comment on the following:
    45. Should a market center or broker-dealer that is subject to Rule 
605's reporting requirement be required to also provide a summary 
report reflecting aggregated execution quality information? Why or why 
not? Do commenters agree that summary reports would make execution 
quality information more accessible to individual investors? Please 
explain.
    46. Should the summary report be required to be divided into 
separate categories according to whether or not securities are included 
in the S&P 500 Index? Why or why not? Are there any alternative means 
to group securities that have higher market capitalization or trading 
volume that should be required to be used to organize the summary 
statistics, instead of or in addition to dividing the securities 
included in the report according to whether or not they are included in 
the S&P 500 Index? Should the summary report include order size 
categories? Why or why not? Please explain and provide data, if 
available.
    47. Should stocks be required to be equally weighted by symbol 
based on share volume within each section? Why or why not? Is there 
another method of weighting the stocks that would be preferable (e.g., 
equal weighting by symbol based on dollar volume or applying a common 
weighting scheme across securities)? Please explain.
    48. Should the summary report be limited to covered orders that are 
market or marketable limit orders? Why or why not? Would it be 
preferable to include other specific categories of covered orders 
(i.e., marketable IOCs, beyond-the-midpoint limit orders, executable 
NMLOs, executable orders with stop prices) or to include all covered 
orders? Do commenters agree with the proposed aggregated statistics to 
include in the summary report? Are there any aggregated statistics that 
commenters would eliminate? Are there any execution quality statistics 
that would be required pursuant to proposed Rule 605(a)(1) for which 
commenters would add corresponding aggregated statistics to the summary 
report? Please explain.
    49. Should the summary reports be required to be made available 
using the most recent version of an XML schema and an associated PDF 
renderer as published by the Commission? Why or why not? Is there an 
alternative, machine-readable and/or human-readable format, that would 
be preferable? Would it be preferable for the Plan to establish the 
required format, including an associated schema, for the summary 
reports?
    50. Should the Commission require that summary Rule 605 reports be 
posted in a centralized location? Alternatively, should the Commission 
require both summary and detailed reports to be posted in a centralized 
location? Why or why not? Do commenters have a view on how centralized 
posting could be implemented? Are there other ways the Commission could 
improve the accessibility of the reports?

VI. Paperwork Reduction Act

    Certain provisions of the proposed rule amendments contain 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\480\ The Commission is 
submitting these collections of 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. 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. The Commission is 
proposing to alter an existing collection of information and apply 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).\481\
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    \480\ 44 U.S.C. 3501 et seq.
    \481\ OMB Control Number 3235-0542.
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A. Summary of Collection of Information

    The proposed 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 proposed amendments do not create any new collections 
of information.
    The categories of new respondents subject to Rule 605, as proposed 
to be amended, are larger broker-dealers and new market centers, 
consisting of SDPs and entities that would operate proposed qualified 
auctions or act as market centers for orders that were previously not 
covered by the Rule, e.g., fractional share orders.
    The proposed amendments would modify both the scope of the 
standardized monthly reports required under Rule 605 and the required 
information. Rule 605, as proposed to be 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 round lots rather than number of 
shares and includes additional order size categories for fractional 
share, odd-lot, and larger-sized orders; (3) creates a new order type 
category for marketable IOCs and replaces three existing categories of 
non-marketable order types with three new categories of order types 
(beyond-the-midpoint limit orders, executable NMLOs, and executable 
orders with stop prices); (4) eliminates current time-to-execution 
reporting buckets and requires average time to execution, median time 
to execution, and 99th percentile time to execution, each as measured 
in increments of a

[[Page 3826]]

millisecond or finer; (5) modifies realized spread statistics to 
require realized spread to be calculated after 15 seconds and one 
minute; and (6) requires new statistical measures of execution quality 
including average effective over quoted spread, percentage effective 
and realized spread statistics, a size improvement benchmark, and 
certain statistical measures that could be used to measure execution 
quality of NMLOs. The proposed amendments would require all reporting 
entities to make a summary report available that would be formatted in 
the most recent versions of the XML schema and the associated PDF 
renderer as published on the Commission's website. Finally, as a result 
of the proposed amendments to Rule 605, the current Rule 605 NMS Plan 
participants would need to amend the NMS Plan to account for the new 
proposed 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) \482\ 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.
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    \482\ See 17 CFR 242.600(b)(46).
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C. Respondents

    The collection of information obligations of Rule 605 apply 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 currently 
approximately 236 reporting entities (93 OTC market makers, plus 16 
national securities exchanges, 1 national securities association, 94 
exchange market makers, and 32 ATSs).\483\ However, under the proposed 
amendments, the Commission believes there would be 359 reporting 
entities (93 OTC market makers, 85 broker-dealers that introduce or 
carry 100,000 or more customer accounts,\484\ 16 national securities 
exchanges, 1 national securities association, 94 exchange market 
makers, 32 ATSs,\485\ plus 38 new market center respondents \486\) that 
would be subject to the collection of information obligations of Rule 
605. Each of these respondents would be required to respond to the 
collection of information on a monthly basis.
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    \483\ The current PRA for Rule 605 estimates 319 reporting 
entities (153 OTC market makers, plus 24 exchanges, 1 securities 
association, 80 exchange market makers, and 61 ATSs). Based on 
updated estimates of the number of respondents, the Commission 
estimates that there are only 236 current reporting entities.
    \484\ These 85 brokers-dealers include 37 broker-dealers that 
act as introducing brokers.
    \485\ As of September 30, 2022, there are 32 NMS Stock ATSs that 
have filed an effective Form ATS-N with the Commission.
    \486\ These 38 new market center respondents would consist of 20 
market centers that would need to produce reports as a result of 
including fractional share orders within the scope of Rule 605, 10 
SDPs, and 8 qualified auctions.
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    In addition, the proposed amendments to Rule 605 would require the 
existing NMS Plan participants (16 national securities exchanges and 1 
national securities association) to prepare and file an amendment to 
the existing NMS Plan.

D. Total PRA Burdens

    As proposed, Rule 605 would require broker-dealers and market 
centers to make available to the public monthly order execution reports 
in electronic form. The Commission believes that 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.\487\ Consequently, the Rule would not require additional 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.
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    \487\ National securities exchanges, national securities 
associations, and registered brokers and dealers are subject to 
existing recordkeeping and retention requirements including Rule 
17a-1 (for self-regulatory organizations (``SROs'')); Rules 17a-3 
and 17a-4 (for broker-dealers). See 17 CFR 240.17a-1, 17 CFR 
240.17a-3, and 17 CFR 240.17a-4. The Commission's estimates include 
the Rule's requirement that reporting market centers and broker-
dealers keep Rule 605 reports 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 on the internet website. See 
proposed Rule 605(a)(5).
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    The Commission estimates that the initial and ongoing burdens would 
be different for those respondents that are currently required to 
prepare reports and for new respondents. The Commission estimates that 
proposed Rule 605 amendments would result in an initial burden for 
current respondents of 50 hours per respondent \488\ 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 would need to be done by existing respondents 
to modify their systems to collect data required under the proposed 
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 proposed to be 
amended, would require existing respondents to acquire new hardware or 
systems to process the information required in the reports. The 
Commission further estimates that the proposed Rule 605 amendments 
would result in an ongoing monthly burden of 8 hours per respondent to 
collect the necessary data and to prepare the required Rule 605 
reports, for a total annual burden of 96 hours per respondent.\489\ 
This estimate represents the time that would 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.\490\ With an

[[Page 3827]]

estimated 236 respondents currently subject to Rule 605, the total 
initial burden to comply with the Rule 605 amendments is estimated to 
be 11,800 hours while the monthly reporting requirement is estimated to 
be 22,656 hours per year (236 x 96). 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 XML schema and the associated PDF renderer as published on the 
Commission's website.
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    \488\ The Commission believes the monetized initial burden for 
this requirement to be $4,368,360. The Commission derived this 
estimate based on per hour figure from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1,800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead: [(Sr. Programmer at $368 for 25 
hours) + (Sr. Systems Analyst at $316 for 10 hours) + (Compliance 
Manager at $344 for 10 hours) + (Director of Compliance at $542 for 
5 hours)] = $18,510 per respondent for a total initial monetized 
burden of $4,368,360 ($18,510 x 236 respondents).
    \489\ The Commission believes the monetized annual burden for 
this requirement to be $8,847,168. The Commission derived this 
estimate based on per hour figure from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1,800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead: [((Compliance Attorney at $406 for 6 
hours) + (Compliance Manager at $344 for 2 hours)) x 12 reports per 
year] = $37,488 per respondent for a total annual monetized burden 
of $8,847,168 ($37,488 x 236 respondents).
    \490\ The Commission's currently approved PRA for Rule 605 (OMB 
Control Number 3235-0542), last updated in April 2022, estimates 
that current respondents each will spend 6 hours per month to 
collect the data necessary to generate the reports, or 72 hours per 
year. Although the proposed amendments to Rule 605 would require 
additional data fields and the generation of summary reports, the 
Commission believes the data collection and report generation 
process should be an automated process that would not require 
substantial additional burden hours after initial set-up.
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    The Commission estimates that proposed Rule 605 amendments would 
result in an initial burden for new respondents of 100 hours for each 
respondent \491\ 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 would 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 is collected, respondents 
could either program their systems to generate the reports, or transfer 
the data to a service provider that would generate the reports. 
Respondents would likely not be required to acquire new hardware or 
other technological resources to be able to collect the data required 
by the proposed rule given that respondents would 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 would likely utilize a service provider, as 
discussed below. The Commission estimates that the proposed Rule 605 
amendments would result in an ongoing monthly burden of 8 hours to 
collect the necessary data and to prepare the required Rule 605 
reports, for a total annual burden of 96 hours per respondent.\492\ 
With an estimated 123 new respondents subject to Rule 605, the total 
initial burden to comply with the Rule 605 amendments is estimated to 
be 12,300 hours while the monthly reporting requirement is estimated to 
be 11,808 hours per year (123 x 96). These estimates include the impact 
of preparing and making summary reports available using the most recent 
versions of the XML schema and the associated PDF renderer as published 
on the Commission's website.
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    \491\ The Commission believes the monetized initial burden for 
this requirement to be $4,553,460. The Commission derived this 
estimate based on per hour figure from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1,800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead: [(Sr. Programmer at $368 for 50 
hours) + (Sr. Systems Analyst at $316 for 20 hours) + (Compliance 
Manager at $344 for 20 hours) + (Director of Compliance at $542 for 
10 hours)] = $37,020 per respondent for a total initial monetized 
burden of $4,553,460 ($37,020 x 123 respondents).
    \492\ The Commission believes the monetized annual burden for 
this requirement to be $4,611,024. The Commission derived this 
estimate based on per hour figure from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1,800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead: [((Compliance Attorney at $406 for 6 
hours) + (Compliance Manager at $344 for 2 hours)) x 12 reports per 
year] = $37,488 per respondent for a total annual monetized burden 
of $4,611,024 ($37,488 x 123 respondents).
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BILLING CODE 8011-01-P

Table 2--Respondent Burdens for Producing Rule 605 Reports

[[Page 3828]]

[GRAPHIC] [TIFF OMITTED] TP20JA23.001

BILLING CODE 8011-01-C

[[Page 3829]]

    The Commission estimates that in lieu \493\ 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.\494\ 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 359 respondents to retain service 
providers to prepare reports would be between approximately $1,077,000 
and $1,256,000 ((359 x $3,000) and (359 x $3,500), respectively), or a 
total annual cost of between approximately $12,924,000 and $15,078,000 
(($1,077,000 x 12) and ($1,256,000 x 12), respectively).
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    \493\ In the case of annual burdens, the burden per respondent 
is the burden hours multiplied by the number of responses per year.
    \494\ The Commission's currently approved PRA for Rule 605 
estimates that the retention of a service provider to prepare a 
monthly report would cost $2,978 per month, or approximately $35,736 
per year. Although the individual line items required by the Rule 
605 amendments would be different than the current Rule, the 
Commission does not believe that the overall cost of creating the 
required reports would differ substantially from these current 
estimates.
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    Finally, the 16 national securities exchanges and 1 national 
securities association would be required to amend the 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 estimates that there would be a one-time (or initial) burden 
of 5 hours per respondent \495\ to amend the NMS Plan to account for 
the new reporting fields and reporting parties, for a total burden of 
85 hours (17 x 5). The Commission does not estimate that there would be 
any ongoing annual burden associated with the 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 NMS 
Plan on the burden hours for existing NMS plans, while also taking into 
account the limited nature of the updates to the NMS Plan that would be 
required under the proposed amendments to Rule 605.
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    \495\ The Commission believes the monetized initial burden for 
this requirement to be $40,222. The Commission derived this estimate 
based on per hour figure from SIFMA's Management & Professional 
Earnings in the Securities Industry 2013, modified by Commission 
staff to account for an 1,800-hour work-year and inflation, and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead: [(Attorney at $462 for 4 hours) + (Assistant 
General Counsel at $518 for 1 hour)] = $2,366 per respondent for a 
total initial monetized burden of $40,222 ($2,366 x 17 respondents).
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    The Commission estimates that there would be outsourcing of legal 
time to develop and draft the NMS Plan amendment in order to account 
for additional data fields and reporting parties. The NMS Plan 
amendment would 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 would be 
significantly lower than other recent NMS plan amendments. The 
Commission staff estimates that, on average, each exchange and 
association would outsource 2 hours of legal time to prepare and file 
an amendment to the NMS Plan, at an average hourly rate of $496.\496\ 
The Commission estimates that the aggregate one-time reporting burden 
for preparing and filing an amendment to the NMS Plan would be 
approximately $992 in external costs per national securities exchange 
or national securities association, for an aggregate external cost of 
$16,864 resulting from outsourced legal work [(2 hours @ $496 per hour 
= $992) x (16 national securities exchanges and 1 national securities 
association)].
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    \496\ The Commission's estimates of the relevant wage rates for 
outside legal services takes into account staff experience, a 
variety of sources including general information websites, and 
adjustments for inflation.
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    The Commission currently estimates a total initial burden of 24,169 
hours for all respondents and a total annual burden of 34,368 hours for 
all respondents.\497\
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    \497\ (11,800 + 12,300 + 119) = 24,219 initial burden hours. 
(22,656 + 11,808) = 34,464 annual burden hours. The Commission 
estimates the monetized initial burden for all respondents to be 
$8,978,906 ($4,368,360 + $4,553,460 + $57,086) and the monetized 
annual burden for all respondents to be $13,458,192 ($8,847,168 + 
$4,611,024).
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E. Request for Comment

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to:
    51. Evaluate whether the proposed collection of information is 
necessary for the proper performance of the Commission's functions, 
including whether the information shall have practical utility;
    52. Evaluate the accuracy of the Commission's estimates of the 
burden of the proposed collection of information;
    53. Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected;
    54. Evaluate whether there are ways to minimize the burden of 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology; and
    55. Evaluate whether the proposed amendments would have any effects 
on any other collection of information not previously identified in 
this section.
    Persons submitting comments on the collection of information 
requirements should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Secretary, Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with 
reference to File Number S7-29-22. Requests for materials submitted to 
OMB by the Commission with regard to this collection of information 
should be in writing, with reference to File Number S7-29-22 and be 
submitted to the Securities and Exchange Commission, Office of FOIA/PA 
Services, 100 F Street NE, Washington, DC 20549-2736. As OMB is 
required to make a decision concerning the collection of information 
between 30 and 60 days after publication, a comment to OMB is best 
assured of having its full effect if OMB receives it within 30 days of 
publication.

VII. Economic Analysis

A. Introduction

    The Commission is mindful of the economic effects that may result 
from the proposed amendments, including the benefits, costs, and the 
effects on efficiency, competition, and capital formation.\498\ The 
following economic analysis identifies and considers the costs and 
benefits--including the effects on efficiency, competition, and capital 
formation--that could result from the proposed amendments to Rule 605.
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    \498\ Exchange Act section 3(f) requires the Commission, when it 
is engaged in rulemaking pursuant to the Exchange Act and is 
required to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f). In 
addition, Exchange Act section 23(a)(2) requires the Commission, 
when making rules pursuant to the Exchange Act, to consider among 
other matters the impact that any such rule will have on competition 
and not to adopt any rule that would impose a burden on competition 
that is not necessary or appropriate in furtherance of the purposes 
of the Exchange Act. See 15 U.S.C. 78w(a)(2).
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    When the Commission adopted Rule 11Ac1-5, which was later re-
designated as Rule 605, in 2000, it stated that the

[[Page 3830]]

rule should facilitate comparisons across market centers and provoke 
more vigorous competition on execution quality and broker-dealer order 
routing performance.\499\ However, under current Rule 605 reporting 
requirements, variations across broker-dealers in terms of the 
execution quality achieved by their order routing services are not 
currently observable by market participants using 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 are 
less informative than they were when the Rule was adopted. Furthermore, 
the Commission believes that the proposed amendments to Rule 605, 
including expanding the scope of reporting entities, modernizing its 
content, and broadening its accessibility, would increase the relevance 
and use of the information contained in Rule 605 reports, and promote 
competition among market centers and broker-dealers. This increase in 
competition would ultimately lead to improved execution quality for 
investors.
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    \499\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75417.
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    The Commission recognizes that the proposed amendments would entail 
additional costs to market centers and broker-dealers of disclosing the 
required execution quality information. Market centers would face 
initial compliance costs when updating their methods for preparing Rule 
605 reports, and broker-dealers that were previously not required to 
publish Rule 605 reports would 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 continue to publish Rule 605 reports 
each month.
    The Commission has considered and is describing the economic 
effects of the proposed amendments to Rule 605 and wherever possible 
has quantified the likely economic effects of the proposed amendments. 
The Commission has incorporated data and other information, such as 
academic literature, to assist in the analysis of the economic effects 
of the proposal. However, because the Commission does not have, and in 
certain cases does not believe that it can reasonably 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. The Commission requests that commenters 
provide relevant data and information to assist the Commission in 
quantifying the economic consequences of the proposed amendments to 
Rule 605.

B. Market Failure

    The Commission is proposing to update the disclosure of order 
execution information and expand the scope of reporting entities under 
Rule 605 to achieve a variety of improvements to market participants' 
access to information about execution quality, which the Commission 
does not believe are likely to occur through a market-based solution.
    Because equity markets have changed substantially since the initial 
adoption of Rule 605's predecessor in 2000, and yet the content of the 
disclosures required by Rule 605 has not been substantively updated 
since then,\500\ the utility of Rule 605 reports has been eroded, which 
has limited the Rule's ability to address the market failures 
identified in the Adopting Release, including market centers' limited 
incentives to produce publicly available, standardized execution 
quality reports.\501\ Instead, the metrics currently required to be 
reported by Rule 605 are no longer as useful for comparing execution 
quality across market centers as they were when Rule 605 was adopted, 
and other metrics that would be useful for this purpose are not 
currently included in reporting requirements, which limits the current 
benefits of Rule 605 for promoting competition among market centers and 
improving execution quality for all types of investors.
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    \500\ In 2018, while amending Rule 606, the Commission also 
modified Rule 605 to require that the public order execution quality 
report be kept publicly available for a period of three years. See 
supra note 11.
    \501\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75414-
15.
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    The Commission does not believe that updates to Rule 605 metrics 
are likely to be achieved through a market-based solution.\502\ Even if 
all markets 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 could be difficult for market 
participants to easily compare execution quality across market centers.
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    \502\ In the Adopting Release, the Commission stated that, while 
some market centers may have voluntarily made order execution 
information privately available to independent companies or broker-
dealers, the information in these reports generally had not been 
publicly disseminated. To the extent such information had been made 
available, not all of it was useful or in a form that would allow 
for cross-market comparisons. See Adopting Release, 65 FR 75414 
(Dec. 1, 2000) at 75431.
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    Furthermore, it may be difficult for certain market participants to 
compute accurate and relevant execution quality metrics from data 
sources other than data collected pursuant to Rule 605, 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 and may 
thereby further inform investors. Therefore, rulemaking to modernize 
the information required by Rule 605 may prove beneficial.\503\
---------------------------------------------------------------------------

    \503\ See supra sections IV.A and IV.B describing, respectively, 
the proposed amendments modifying the scope of orders covered and 
information required to be disclosed pursuant to Rule 605.
---------------------------------------------------------------------------

    In addition to the need to modernize the content of Rule 605, it 
may also be appropriate to expand the scope of entities that would be 
required to prepare Rule 605 reports to include larger broker-
dealers.\504\ 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.\505\ This limits 
the extent to which broker-dealers need to compete for order flow on 
the basis of

[[Page 3831]]

execution quality, which may result in lower execution quality for 
their customers.
---------------------------------------------------------------------------

    \504\ See supra note 1 defining ``larger broker-dealer'' as a 
broker-dealer that meets or exceeds the ``customer account 
threshold,'' as defined in proposed Rule 605(a)(7). See also supra 
section III.A describing the proposed amendments expanding the scope 
of Rule 605 reporting entities to include larger broker-dealers.
    \505\ Similar information asymmetries were recognized in the 
Adopting Release, which stated that ``the decision about where to 
route a customer order is frequently made by the broker-dealer, and 
broker-dealers may make that decision, at least in part, on the 
basis of factors that are unknown to their customers.'' See Adopting 
Release, 65 FR 75414 (Dec. 1, 2000) at 75433.
---------------------------------------------------------------------------

    As with market centers, most broker-dealers also do not necessarily 
have incentives to produce public and standardized execution quality 
reports, and in that way are subject to the same market failures 
identified in the Rule 605 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.\506\ As a result, 
individual investors and, to some extent, institutional investors,\507\ 
have limited access to standardized information that could be used to 
compare how execution quality varies across broker-dealers.\508\ 
Therefore, it may be appropriate to engage in rulemaking to expand Rule 
605 reporting requirements to larger broker-dealers.
---------------------------------------------------------------------------

    \506\ While the FIF Template provides a standardized template 
for summary information about execution quality for retail investor 
orders in exchange-listed stocks (see supra note 450), the 
Commission understands that currently only one retail broker 
voluntarily provides reports using the FIF Template. See also infra 
notes 554-555 and accompanying text (discussing the limited number 
of firms that have produced reports utilizing the FIF Template at 
various points in time). There are also some broker-dealers that 
disclose their own execution quality metrics on their respective 
websites, but the disclosures tend to differ in ways that make them 
difficult to compare, such as reporting different metrics, using 
different methodologies, or different samples of stocks. See, e.g., 
Order Execution Quality, TD Ameritrade, available at https://www.tdameritrade.com/tools-and-platforms/order-execution.html; 
Execution Quality, E*TRADE from Morgan Stanley, available at https://us.etrade.com/trade/execution-quality; Our Execution Quality, 
Robinhood, available at https://robinhood.com/us/en/about-us/our-execution-quality/.
    \507\ While institutional investors are likely to have access to 
alternative sources of execution quality information, such as Rule 
606(b)(3) reports and transaction cost analysis, the information on 
execution quality that is individually collected by institutional 
investors is typically non-public and highly individualized, and 
therefore limited to the execution quality obtained from broker-
dealers with which the institutional investors currently does 
business. Since Rule 605 reports are public, institutional investors 
could use these reports to assess the execution quality of the 
broker-dealers and market centers with which they do not currently 
do business. See infra section VII.C.1.(c)(2) for further 
discussion.
    \508\ Institutional and individual investor customers of broker-
dealers may differ in their abilities to request execution quality 
information from their broker-dealers. See infra sections 
VII.C.1.(c)(1) and VII.C.1.(c)(2) for further discussion.
---------------------------------------------------------------------------

    While ``data available for downloading from a free website in a 
consistent, usable, and machine-readable electronic format'' is 
currently accessible under Rule 605,\509\ the data generated under Rule 
605 is complex, and the raw data may be difficult for individual 
investors to access and aggregate. Rule 605 reporting entities have 
little incentive to voluntarily summarize their execution quality in a 
standardized way. Instead, in summarizing their execution quality 
information, reporting entities may be incentivized to select the 
measures and aggregation methodologies that make them look the most 
favorable. Therefore, absent regulation, there is little incentive for 
Rule 605 reporting entities to coordinate on a standardized summary 
report that could be used to easily and accurately compare execution 
quality across reporting entities.\510\
---------------------------------------------------------------------------

    \509\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75436.
    \510\ See supra section V describing the proposed amendments 
requiring Rule 605 reporting entities to prepare summary reports of 
execution quality information.
---------------------------------------------------------------------------

C. Baseline

    The baseline against which the costs, benefits, and the effects on 
efficiency, competition, and capital formation of the proposed 
amendments are measured consists of the regulatory baseline, which 
frames investors' current access to execution quality information under 
Rule 605, as well as market participants' present ability to use the 
information contained in current Rule 605 reports to evaluate and 
compare execution quality across reporting entities. Lastly, the 
baseline consists of the extent to which Rule 605 currently promotes 
competition on the basis of execution quality, both among broker-
dealers and among market centers.
1. Regulatory Baseline
(a) Current Rule 605 Disclosure Requirements
    Currently, Rule 605 requires market centers to make available, on a 
monthly basis, standardized information concerning execution quality 
for covered orders in NMS stocks.\511\ Under the Rule, 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.\512\ This format serves 
the purpose of allowing market participants to 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 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 level.\513\
---------------------------------------------------------------------------

    \511\ See 17 CFR 242.605.
    \512\ See supra notes 39-40 for a discussion and definitions of 
these order categories.
    \513\ For example, larger order sizes are typically more 
difficult to ``work'' than smaller order sizes, so the execution 
quality information of a market center that tends to handle larger 
order sizes would likely be more constrained than that of a market 
center that tends to handle smaller order sizes.
---------------------------------------------------------------------------

    The execution quality information required to be disclosed in Rule 
605 reports pertains to several different aspects of execution quality, 
including execution prices, execution speeds, and fill rates. 
Information on execution prices includes, for market orders and 
marketable limit orders, the average effective spread,\514\ number of 
shares executed at prices better than the quote, at the quote, or 
outside the quote,\515\ as well as average dollar amount per share that 
orders were executed better than the quote or outside the quote.\516\ 
Information on execution speeds includes, for all order types, the 
cumulative number of shares executed within different time-to-execution 
buckets \517\ 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.\518\ Information that can be 
used to calculate fill rates includes, 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.\519\
---------------------------------------------------------------------------

    \514\ See 17 CFR 242.605(a)(1)(ii)(A).
    \515\ See 17 CFR 242.605(a)(1)(ii)(B), 17 CFR 
242.605(a)(1)(ii)(E) and 17 CFR 242.605(a)(1)(ii)(G), respectively.
    \516\ See 17 CFR 242.605(a)(1)(ii)(C) and 17 CFR 
242.605(a)(1)(ii)(H), respectively.
    \517\ The time-to-execution categories currently defined in Rule 
605 are shares executed from 0 to 9 seconds, shares executed from 10 
to 29 seconds, shares executed from 30 to 59 seconds, shares 
executed from 60 to 299 seconds, and shares executed from 5 to 30 
minutes. See 17 CFR 242.605(a)(1)(i)(F)-(J).
    \518\ See 17 CFR 242.605(a)(1)(ii)(D), 17 CFR 
242.605(a)(1)(ii)(F) and 17 CFR 242.605(a)(1)(ii)(I), respectively.
    \519\ See 17 CFR 242.605(a)(1)(i)(B), 17 CFR 242.605(a)(1)(i)(D) 
and 17 CFR 242.605(a)(1)(i)(E). The fill rate can be calculated as 
Fill Rate = (Cumulative Number of Shares Executed at Receiving 
Market Center + Cumulative Number of Shares Executed at Other 
Venues)/(Cumulative Number of Covered Shares).
---------------------------------------------------------------------------

    Market participants have access to public information about the 
execution quality of market centers other than Rule 605. For example, 
some

[[Page 3832]]

wholesalers and ATSs make additional order flow and execution quality 
statistics other than those required under Rule 605 available either on 
their websites or as part of their ATS-N filings.\520\ However, these 
sources are either not standardized \521\ or are not available across 
all market centers,\522\ such that Rule 605 is an important source of 
standardized information about market center execution quality.
---------------------------------------------------------------------------

    \520\ If an ATS provides one or more of its subscribers with 
aggregate platform-wide order flow and execution statistics that 
were not otherwise required disclosures under Rule 605, that ATS is 
required to either attach that information to its Form ATS-N, or 
certify that the information is available on its website. See Item 
26 of Form ATS-N, available at https://www.sec.gov//files/formats-n.pdf.
    \521\ For example, reports contain different execution quality 
metrics or, if they contain the same execution quality metrics, 
these metrics are calculated using different methodologies, 
different samples of stocks, and/or different time horizons, making 
it difficult to compare across reporting entities. For example, some 
ATSs produce execution quality information on a monthly basis (see, 
e.g., Unlocking Global Liquidity, UBS, available at https://www.ubs.com/global/en/investment-bank/electronic-trading/equities/unique-liquidity.html), while at least one ATS operator produces 
reports on a quarterly basis (see, e.g., JPM-X & JPB-X U.S. 
Quarterly Summary, J.P. Morgan, available at https://www.jpmorgan.com/solutions/cib/markets/jpm-x-jpb-x-us-quarterly-summary).
    \522\ While the FIF Template represents a standardized set of 
execution quality statistics, only one wholesaler currently produces 
reports using the FIF Template. See infra note 555.
---------------------------------------------------------------------------

    The Commission believes that standardized execution quality 
information is relevant to many market participants, including to both 
individual and institutional investors and their broker-dealers,\523\ 
who 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, but information asymmetries prevent the principal from being 
able to directly observe the agent's handling of the order. This can 
create possible conflicts of interest, in which the agent's incentives 
may not coincide with the interests of the principal.\524\ These 
information asymmetries exist both between broker-dealers and their 
customers, who do not directly observe their broker-dealers' handling 
of their orders,\525\ and between market centers and broker-dealers, 
who typically do not directly observe market centers' executions of 
their routed orders. Rule 605 serves to alleviate these information 
asymmetries by, first, giving broker-dealers access to information 
about the execution quality of market centers, which they can use to 
inform their routing decisions and, second, in conjunction with broker-
dealer routing information from Rule 606 reports,\526\ giving investors 
access to information about the execution quality achieved by the 
market centers to which their broker-dealers typically route.\527\
---------------------------------------------------------------------------

    \523\ See infra sections VII.C.1.(c)(1) and VII.C.1.(c)(2) for 
further discussions of how publicly available execution quality 
information may be useful for both individual and institutional 
investors.
    \524\ If there were no information asymmetries and the principal 
could perfectly observe the agent's handling of its order, and if 
there is competition among agents, then the principal-agent 
relationship would not necessarily result in any conflicts of 
interest as the principal would be able to directly observe the 
agent's actions and switch to another agent.
    \525\ See supra note 505, noting that a similar principal-agent 
problem was recognized in the Adopting Release.
    \526\ See infra section VII.C.2.(a)(1), which discusses issues 
with the usage of Rule 606 broker-dealer routing information and 
Rule 605 execution quality information to infer the execution 
quality achieved by broker-dealers.
    \527\ Some market participants may have access to sources of 
execution quality information that reduce these information 
asymmetries and may serve as an alternative to Rule 605 data. See 
infra section VII.C.1.(c) for a detailed discussion. Note that any 
source of ex post execution quality information is unlikely to 
eliminate this information asymmetry entirely, as it is likely 
infeasible for any agent to perfectly observe ex ante or even in 
real time how a principal will perform in executing their order.
---------------------------------------------------------------------------

    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 where to route orders for 
execution,\528\ 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, and found that the execution quality of these orders differed 
significantly in terms of average price improvement and effective 
spreads.\529\ 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.\530\ Given 
this evidence that there are significant differences in execution 
quality across broker-dealers, without access to standardized 
information about broker-dealer execution quality, it is difficult for 
investors to compare these differences when choosing a broker-dealer.
---------------------------------------------------------------------------

    \528\ See infra section VII.C.3.(b)(1) for a discussion of 
fragmentation in the market for trading services.
    \529\ See Christopher Schwarz, Brad M. Barber, Xing Huang, 
Philippe Jorion & Terrance Odean, The `Actual Retail Price' of 
Equity Trades (Aug. 28, 2022) available at https://ssrn.com/abstract=4189239 (retrieved from SSRN Elsevier database). The 
authors find that this dispersion is due to off-exchange wholesalers 
systematically giving different execution prices for the same trades 
to different brokers.
    \530\ See id. at 24.
---------------------------------------------------------------------------

    Given that Rule 605 reports contain aggregated information, some 
information asymmetries regarding the order execution quality achieved 
at different market centers are not fully addressed by Rule 605 because 
the principal is not able to use Rule 605 reports 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, and there is evidence that Rule 605 reports have indeed been 
used for this purpose. 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.\531\ 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.
---------------------------------------------------------------------------

    \531\ See Boehmer et al.
---------------------------------------------------------------------------

(b) Current Rule 606 Disclosure Requirements
    Currently, under Rule 606, broker-dealers are required to identify 
the venues, including market centers, to which they route customer 
orders for execution.\532\ 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

[[Page 3833]]

any PFOF arrangements.\533\ 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.\534\ For orders 
submitted on a held basis, the reports required by Rule 606 do not 
contain any execution quality information.
---------------------------------------------------------------------------

    \532\ See 17 CFR 242.606.
    \533\ See 17 CFR 242.606(a)(1). See also corresponding 
discussion in section III.A, supra.
    \534\ See 17 CFR 242.606(a)(2). See also corresponding 
discussion in section III.A, supra.
---------------------------------------------------------------------------

    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 order to make more informed decisions with respect to 
their orders.\535\ 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.\536\ 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.
---------------------------------------------------------------------------

    \535\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75435 
(``Rule 11Ac1-6 is designed to address the complementary need for 
broker-dealers to disclose to customers where their orders are 
routed for execution. The primary objective of the rule is to afford 
customers a greater opportunity to monitor their broker-dealer's 
order routing practices. Supplied with information on where their 
orders are routed, as well as information about the quality of 
execution from the market centers to which their orders are routed, 
investors will be able to make better informed decisions with 
respect to their orders. The information also may assist investors 
in selecting a broker-dealer.'').
    \536\ See infra section VII.C.2.(a)(1) for a discussion of 
current issues with using information from Rule 606 reports to infer 
the execution quality of broker-dealers.
---------------------------------------------------------------------------

    Following amendments to Rule 606 in 2018,\537\ broker-dealers are 
subject to requirements under Rule 606 that provide information about 
the execution quality achieved by their broker-dealers for not held 
orders, which are typically used by institutional investors.\538\ 
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.\539\ 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.\540\
---------------------------------------------------------------------------

    \537\ See supra note 60 and accompanying text for a discussion 
of these amendments.
    \538\ An analysis included in the 2018 Rule 606 Amendments 
Release looked at orders submitted from customer accounts of 120 
randomly selected NMS stocks listed on NYSE during the sample period 
of December 5, 2016, to December 9, 2016, consisting of 40 large-cap 
stocks, 40 mid-cap stocks, and 40 small-cap stocks. The analysis 
found that among the orders received from the institutional 
accounts, about 69% of total shares and close to 39% of total number 
of orders in the sample are not held orders, whereas among the 
orders received from the individual accounts, about 19% of total 
shares and about 12% of total number of orders in the sample are not 
held orders. See 2018 Rule 606 Amendments Release, 83 FR 58338 (Nov. 
19, 2018) at 58393. See also supra note 56 and accompanying text, 
describing the Commission's understanding that held orders are 
typically used by individual investors.
    \539\ See 17 CFR 242.606(b)(3). In addition, Rule 606(b)(5)'s 
customer-level de minimis exception exempts broker-dealers from 
providing upon request execution quality reports for customers that 
traded on average each month for the prior six months less than 
$1,000,000 of notional value of not held orders in NMS stocks 
through the broker-dealer. See 17 CFR 242.606(b)(5).
    \540\ See 17 CFR 242.606(b)(3)(ii).
---------------------------------------------------------------------------

(c) Current Usage of Rule 605 Reports
    Rule 605 data is currently used by some market participants, such 
as broker-dealers and investment advisers as part of their review of 
execution quality. However, the use of this data by both individual and 
institutional investors to directly evaluate and compare execution 
quality across market centers is currently limited.
(1) Usage of Rule 605 Reports by Individual Investors
    It is likely that the extent to which individual investors directly 
access Rule 605 reports is currently limited. Several market 
participants have stated that Rule 605 reports have low usage among 
individual investors, including at least one commenter to the 
Commission's Concept Release on Equity Market Structure,\541\ and some 
EMSAC committee members.\542\
---------------------------------------------------------------------------

    \541\ See, e.g., Letter from Daniel Keegan, Managing Director, 
Citigroup Global Markets Inc. re Concept Release on Equity Market 
Structure (Release No. 34-61358; File No. S7-02-10) (May 5, 2010) 
(``Citigroup Letter II'') at 6.
    \542\ See supra note 112 and accompanying text.
---------------------------------------------------------------------------

    Rule 605 reports are designed to be machine-readable, rather than 
human-readable. While machine-readable data is useful for facilitating 
further processing and analysis,\543\ it is not readily usable by 
market participants and other interested parties that may prefer to 
review summary statistics, and is not easily consumable by market 
participants who do not have the access to necessary software or 
programming skills. This may limit the usability of Rule 605 reports 
for individual investors in particular, who are less likely to have 
access to these resources. In the 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.\544\ Although the Commission is unable to observe 
the full extent to which this has occurred, some third parties have 
produced information based on Rule 605 reports that is meant for public 
consumption. For example, data obtained from Rule 605 reports are 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,\545\ and at least one 
market participant used Rule 605 data in an analysis supporting its 
letter to the Commission commenting on one national securities 
exchange's registration application.\546\ Rule 605 data is also used in 
the financial press.\547\
---------------------------------------------------------------------------

    \543\ See discussion in infra section VII.C.1.(c)(2).
    \544\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75419.
    \545\ See, e.g., Ruslan Y. Goyenko, Craig W. Holden & Charles 
Trzcinka, Do liquidity measures measure liquidity? 92 J. Fin. Econ. 
153 (2009); Edward D. Watson & Donovan Woods, Exchange introduction 
and market competition: The entrance of MEMX and MIAX, 54 Glo. Fin. 
J. (2022) 100756; Pankaj K. Jain, Suchismita Mishra, Shawn 
O'Donoghue & Le Zhao, Trading Volume Shares and Market Quality: Pre-
and Post-Zero Commissions (working paper Dec. 2, 2020), available at 
https://ssrn.com/abstract=3741470 SSRN 3741470 (retrieved from SSRN 
Elsevier database); Schwarz et al (2022).
    \546\ See, e.g., Letter from David Weisberger, Managing 
Director, Markit, New York, New York Re: Investor's Exchange LLC 
Form 1 Application; Release No. 34-75925; File No. 10-222 (Feb. 16, 
2016), available at https://www.sec.gov/comments/10-222/10222-394.pdf.
    \547\ See, e.g., Bill Alpert ``Who Makes Money on Your Stock 
Trades,'' Barron's, Feb. 28, 2015 (retrieved from Factiva database) 
(stating that ``we ran each market maker's Rule 605 execution 
reports through statistical-analysis scripts that we wrote in the 
widely used open-source math software known as `R.' '').
---------------------------------------------------------------------------

    Unlike institutional investors,\548\ 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

[[Page 3834]]

indirectly) from Rule 605 reports.\549\ 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 mostly used by individual investors,\550\ and 
contains a customer-level de minimis exception that likely excludes 
most individual investors.\551\ In addition, many individual investors 
do not have access to the information or expertise required to 
calculate their own execution quality metrics, which makes it difficult 
for them to compare how execution quality varies across broker-
dealers.\552\
---------------------------------------------------------------------------

    \548\ See discussion in infra section VII.C.1.(c)(2).
    \549\ There are also some broker-dealers that disclose their own 
execution quality metrics on their respective websites, but the 
disclosures are not standardized and tend to differ in ways that 
make them difficult to compare, such as reporting different metrics, 
using different methodologies, or different samples of stocks. See 
supra note 506.
    \550\ See supra note 538 describing an analysis showing that not 
held orders made up only 19% of total shares and about 12% of total 
number of orders among the sample of orders received from the 
individual accounts.
    \551\ See supra note 539 describing the customer-level de 
minimis exception of Rule 606(b)(5).
    \552\ See infra section VII.C.2.(a)(1) discussing several 
analyses that find significant differences in execution quality 
across retail brokers.
---------------------------------------------------------------------------

    One exception is the recent efforts by a few brokers-dealers and 
wholesalers to make available voluntary summary disclosures of 
execution quality in exchange-listed stocks for individual investors 
using the FIF Template.\553\ 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, and that one of 
these broker-dealers was acquired and stopped producing these reports 
in 2017, and another stopped producing these reports in 2018, such that 
only one retail broker currently produces reports using the FIF 
Template.\554\ Likewise, the Commission understands that there is 
currently only one wholesaler producing reports using the FIF 
Template.\555\
---------------------------------------------------------------------------

    \553\ See supra note 450 and accompanying text for further 
discussion of the FIF Template.
    \554\ See Retail Execution Quality Statistics, Financial 
Information Forum, available at https://fif.com/tools/retail-execution-quality-statistics; Retail Execution Quality Statistics 
Q2--2022, Fidelity, available at https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/FIF-FBS-retail-execution-quality-stats.pdf.
    \555\ See Retail Execution Quality Statistics, Financial 
Information Forum, available at https://fif.com/tools/retail-execution-quality-statistics; Retail Execution Quality Statistics--
Wholesale Market Maker Perspective, Two Sigma, available at https://www.twosigma.com/businesses/securities/execution-statistics/. The 
Commission is aware of at least two wholesalers that formerly 
produced reports using the FIF Template, but stopped in Q3 2019.
---------------------------------------------------------------------------

(2) Usage of Rule 605 Reports by Institutional Investors
    The Commission preliminarily understands that, while the usage of 
Rule 605 reports by institutional investors may be limited by several 
factors, Rule 605 reports nevertheless contain information about 
execution quality that is otherwise useful for institutional investors.
    First, 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 costs 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 would be less 
likely to rely on information from Rule 605 reports in order to 
estimate the execution quality of their orders. Furthermore, the 
requirement in Rule 606(b)(3) for broker-dealers to provide 
individualized reports of execution quality of not held orders upon 
request,\556\ which is most likely to be utilized by institutional 
investors,\557\ provides institutional investors with another 
alternative source of information about the execution quality of their 
orders. While broker-dealers are currently required to provide their 
customers only with execution quality information about their not held 
orders under Rule 606(b)(3), which are not covered by Rule 605 
reporting requirements, given the large size of most institutional 
investors and their business, institutional investors may have 
sufficient bargaining power such that broker-dealers have strong 
incentives to provide them with this information about the execution 
quality of their held orders when asked.
---------------------------------------------------------------------------

    \556\ See supra Section VIII.C.1.(b) discussing broker-dealer 
reporting requirements under Rule 606.
    \557\ See supra note 538 discussing an analysis showing that 
institutional investors are more likely than individual investors to 
use not held orders. See also supra note 539 describing the 
customer-level de minimis exception of Rule 606(b)(5).
---------------------------------------------------------------------------

    However, 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. The information on execution quality that is individually 
collected by institutional investors is typically highly individualized 
and non-public.\558\ Therefore, institutional investors would 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. Furthermore, any ad hoc reports that institutional investors 
may receive from their broker dealers containing information about 
their held orders are unlikely to be sufficiently standardized to allow 
for easy comparisons across broker-dealers or market centers.
---------------------------------------------------------------------------

    \558\ In 2018, the Commission proposed but ultimately did not 
adopt a requirement that broker-dealers that handle orders subject 
to the customer-specific disclosures required by Rule 606(b)(3) 
issue a quarterly public aggregated disclosure on order handling. 
See 2018 Rule 606 Amendments Release, 83 FR 58338 (Nov. 19, 2018) at 
58369.
---------------------------------------------------------------------------

    Second, 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,'' \559\ are excluded 
from Rule 605 metrics.\560\ As many institutional orders tend to be not 
held,\561\ this may limit the extent to which Rule 605 reports contain 
relevant information for institutional investors. Rule 605 reports may 
contain information that is relevant for institutional investors, 
however, as large institutional ``parent'' orders are often split into 
multiple smaller ``child'' orders, which may be handled as held orders 
and reflected in Rule 605 reports. This would allow institutional 
investors to use the information in Rule 605 reports to evaluate the 
performances of their broker-dealers. For example, institutional 
investors may incorporate information from Rule 605 reports into their 
TCA when evaluating the performance of their broker-dealers'

[[Page 3835]]

Smart Order Router (``SOR'') algorithms.\562\
---------------------------------------------------------------------------

    \559\ Currently there are no requirements for aggregated 
information about the execution quality of not held orders to be 
made public. The Commission believes that the potential ability for 
customers and broker-dealers to use aggregated order handling 
information for not held orders to better understand broker-dealers' 
routing behavior or compare broker-dealers' order routing 
performance is limited as a result of the disparate behavior of 
customers when using not held orders. See, e.g., 2018 Rule 606 
Amendments Release, 83 FR 58338 (Nov. 19, 2018) at 58369-70, in 
which the Commission stated that, in contrast to held orders, not 
held order flow is diverse and customers may provide specific order 
handling instructions to their broker-dealers, limit the order 
handling discretion of their broker-dealers, or have specific needs 
that impact the broker-dealers' handling of these orders. See also 
supra note 63 for further discussion.
    \560\ See supra note 60 and accompanying text discussing broker-
dealers requirements under Rule 606(b)(3) to provide individualized 
reports of execution quality upon request for not held orders.
    \561\ See supra note 538 discussing an analysis showing that 
institutional investors are more likely than individual investors to 
use not held orders.
    \562\ See infra section VII.C.3.(a)(1)(b) discussing the use of 
SORs by broker-dealers to split a large institutional ``parent'' 
order into multiple ``child'' orders in a way that achieves the best 
execution for the parent order.
---------------------------------------------------------------------------

    The Commission believes that, due to their typically larger 
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 currently use aggregated statistics or 
summaries of Rule 605 reports prepared by third parties, who make these 
reports available, possibly for a fee.
(3) Other Users of Rule 605 Reports
    While the direct usage of Rule 605 reports by individual and 
institutional investors is likely limited, Rule 605 reports are 
currently used by other market participants, including analysts and 
researchers,\563\ as well as financial service providers, such as 
investment advisers and broker-dealers, that are subject to best 
execution obligations.
---------------------------------------------------------------------------

    \563\ See, e.g., supra notes 545-547, describing the use of Rule 
605 data in academic literature, in comment letters related to 
Commission and SRO rulemaking, and the financial press.
---------------------------------------------------------------------------

    In particular, 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.\564\ 
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.\565\ Broker-dealers also have an obligation to seek best 
execution of customer orders.\566\ 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.\567\
---------------------------------------------------------------------------

    \564\ See Investment Advisers Act Release No. 5248 (June 5, 
2019), 84 FR 33669 (July 12, 2019) (Commission Interpretation 
Regarding Standard of Conduct for Investment Advisers) (``IA 
Fiduciary Interpretation'').
    \565\ See, e.g., Investment Advisers Act Rule 206(3)-2(c). The 
Commission previously has described the contours of an investment 
adviser's duty to seek best execution. IA Fiduciary Interpretation, 
84 FR 33669 (Jul. 12, 2019) at 33674-75. In addition, the Commission 
has brought a variety of enforcement actions against registered 
investment advisers in connection with their alleged failure to 
satisfy their duty to seek best execution. See, e.g., In the Matter 
of Aventura Capital Management, LLC, Investment Advisers Act Release 
No. 6103 (Sept. 6, 2022) (settled action); In the Matter of Madison 
Avenue Securities, LLC, Investment Advisers Act Release No. 6036 
(May 31, 2022) (settled action).
    \566\ See supra note 69 and accompanying text for further 
discussion of broker-dealers' best execution requirements.
    \567\ See, e.g., Practical Considerations for Your `Best 
Execution Compliance Program', Ernst & Young (Mar. 2017), available 
at http://documents.sifma.org/uploadedFiles/Events/2017/Compliance_and_Legal_Society_Annual_Seminar/EY_CL%20Annual_Marketing%20PDF.pdf (stating the broker-dealers rely 
on ``traditional 605 metrics'' for best execution review). See also 
Citigroup Letter II at 7 (stating that, ``under the current market 
structure, broker-dealers closely review and analyze Rule 605 
statistics as part of their regular and rigorous review for best 
execution'').
---------------------------------------------------------------------------

(d) 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,\568\ 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 practice. 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. Accordingly, this section first will 
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 could have on the baseline estimations.
---------------------------------------------------------------------------

    \568\ See supra section IV.B.5, discussing the MDI Rules.
---------------------------------------------------------------------------

(1) Regulatory Structure for Consolidated Market Data Prior to the MDI 
Rules
    Consolidated market data is made widely available to investors 
through the national market system, a system set forth by Congress in 
section 11A of the Exchange Act \569\ and facilitated by the Commission 
in Regulation NMS.\570\ Market data is collected by exclusive 
SIPs,\571\ 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.\572\ 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. 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.
---------------------------------------------------------------------------

    \569\ See supra note 3 and accompanying text.
    \570\ 17 CFR 242.600 through 242.614.
    \571\ See supra note 195 and accompanying text.
    \572\ Currently, these national securities exchanges are: Cboe 
BYX Exchange, Inc. (``Cboe BYX''); Cboe BZX Exchange, Inc. (``Cboe 
BZX''); Cboe EDGA Exchange, Inc. (``Cboe EDGA''); Cboe EDGX 
Exchange, Inc. (``Cboe EDGX''); Investors Exchange LLC (``IEX''); 
Long-Term Stock Exchange, Inc. (``LTSE''); MEMX LLC (``MEMX''); MIAX 
Pearl, LLC (``MIAX PEARL''); Nasdaq BX, Inc. (``Nasdaq BX''); Nasdaq 
PHLX LLC (``Nasdaq Phlx''); The Nasdaq Stock Market LLC 
(``Nasdaq''); NYSE; NYSE American LLC (``NYSE American''); NYSE 
Arca, Inc. (``NYSE Arca''); NYSE Chicago, Inc. (``NYSE CHX''); and 
NYSE National, Inc. (``NYSE National''). The Commission approved 
rules proposed by BOX Exchange LLC (``BOX'') for the listing and 
trading of certain equity securities that would be NMS stocks on a 
facility of BOX known as BSTX LLC (``BSTX''), but BSTX is not yet 
operational. See Securities Exchange Act Release Nos. 94092 (Jan. 
27, 2022), 87 FR 5881 (Feb. 2, 2022) (SR-BOX-2021-06) (approving the 
trading of equity securities on the exchange through a facility of 
the exchange known as BSTX); 94278 (Feb. 17, 2022), 87 FR 10401 
(Feb. 24, 2022) (SR-BOX-2021-14) (approving the establishment of 
BSTX as a facility of BOX). BSTX cannot commence operations as a 
facility of BOX until, among other things, the BSTX Third Amended 
and Restated Limited Liability Company Agreement approved by the 
Commission as rules of BOX is adopted. Id. at 10407.
---------------------------------------------------------------------------

    For transaction information, currently all of the national 
securities exchanges that trade NMS stocks and 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, including 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; \573\ (2) information about certain orders that are 
outside of an exchange's best bid and best offer (i.e., certain depth 
of book data); \574\ and (3) information about orders that are 
participating in opening, closing, and

[[Page 3836]]

other auctions.\575\ The Rules also introduce a four-tiered definition 
of round lot that is tied to a stock's average closing price during the 
previous month.\576\ For stocks with prices greater than $250, a round 
lot is defined as consisting of between 1 and 40 shares, depending on 
the tier.\577\ 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.\578\
---------------------------------------------------------------------------

    \573\ See supra note 422 and accompanying text for further 
discussion of changes to the availability of odd-lot information 
under the MDI Rules.
    \574\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at 
18625.
    \575\ See id. at 18630.
    \576\ See id. at 18617.
    \577\ See id. The Commission adopted a four-tiered definition of 
round lot: 100 shares for stocks priced $250.00 or less per share, 
40 shares for stocks priced $250.01 to $1,000.00 per share, 10 
shares for stocks priced $1,000.01 to $10,000.00 per share, and 1 
share for stocks priced $10,000.01 or more per share.
    \578\ See id. at 18637.
---------------------------------------------------------------------------

    In the MDI Adopting Release, the Commission established a 
transition period for the implementation of the MDI Rules.\579\ The 
``first key milestone'' for the transition period was to be an 
``amendment of the effective national market system plan(s),'' which 
``must include the fees proposed by the plan(s) for data underlying'' 
consolidated market data (``Proposed Fee Amendment'').\580\ The 
compliance date for the Infrastructure Rules was set with reference to 
the date that the Commission approved the Proposed Fee Amendment.\581\ 
The end of the transition period was to be at least two years after the 
date the Commission approved the Proposed Fee Amendment.\582\
---------------------------------------------------------------------------

    \579\ See id. at 18698-18701.
    \580\ See id. at 18699.
    \581\ See, e.g., id. at 18700 n. 355 (compliance date for 
amendment to Rule 603(b) to be ``180 calendar days from the date of 
the Commission's approval of the amendments to the effective 
national market system plan(s)'').
    \582\ See id. at 18700-18701 (specifying consecutive periods of 
90 days, 90 days, 90 days, 180 days, 90 days, a period for filing 
and approval of another national market system plan amendment to 
effectuate the cessation of the operations of the SIPS (with a 300-
day maximum time for Commission action after filing to approve or 
disapprove the filing), and a 90-day period).
---------------------------------------------------------------------------

    The MDI Adopting Release did not specify a process for continuing 
the transition period if the Commission disapproved the Proposed Fee 
Amendment. On September 21, 2022, the Commission disapproved the 
Proposed Fee Amendment, because the Participants had not demonstrated 
that the proposed fees were fair, reasonable and not unreasonably 
discriminatory.\583\ Accordingly, there currently is no date to begin 
the at-least-two-year period for implementation of the MDI Rules, and 
there is no date that can be reasonably estimated for the 
implementation of the MDI Rules to be completed.
---------------------------------------------------------------------------

    \583\ Securities Exchange Act Release No. 95851 (Sept. 21, 2022) 
(Order Disapproving the Twenty-Fifth Charges Amendment to the Second 
Restatement of the CTA Plan and Sixteenth Charges Amendment to the 
Restated CQ Plan).
---------------------------------------------------------------------------

    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 comprehensive 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 this proposal.\584\
---------------------------------------------------------------------------

    \584\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at 
18741-18799.
---------------------------------------------------------------------------

    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 \585\) to 
form a round lot and qualify for the NBBO.\586\ 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.\587\ 
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.\588\ 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 
direction such odd-lot imbalances in higher priced stocks currently 
exist, so it is uncertain of the extent or direction of the 
change.\589\
---------------------------------------------------------------------------

    \585\ The calculation of the NBBO includes odd-lots that, when 
aggregated, are equal to or greater than a round lot. Under CFR 
242.600(b)(21)(ii), ``such aggregation shall occur across multiple 
prices and shall be disseminated at the least aggressive price of 
all such aggregated odd-lots.'' For example, if there is one 50-
share bid at $25.10, one 50-share bid at $25.09, and two 50-share 
bids at $25.08, the odd-lot aggregation method would show a 
protected 100-share bid at $25.09.
    \586\ For example, if there is one 20-share bid at $250.10, one 
20-share bid at $250.09, and two 50-share bids at $250.08, prior to 
MDI the NBB would be $250.08, as even aggregated together the odd 
lot volume would not add up to at least a round lot. After MDI, the 
NBB would be $25.09, as the odd-lot aggregation method would show a 
protected 40-share round lot bid at $25.09.
    \587\ See supra note 577. An analysis in the MDI Adopting 
Release showed that the new round lot definition caused a quote to 
be displayed that improved on the current round lot quote 26.6% of 
the time for stocks with prices between $250.01 and $1,000, and 
47.7% of the time for stocks with prices between $1,000.01 and 
$10,000. See MDI Adopting Release, 86 FR at 18743.
    \588\ For example, if the NBB is $260 and the NBO is $260.10, 
the NBBO midpoint is $260.05. Under the adopted rules a 40 share buy 
quotation at $260.02 will increase the NBBO midpoint to $260.06. 
Using this new midpoint, calculations of effective spread will be 
lower for buy orders, but will be higher for sell orders.
    \589\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at 
18750.
---------------------------------------------------------------------------

    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.\590\ 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.''
---------------------------------------------------------------------------

    \590\ However, this effect will depend on how market 
participants adjust their order submissions. See id. at 18746 for 
further discussion.
---------------------------------------------------------------------------

    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 previously did not have access 
to this information.\591\ 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

[[Page 3837]]

Release that it believes it is not possible to observe this willingness 
to trade with existing market data.\592\
---------------------------------------------------------------------------

    \591\ See id. at 18754.
    \592\ See id.
---------------------------------------------------------------------------

    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.\593\
---------------------------------------------------------------------------

    \593\ See id. at 18725.
---------------------------------------------------------------------------

    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.\594\ 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.\595\ However, the 
Commission stated that it was uncertain about the magnitude of both of 
these effects.\596\ 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.
---------------------------------------------------------------------------

    \594\ See id. at 18744.
    \595\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at 
18754.
    \596\ See id. at 18745, 18754.
---------------------------------------------------------------------------

    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.\597\ 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.\598\ However, the Commission stated that 
it was uncertain of the magnitude of these effects.\599\
---------------------------------------------------------------------------

    \597\ See id. at 18748.
    \598\ See id.
    \599\ See id.
---------------------------------------------------------------------------

    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.\600\ 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,\601\ 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.\602\ 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.
---------------------------------------------------------------------------

    \600\ See id. at 18747.
    \601\ Individual investor orders typically feature lower adverse 
selection than other types of orders, such as institutional orders. 
See infra note 608 and accompanying text, describing how it is 
generally more profitable for any liquidity provider, including 
wholesalers, to execute against orders with lower adverse selection 
risk.
    \602\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021) at 
18748.
---------------------------------------------------------------------------

    Where implementation of the above-described MDI Rules may affect 
certain numbers in the baseline, the description of the baseline below 
notes those effects.
2. Current Rule 605 Disclosure Requirements
    The Commission believes that there are several areas where market 
participants' current access to information about execution quality 
under Rule 605 could be improved. Specifically, currently broker-
dealers that are not market centers are not required to report under 
Rule 605, which limits 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 the Rule was adopted in 2000, such as 
an increase in the speed of trading, have decreased the relevance of 
some of the information contained in Rule 605 reports.\603\
---------------------------------------------------------------------------

    \603\ See supra notes 12-16 and accompanying text for further 
discussion.
---------------------------------------------------------------------------

(a) Scope of Reporting Entities Under Current Rule 605 Reporting 
Requirements
    The current scope of entities that are required to report under 
Rule 605 does not include broker-dealers that only route customer 
orders externally, rather than executing customer orders internally, 
because they do not meet the definition of market center. As a result, 
it is difficult for market participants to use the execution quality 
statistics that are currently available to compare execution quality 
across these broker-dealers. Furthermore, to the extent that firms that 
operate two separate market centers co-mingle execution quality 
information about multiple market centers in Rule 605 reports, this 
would make it difficult for market participants to assess the execution 
quality of each market individually.
(1) Broker-Dealers
    Currently, broker-dealers that are not market centers are not 
required to prepare Rule 605 reports,\604\ which the Commission 
believes limits market participants' ability to assess and compare the 
execution quality that broker-dealers obtain for their customers.
---------------------------------------------------------------------------

    \604\ A broker-dealer may currently be subject to Rule 605 
reporting requirements to the extent that the broker-dealer is 
acting as or operates a market center. However, such reports are 
required to cover only the orders that the broker-dealer handled 
within its capacity as a market center. See supra notes 179-180 and 
accompanying text.
---------------------------------------------------------------------------

    Rule 605 and Rule 606 operate together to allow investors to 
evaluate what happens to their orders after the investors submit their 
orders to a broker-dealer for execution.\605\ 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
---------------------------------------------------------------------------

    \605\ See supra note 141 and accompanying text.

---------------------------------------------------------------------------

[[Page 3838]]

execution quality at those market centers.\606\ However, if broker-
dealers receive different execution quality from a given market center, 
combining Rule 606 and Rule 605 data would not be informative about the 
execution quality of individual broker-dealers' average execution 
quality. This is because, since a market center's Rule 605 report is 
aggregated across all of its broker-dealer customers, it is not 
possible to determine how execution quality varies across broker-
dealers at a particular market center.\607\
---------------------------------------------------------------------------

    \606\ See supra section VII.C.1.(b) for a discussion of broker-
dealers' current reporting requirements under Rule 606.
    \607\ For example, consider two broker-dealers, Broker-Dealer 1 
and Broker-Dealer 2, which both route orders to a market center 
(``Market Center A'') according to these broker-dealers' Rule 606 
reports. Assume that the orders routed by Broker-Dealer 1 receive 
consistently below-average execution quality from the wholesaler, 
while the orders routed by Broker-Dealer 2 receive consistently 
above-average execution quality. If a customer of Broker-Dealer 1 
were to examine Market Center A's Rule 605 report to get a sense of 
the average execution quality that their Broker-Dealer achieves for 
their orders, the customer would see only the execution quality 
statistics aggregated across Broker-Dealers 1 and 2, which would 
likely reveal that Market Center A offers about average levels of 
execution quality. However, this would not reveal the worse 
execution quality that Broker-Dealer 1, and therefore the customer 
of Broker-Dealer 1, is receiving from the market center.
---------------------------------------------------------------------------

    To explore this idea, an analysis was performed examining whether 
wholesalers, which know the identities of the broker-dealers who route 
orders to them, provide different execution quality to different 
broker-dealers because of differences in characteristics of their order 
flows: specifically, adverse selection risk. All else equal, it is 
generally more profitable for any liquidity provider, including 
wholesalers, to execute against orders with lower adverse selection 
risk, due to the reduced risk that prices will move against the 
liquidity provider.\608\ Therefore, wholesalers may provide better 
execution quality to retail brokers whose order flow exhibits lower 
adverse selection risk, e.g., in order to attract further order flow 
from that retail broker. Accordingly, a sample of CAT data \609\ 
between January 1, 2022 and March 31, 2022 in NMS common stocks and 
ETFs was evaluated to see if execution quality \610\ that retail 
brokers received from wholesalers differed based on the adverse 
selection risk of the broker-dealers' order flow,\611\ as measured 
using price impact.\612\ Retail brokers were grouped into quintiles 
based on the weighted average percentage price impact of their order 
flow.
---------------------------------------------------------------------------

    \608\ See, e.g., David Easley, Nicholas M. Kiefer & Maureen 
O'Hara, Cream-skimming or profit-sharing? The curious role of 
purchased order flow, 51 J. Fin. 811 (1996).
    \609\ This Commission analysis uses CAT data to examine the 
execution quality of marketable orders in NMS Common stocks and ETFs 
that belonged to accounts with a CAT account type of ``Individual 
Customer'' and that originated from a broker-dealer MPID that 
originating orders from 10,000 or more unique ``Individual 
Customer'' accounts during January 2022. The number of unique 
``Individual Customer'' accounts associated with each MPID was 
calculated as the number for unique customer account identifiers 
with an account customer type of ``Individual Customer'' that 
originated at least one order during the month of January 2022. 
Fifty-eight (58) broker-dealer MPIDs were associated with retail 
brokers originated orders from 10,000 or more unique Individual 
Customer accounts in January 2022. Account type definitions are 
available in Appendix G to the CAT Reporting Technical 
Specifications for Industry Members (https://catnmsplan.com/), under 
the field name ``accountHolderType.'' Account types represent the 
beneficial owner of the account for which an order was received or 
originated, or to which the shares or contracts are allocated. 
Possible types are: Institutional Customer, Employee, Foreign, 
Individual Customer, Market Making, Firm Agency Average Price, Other 
Proprietary, and Error. An Institutional Customer account is defined 
by FINRA Rule 4512(c) as a bank, investment adviser, or any other 
person with total assets of at least $50 million. An Individual 
Customer account means an account that does not meet the definition 
of an ``institution'' and is also not a proprietary account. 
Therefore, the CAT account type ``Individual Customer'' may not be 
limited to individual investors because it includes natural persons 
as well as corporate entities that do not meet the definitions for 
other account types. The Commission restricted that analysis to 
MPIDs that originated orders from 10,000 or more ``Individual 
Customer'' accounts in order to ensure that these MPIDs are likely 
to be associated with retail brokers to help ensure that the sample 
is more likely to contain marketable orders originating from 
individual investors.
    \610\ Measures of execution quality in this analysis include the 
percentage effective half-spread and the average E/Q ratio. 
Percentage effective half-spread is the weighted average of the 
percentage effective half spread (measured as (execution price--NBBO 
midpoint at time of order receipt)/NBBO midpoint at time of order 
receipt). E/Q ratio is the weighted average of the ratio of each 
transaction's effective spread divided by its quoted spread at the 
time of order receipt. Time of order receipt is defined as the time 
the wholesaler first receives the order. The NBBO is based on 
consolidated market data feed. Weighted averages are calculated by 
calculating the share weighted value at the individual stock level 
over the sample (i.e., weighting at the stock level based on the 
number of shares executed for transactions in the individual stock) 
and then weighting across stocks based on their total dollar 
transaction volume during the sample period (i.e., using the stock's 
total dollar trading volume as the weight when averaging the share 
weighted average stock values).
    \611\ The analysis employed filters to clean the data and 
account for potential data errors. Retail brokers' fractional share 
orders with share quantity less than one share were excluded from 
the analysis. The analysis included market and marketable limit 
orders that were under $200,000 in value and that originated from 
one the 58 retail broker MPIDs and were received by a market center 
that was associated with one of the six wholesalers CRD numbers 
(FINRA's Central Registration Depository number) during some point 
in the order's lifecycle. Orders that were received by the 
wholesaler or executed outside of normal market hours were excluded. 
Orders were also excluded if they had certain special handling codes 
so that execution quality statistics would not be skewed by orders 
being limited in handling by special instructions (e.g., pegged 
orders, stop orders, post only orders, etc.) Orders identified in 
CAT as Market and Limit orders with no special handling codes or one 
of the following special handling codes were included in the 
analysis: NH (not held), CASH (cash), DISQ (display quantity), RLO 
(retail liquidity order), and DNR (do not reduce). These special 
handling codes were identified based on their common use by retail 
brokers and descriptions of their special handling codes. The 
marketability of a limit order was determined based on the 
consolidated market data feed NBBO at the time a wholesaler first 
receives the order. Limit orders that were not marketable were 
excluded. The dollar value of an order was determined by multiplying 
the order's number of shares by either its limit price, in the case 
of a limit order, or by the midpoint of the consolidated market data 
feed NBBO at the time the order was first received by a wholesaler, 
in the case of a market order. The analysis includes NMS Common 
Stocks and ETFs (identified by security type codes of `A' and `ETF' 
in NYSE TAQ data) that are also present in CRSP data from CRSP 1925 
US Indices Database and CRSP 1925 US Stock Database, Ctr. Rsch. Sec. 
Prices, U. Chi. Booth Sch. Bus. (2022). Price improvement, effective 
spreads, realized spreads, quoted spreads, and price impacts were 
winsorized if they were greater than 20% of a stock's VWAP during a 
stock-week.
    \612\ By measuring the difference between the transaction price 
and the prevailing market price some fixed period of time after the 
transaction (e.g., one minute), price impact measures the extent of 
adverse selection costs faced by a liquidity provider. For example, 
if a liquidity provider provides liquidity by buying shares from a 
trader who wants to sell, thereby accumulating a positive inventory 
position, if the liquidity provider wants to unwind this inventory 
position by selling shares in the market, they will incur a loss if 
the price has fallen in the meantime. In this case, the price impact 
measure will be positive, reflecting the liquidity provider's 
exposure to adverse selection costs. In this analysis, percentage 
price impact is the weighted average of the percentage one minute 
price impact half spread (measured as (NBBO midpoint one minute 
after execution--NBBO midpoint at time of order receipt)/NBBO 
midpoint at time of order receipt). See supra note 610 for a 
definition of the time of order receipt and information about how 
weighted averaged were calculated in this analysis.
---------------------------------------------------------------------------

    Table 3 shows that the execution quality that retail brokers 
received from wholesalers systematically decreases as the adverse 
selection risk of their order flow increases, such that retail brokers 
with orders with higher average adverse selection risk systematically 
receive worse execution quality in the form of higher average 
percentage effective half-spreads and higher average E/Q ratios (i.e., 
lower price improvement) as

[[Page 3839]]

compared to broker-dealers with orders with lower average adverse 
selection risk.\613\ This highlights that wholesalers provide different 
execution quality to different retail brokers, in this case depending 
on the adverse selection risk of their orders. This is likely to have a 
large effect on the execution quality received by retail brokers, as an 
analysis of Rule 606 data found that retail brokers route more than 87% 
of the individual investor orders that they handle to wholesalers.\614\ 
However, since a wholesaler's Rule 605 report is aggregated across all 
of its broker-dealer customers, this variation in execution quality 
across retail brokers cannot be determined by matching its Rule 605 
report to broker-dealers' routing information from their Rule 606 
reports.
---------------------------------------------------------------------------

    \613\ This analysis uses data from prior to the implementation 
of the MDI Rules and specific numbers may differ following the 
implementation of the MDI Rules. In particular, for stocks with 
prices over $250, quoted spreads and price improvement statistics 
are expected to narrow because they will be measured against a 
narrower NBBO. The effects on effective spread, price impact, and 
realized spread statistics in these stocks is uncertain, because 
they are measured against the NBBO midpoint, and the Commission is 
uncertain how this will be affected. See supra section 
VII.C.1.(d)(2). However, the Commission does not anticipate that the 
existence of a negative relation between the retail brokers' adverse 
selection risk and the execution quality that they receive from 
wholesalers described here would be affected by the implementation 
of the MDI Rules.
    \614\ These numbers are based on an analysis of the percentage 
of market orders, marketable limit orders, non-marketable limit 
orders, and other orders that 46 retail brokers route to different 
types of venues in Q1 2022 based on their Rule 606 reports. 
Consistent with Rule 606, routing statistics are aggregated together 
in Rule 606 reports based on whether the stock is listed in the S&P 
500 index. The 46 broker-dealers were identified from the 58 retail 
brokers identified according to the procedure described in supra 
note 609. This analysis uses the retail broker's 606 report if they 
publish one, or the Rule 606 report of their clearing broker if they 
did not produce a Rule 606 report themselves (the sample of 46 
broker-dealer Rule 606 reports include some broker-dealers that were 
not included in the CAT retail analysis because some clearing broker 
Rule 606 reports are included). Some broker-dealers reported 
handling orders only on a not held basis and did not have any Rule 
606 reports. Because Rule 606 only include percentages of where 
their order flow is routed and not statistics on the number of 
orders, the reports are aggregated together using a weighting factor 
based on an estimate of the number of non-directed orders each 
broker-dealer routes in each security type each month. The number of 
non-directed orders is estimated separately for S&P 500 and non-S&P 
500 stocks by dividing the number of non-directed market orders 
originating from a retail broker in each stock type in a given 
month, which is estimated from CAT data, by the percentage of market 
orders as a percent of non-directed orders in the retail broker's 
Rule 606 report for that stock type in the same month (the weight 
for a clearing broker consists of the aggregated orders from the 
introducing brokers in the CAT analysis that utilize that clearing 
broker). The resulting statistics show that broker-dealers routed 
87.3% of orders in S&P 500 stocks and 87.9% of orders in non-S&P 500 
stocks to wholesalers, as compared to 9.1% and 8.5%, respectively, 
to national securities exchanges.

      Table 3--Average Wholesaler Execution Quality Received by Retail Broker Quintiles, January-March 2022
----------------------------------------------------------------------------------------------------------------
                                                                    Percentage      Percentage
                     Broker-dealer quintile                        price impact   effective half-    E/Q ratio
                                                                      (bps)        spread (bps)
----------------------------------------------------------------------------------------------------------------
1..............................................................            -1.04            2.86            0.43
2..............................................................             0.48            1.87            0.46
3..............................................................             0.79            2.15            0.48
4..............................................................             1.32            3.48            0.61
5..............................................................             3.85            7.24            0.88
----------------------------------------------------------------------------------------------------------------
Table 3: Average Wholesaler Execution Quality Received by Retail Broker Quintiles, January-March 2022. This
  table summarizes how execution quality varies in NMS Common Stocks and ETFs based on a retail broker MPID's
  price impact by grouping 58 retail broker MPIDs identified according to the procedure described in supra note
  609 in NMS Common Stocks and ETFs into quintiles based on their average price impact. Each retail broker
  MPID's price impact is determined by share weighting its average percentage price impact half spread within an
  individual NMS common stock or ETF and then averaging across stocks using the weighting of the dollar volume
  the retail broker executed in each security (dollar volume weighted); this measure of price impact is then
  used to sort retail broker MPIDs into quintiles. Within each quintile, average percentage price impacts,
  percentage effective half-spreads, and E/Q ratios are calculated as described in supra notes 610 and 612. See
  supra note 609 for dataset description and supra note 611 for details on the sample and filters used in this
  analysis. This analysis uses data from prior to the implementation of the MDI Rules and specific numbers may
  differ following the implementation of the MDI Rules. See supra note 613 and section VII.C.1.(d).

(2) Reporting Entities That Operate SDPs
    When a market center also operates a SDP, co-mingling SDP activity 
with other market center activity may obscure or distort information 
about the market center's execution quality in their Rule 605 reports, 
making it more difficult for market participants to observe the 
execution quality of each separate trading venue. SDPs are sometimes 
called ``ping pools,'' \615\ reflecting that institutional investors 
use these venues to ``ping'' (i.e., submit a small order in search of 
hidden liquidity) SDPs, often using Immediate or Cancel (IOC) orders. 
IOC orders typically have different execution profiles than other types 
of orders, including lower fill rates.\616\ Combining information on 
orders submitted to a market center's SDP along with its other orders 
will therefore effect a downwards 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 SDP with orders that are internalized or executed on 
a riskless principal basis,\617\ since SDP activity represents a 
significant portion of their trading volume.\618\ Also, since the 
information on executions in SDPs largely reflects institutional 
orders, combining information on SDP orders along with other orders 
would 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 are less able to observe and 
compare differences in execution quality across market centers as a 
result, this may reduce incentives for these market centers to compete 
for institutional investor orders on the basis of execution quality.
---------------------------------------------------------------------------

    \615\ See, e.g., Annie Massa, Trader VIP Clubs, `Ping Pools' 
Take Dark Trades to New Level, Bloomberg, (Jan. 16, 2018, 5:00 
a.m.), available at https://www.bloomberg.com/news/articles/2018-01-16/trader-vip-clubs-ping-pools-take-dark-trades-to-new-level#xj4y7vzkg.
    \616\ See infra section VII.C.2.(c)(7) for discussion of 
differences between marketable IOC order executions and the 
executions of other marketable order types.
    \617\ See infra section VII.C.2.(c)(8) for a discussion on how 
the treatment of wholesalers' riskless principal trades in Rule 605 
reports may also obscure information on execution quality.
    \618\ See infra note 769 and accompanying text, describing that 
the combined trading volume of the affiliated SDPs of the two most 
active wholesalers accounted for over 4% of total U.S. consolidated 
trading volume in 2021.
---------------------------------------------------------------------------

(b) Coverage of Orders Under Current Rule 605 Reporting Requirements
    The Commission believes that current Rule 605 reporting 
requirements exclude execution quality information about some order 
sizes and types that are relevant to market participants.
    To estimate the percentage of shares that are currently excluded 
from Rule 605 reporting requirements and the driving factor behind 
their exclusions (i.e., whether they are excluded based on their 
submission time, type, or size), data from the Tick Size Pilot B.I 
Market

[[Page 3840]]

Quality dataset,\619\ which had much broader reporting requirements 
than Rule 605,\620\ was analyzed for a period from April 2016 to March 
2019. As a first step, approximately 25% of orders are estimated to be 
excluded from Rule 605 requirements as they are 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 2, and shows that around 2.2% of shares are currently excluded 
from Rule 605 reporting requirements due to having effective times 
outside of regular trading hours. A further 51.6% of shares are 
excluded because they were of an order type that is currently excluded 
from Rule 605 reporting requirements.\621\ An additional 11.3% of the 
remaining order volume are excluded from Rule 605 coverage because of 
the exclusion of orders less than 100 shares and larger-sized orders. 
This leaves only around a third of share volume that is currently 
eligible to be included in Rule 605.\622\
---------------------------------------------------------------------------

    \619\ See Securities Exchange Act Release No. 72460 (June 24, 
2014), 79 FR 36840 (June 30, 2014) (Order Directing the Exchanges 
and the Financial Industry Regulatory Authority To Submit a Tick 
Size Pilot Plan) (``Tick Size Pilot Plan''). The Tick Size Pilot B.I 
Market Quality dataset contains information for approximately 2,400 
small cap stocks for a period from April 2016 to March 2019. As the 
Tick Size Pilot data only collected data for small cap stocks, 
results using this dataset are not necessarily representative of all 
stocks.
    \620\ See Appendix B and C Requirements and Technical 
Specifications, available at https://www.finra.org/sites/default/files/Appendix_B_C_Reporting_Requirements_version2.pdf. Order types 
that are included in the Tick Size Pilot dataset that are not 
covered by Rule 605 include Resting Intermarket Sweep orders, Retail 
Liquidity Providing orders, Midpoint Passive Liquidity orders, Not 
Held orders, Clean Cross orders, Auction orders, and orders that 
became effective when an invalid NBBO was in effect. Order sizes 
included in the Tick Size Pilot dataset that are not covered by Rule 
605 include orders for between 1-99 shares and orders for 10,000+ 
shares. See also Tick Size Pilot Program, Appendix B and C 
Statistics Frequently Asked Questions, available at https://www.finra.org/sites/default/files/Tick-Size-Pilot-Appendix-B-and-C-FAQ.pdf (``Tick Size Pilot FAQs''), answer to Question 2.1. 
Furthermore, the Tick Size Pilot dataset includes separate 
statistics for orders submitted outside of regular trading hours 
(trading sessions E and BE). See Tick Size Pilot FAQs, answer to 
Question 4.11.
    \621\ Of the shares excluded on the basis of order type, the 
largest percentage (73.6%) are excluded because they are not-held 
orders.
    \622\ An additional percentage of this order flow is also 
excluded from coverage due to the exclusion of stop-loss orders and 
non-exempt short sales, but these are not one of the listed order 
types in the Tick Size Pilot dataset and therefore it is not 
possible to exclude them. See Appendix B and C Requirements and 
Technical Specifications, available at https://www.finra.org/sites/default/files/Appendix_B_C_Reporting_Requirements_version2.pdf.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

Figure 2: Rule 605 Coverage, by Submission Time, Order Type, and Order 
Size, April 2016-March 2019
[GRAPHIC] [TIFF OMITTED] TP20JA23.002

    In order to examine changes in Rule 605 coverage, the Commission 
compared the number of executed shares in one market center's Rule 605 
reports between October 2003 and February 2021 to data on that market 
center's execution volume retrieved from TAQ.\623\ Figure 3 shows that 
an estimated 50% of shares executed during regular market hours were 
included in Rule 605 reports as of February 2021,\624\ and shows that 
this number has been on a slightly downward trend since around mid-
2012.\625\
---------------------------------------------------------------------------

    \623\ The number of shares traded on NYSE was collected from the 
intraday TAQ Consolidated Trade files for the period from October 
2003 to February 2021 for the entire universe of TAQ securities. 
Trades outside of regular trading hours were excluded. This dataset 
includes trades at the opening and closing auction. Due to that fact 
that odd-lot trades are only included in TAQ from December 2013 
onwards, the Commission excluded odd-lot trades from the dataset to 
avoid a mechanical decrease in coverage following their inclusion 
into the dataset. Rule 605 data for the same period was provided by 
IHS Markit.
    \624\ The Commission focused on the data from one market center 
(NYSE) because of the availability of a long time series for NYSE 
Rule 605 data. The Commission selected NYSE due to its large market 
share and ease of identifying this market center in both Rule 605 
and TAQ data. Note that these results are not necessarily 
representative of all market centers and the results for other 
market centers may be different.
    \625\ The implementation of the MDI Rules may result in a change 
in the flow of orders across trading venues, which may result in 
numbers that are different from those reported here. See supra 
section VII.C.1.(d)(2) for further discussion. However, the 
Commission does not believe that the MDI Rules would significantly 
affect the proportion of exchange volume that is covered by Rule 605 
reporting requirements.

---------------------------------------------------------------------------

[[Page 3841]]

Figure 3: Rule 605 Coverage Compared to TAQ, for the NYSE, October 
2003-February 2021
[GRAPHIC] [TIFF OMITTED] TP20JA23.003

    Figure 3 shows that Rule 605 coverage has varied significantly over 
time, likely the result of market and regulatory events that may have 
affected the usage of orders types that are excluded from or included 
in the definition of a covered order. For example, equity markets have 
seen an increase in the usage of ISOs after Regulation NMS \626\ and an 
increase in participation in national securities exchanges' closing 
auctions,\627\ both of which likely have decreased Rule 605 coverage 
over time.\628\
---------------------------------------------------------------------------

    \626\ See infra note 1021 and corresponding text. Marketable 
ISOs submitted at prices worse than the NBBO are excluded from Rule 
605 reporting requirements.
    \627\ See, e.g., Vincent Bogousslavsky & Dmitriy Muravyev, Who 
trades at the Close? Implications for Price Discovery and Liquidity 
(working paper Dec. 16, 2021), available at https://ssrn.com/abstract=3485840 (retrieved from SSRN Elsevier database), showing 
that closing auctions accounted for 7.5% of daily volume in 2018, up 
from 3.1% in 2010. The definition of ``covered orders'' that are 
subject to Rule 605 reporting requirements excludes orders for which 
customers requested special handling, including orders to be 
executed at a market opening price or a market closing price. See 17 
CFR 242.600(b)(22).
    \628\ Other market and regulatory changes that may have impacted 
Rule 605 coverage over time include the increased use of automated 
orders (e.g., NYSE switching from a floor-based trading model to a 
hybrid model), which may have increased coverage during the period 
of 2003-2007 due to an increase in the number of ``held'' orders 
(see 2018 Rule 606 Amendments Release, 83 FR 58338), and changes in 
the use of block orders. Note that the use of odd-lots and orders 
for less than one share have also changed substantially over time, 
but these orders types are excluded from our analysis of TAQ data.
---------------------------------------------------------------------------

    The following sections will discuss the various facets of Rule 605 
reporting requirements that lead to the exclusion of orders from 
reporting requirements and the extent to which these orders may be 
relevant for an assessment of execution quality, including excluded 
order sizes, ISOs, stop orders, non-exempt short sale orders, away-
from-the-quote limit orders, and orders submitted outside of regular 
trading hours.
(1) Orders Less Than 100 Shares and Larger-Sized Orders
    Currently, orders of certain sizes are excluded from Rule 605 
reporting requirements, including orders for less than 100 shares and 
larger-sized orders.\629\ Taken together, data on the usage of orders 
of these sizes implies that a large percentage of orders and trades is 
currently excluded from Rule 605 reporting requirements on the basis on 
order size, thus limiting the extent to which reporting entities 
compete for customers on the basis of execution quality.
---------------------------------------------------------------------------

    \629\ See 17 CFR 242.605(a)(1). See also supra note 40 and 
corresponding text for a definition of the current order size 
categories included in Rule 605 reporting requirements.
---------------------------------------------------------------------------

(a) Orders Less Than 100 Shares
    Due to the Rule's current exclusion of orders that are sized 
smaller than 100 shares, which excludes all odd-lot orders and, in some 
cases, round lot orders where a round lot is less than 100 shares, the 
Commission believes that Rule 605 reports are missing information about 
an important segment of order flow.
    The rise in the use of odd-lot orders is a phenomenon that has been 
well-

[[Page 3842]]

documented in modern markets.\630\ An analysis of data from the SEC's 
MIDAS analytics tool \631\ confirms that the use of odd-lots has 
increased substantially as a percentage of total on-exchange trades 
within the past decade. Figure 4 plots monthly averages of the odd-lot 
rate (the number of odd-lot trades as a percentage of the total on-
exchange trades) across stock price deciles, showing that the relative 
number of odd-lot trades has increased dramatically between 2012 and 
2022, for high-priced stocks in particular.\632\ Specifically, the 
figure shows that the odd-lot rate increased from around 0.6% to 2.32% 
for the lowest-price stocks (Decile 1), and from 10.6% to 40.9% for the 
highest-priced stocks (Decile 10).
---------------------------------------------------------------------------

    \630\ See, e.g., supra note 273 and accompanying text, 
describing how market participants have stated that odd-lots make up 
a majority of all trades. Until the round lot definition adopted 
pursuant to the MDI Rules is implemented, round lots continue to be 
defined in exchange rules. For most NMS stocks, a round lot is 
defined as 100 shares. Following the implementation of the MDI 
Rules, for stocks with prices greater than $250, a round lot will be 
defined as consisting of between 1 and 40 shares, depending on the 
tier. See supra note 577 for a definition of these tiers.
    \631\ See dataset Summary Metrics by Decile and Quartile, SEC, 
available at https://www.sec.gov/marketstructure/downloads.html. The 
data is available between January 2012 and March 2022.
    \632\ The number of odd-lot trades may be higher following the 
implementation of the MDI Rules due to the availability of odd-lot 
quotes in consolidated market data, which may result in numbers that 
are different from those reported here. For stocks priced above 
$250, the change in the definition of round lots may in result in 
fewer odd-lot trades, as more trades will be incorporated into the 
definition of round lots. See supra section VII.C.1.(d)(2) for 
further discussion.
---------------------------------------------------------------------------

Figure 4: Odd-Lot Rates by Stock Price Deciles, January 2012-March 2022
[GRAPHIC] [TIFF OMITTED] TP20JA23.004

    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.\633\ 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 March 2022.\634\ Confirming results from Figure 4 examining the time 
series of odd-lot order rates, Figure 5 shows that odd-lot orders make 
up a significant percentage of orders (18.2%), although these orders 
are only a small percentage of total submitted share volume 
(2.8%).\635\
---------------------------------------------------------------------------

    \633\ See Bartlett, et al. The authors divide their sample of 
stocks into five price-based buckets, with stocks in the lowest-
priced group defined as those priced at $20.00 or less, and stocks 
in the highest-priced group priced at $250.00 or more.
    \634\ This dataset consists of NMLO submission data collected 
from MIDAS and includes the posted orders and quotes on 11 national 
securities exchanges, for a sample of 80 stocks, across all trading 
days in March 2022. For more details on this dataset, see https://www.sec.gov/marketstructure/midas-system. The sample of stocks is 
chosen to be a representative sample in terms of market 
capitalization and price (calculated using price and shares 
outstanding data from CRSP on the last trading day in February 2021, 
from CRSP 1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. 
Booth Sch. Bus. (2022)). Note that the MIDAS dataset only includes 
displayed orders, and includes some order types that are currently 
excluded from Rule 605 reports, such as short sale orders and orders 
with special handling requests, as it is not possible to distinguish 
these orders in MIDAS.
    \635\ This data only includes information about NMLOs, and 
therefore information about the sizes of market orders and 
marketable limit orders is not available.
---------------------------------------------------------------------------

Figure 5: Distribution of NMLOs Across Order Size Buckets, March 2022

[[Page 3843]]

[GRAPHIC] [TIFF OMITTED] TP20JA23.005

    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.\636\ 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 as a result of trading algorithms that split larger 
parent orders into smaller child orders to reduce the market impact of 
their trades.\637\ 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.\638\ 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.\639\ Therefore, by not capturing information related to these 
orders, Rule 605 reports are missing information about potentially 
important segments of order flow from both individual and institutional 
investors.
---------------------------------------------------------------------------

    \636\ See, e.g., Phil Mackintosh, ``Odd Facts About Odd-Lots,'' 
(Apr. 2021), available at https://www.nasdaq.com/articles/odd-facts-about-odd-lots-2021-04-22.
    \637\ See infra section VII.C.3.(a)(1)(b), discussing the 
practice of broker-dealers handling institutional parent orders as 
not held orders and splitting them up into child orders.
    \638\ See, e.g., Hardy Johnson, Bonnie F. Van Ness & Robert A. 
Van Ness, Are all odd-lots the same? Odd-lot transactions by order 
submission and trader type, 79 J. Banking & Fin. 1(2017); Maureen 
O'Hara, Chen Yao & Mao Ye, What's not there: Odd lots and market 
data, 69 J. Fin. 2199 (2014).
    \639\ See, e.g., Bartlett et al. (2022); Matthew Healey, An In-
Depth View Into Odd Lots, Chi. Bd. Options Exch. (Oct. 2021), 
available at https://www.cboe.com/insights/posts/an-in-depth-view-into-odd-lots/.
---------------------------------------------------------------------------

(b) Orders Less Than a Share
    Due to the Rule's current exclusion of fractional orders that are 
smaller than one share,\640\ the Commission believes that Rule 605 
reports are missing information about an increasingly important segment 
of individual investor order flow. 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.\641\ The past few years have seen increasing 
attention paid to fractional shares, as more and more retail brokers 
are offering this functionality.\642\ The Commission understands that 
there are at least two different ways that retail brokers handle 
fractional trades: first, they can 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 can execute fractional trades against their own 
inventory.\643\
---------------------------------------------------------------------------

    \640\ Note that orders greater than one share can also be 
fractional. If the fractional order is for more than just a single 
share (e.g., 2.5 shares), the broker-dealer may internalize the 
fractional component (0.5 shares) and reroute the whole component (2 
shares) to a market center for execution.
    \641\ See, e.g., Kevin L. Matthews, What are Fractional Shares 
and How do They Work?, Bus. Insider (Sept. 21, 2022), available at 
https://www.businessinsider.com/personal-finance/fractional-shares.
    \642\ See, e.g., Rick Steves, Fractional Shares: Experts Weight 
in Amid Exploding Retail Trading Volumes, Fin. Feeds (June 7, 2021, 
8:25 a.m.), available at https://financefeeds.com/fractional-shares-experts-weigh-in-amid-exploding-retail-trading-volumes/, which shows 
that trading volume increased substantially (in one case, more than 
1,400%) for brokers after they introduced the use of fractional 
shares.
    \643\ See, e.g., Robert P. Bartlett, Justin McCrary & Maureen 
O'Hara, A Fractional Solution to a Stock Market Mystery (working 
paper July 20, 2022), available at https://ssrn.com/abstract=4167890 
(retrieved from SSRN Elsevier database). Note that, as fractional 
shares fall below the smallest order size category in current Rule 
605, a broker-dealer that currently exclusively executes fractional 
shares would be a market center, but would not be required to file 
Rule 605 reports.
---------------------------------------------------------------------------

    An estimation of the percentage of orders that are currently 
excluded from 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 \644\ confirms that

[[Page 3844]]

levels of fractional trading are mostly the result of individual 
investor trading: in March 2022, there were 31.67 million orders for 
less than one share that eventually received an execution, the 
overwhelming majority (92%) of which were submitted by accounts 
attributed to ``Individual Customers.'' \645\ While these orders only 
represented a small fraction (around 1.4%) of total executed orders, 
they represented a much higher fraction (10.4%) of executions received 
by individual investors.\646\ Therefore, by not capturing information 
related to these orders, Rule 605 reports are missing information about 
an important segment of individual investor trades.
---------------------------------------------------------------------------

    \644\ This dataset contains CAT records capturing introducing 
and trading activity in March 2022, including fractional NMS orders 
that were eventually executed on- and off-exchange. As individual 
fractional orders are often aggregated into a single representative 
order before routing and execution, staff looked at the information 
specific to the originating customer orders (designated as MENO 
orders events in CAT) that were eventually executed, and, 
separately, examined the information specific to the executions of 
the orders (designated as MEOT for off-exchange or EX and EOT for 
on-exchange events in CAT) that could be linked to the fractional 
MENOs either directly or via a representative order.
    \645\ See supra note 609 for a definition of account types in 
CAT.
    \646\ In terms of notional volume, executed fractional orders 
make up around 0.17% of total executed dollar volume and 1.4% of 
individual investor executed dollar volume.
---------------------------------------------------------------------------

(c) Larger-Sized Orders
    Due to the Rule's current exclusion of orders that are larger than 
10,000 shares,\647\ the Commission believes that Rule 605 reports are 
missing information about another important segment of order flow. 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.\648\ As shown in Figure 6, which plots the number of shares 
associated with trades that are for 10,000 or more shares as a percent 
of total executed shares,\649\ the rate of larger-sized trades declined 
from more than 25% in late 2003 to 11.3% as of March 2022. This decline 
is likely the result of the increased use of SORs, though other market 
changes such as the overall increase in stock prices may 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%.
---------------------------------------------------------------------------

    \647\ See supra note 281 and corresponding discussion describing 
the exemptive relief provided by the Commission in 2001 for orders 
with a size of 10,000 shares or greater.
    \648\ See infra section VII.C.3.(a)(1)(b) further discussing the 
practice of broker-dealers handling institutional parent orders as 
not held orders and splitting them up into child orders.
    \649\ This analysis uses data from intraday TAQ Consolidated 
Trade files for the period from September 2003 to March 2022 for the 
entire universe of TAQ securities. Plotted is the monthly number of 
shares associated with trades that are for 10,000 shares or more, 
divided by the total number of executed shares. The data is limited 
to trades with sales conditions indicating regular trades, including 
regular trades with no associated conditions, automatic executions, 
intermarket sweep orders, and odd lot trades. See NYSE Daily TAQ 
Client Specification, available at https://www.nyse.com/publicdocs/nyse/data/Daily_TAQ_Client_Spec_v3.3.pdf.
---------------------------------------------------------------------------

Figure 6: Larger-Sized Trades as a Percent of Total Executed Shares, 
September 2003-March 2022
[GRAPHIC] [TIFF OMITTED] TP20JA23.006

BILLING CODE 8011-01-C
    Furthermore, larger-sized orders make up a non-negligible percent 
of order flow. Figure 5, which plots the distribution of NMLO sizes in 
order submission data from MIDAS for the month of March 2022, shows 
that, while NMLOs of 10,000 or more shares made up only 0.09% of order 
flow in terms of number of orders, they made up nearly 7.8% 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, so would not 
be required to be included in Rule 605 reports even without the 
exemptive relief.\650\
---------------------------------------------------------------------------

    \650\ See supra note 60 and accompanying text discussing broker-
dealers' requirements under Rule 606(b)(3) to provide individualized 
reports of execution quality upon request for not held orders.
---------------------------------------------------------------------------

(2) Orders Submitted With Stop Prices
    The Commission believes that the current exclusion of orders with 
stop prices from the definition of ``covered order'' excludes orders 
that are likely relevant for investors. 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

[[Page 3845]]

orders.\651\ The treatment of stop orders varies across broker-dealers 
and market centers.\652\
---------------------------------------------------------------------------

    \651\ See, e.g., SEC, Types of Orders, available at https://www.investor.gov/introduction-investing/investing-basics/how-stock-markets-work/types-orders and the definitions of stop order and stop 
limit order in FINRA Rule 5350(a), available at https://www.finra.org/rules-guidance/rulebooks/finra-rules/5350. The stop 
price can be the last sale price, or a quotation in the case of stop 
on quote or stop limit on quote orders. The stop price may also be 
permitted to increase or decrease by a predetermined amount or 
formula in the case of trailing stop and trailing stop limit orders.
    \652\ For example, one broker-dealer stated that some of the 
market centers to which it routes orders may impose price limits to 
prevent stop orders from being triggered by potentially erroneous 
trades, and that these price limits vary by market center. See 
Trading FAQs: Order Types, Fidelity, available at https://www.fidelity.com/trading/faqs-order-types. Another brokerage firm 
states that, depending on to which market center a stop limit order 
is presented, a stop limit order can be activated as a limit order 
using either a transaction or quotation as the triggering event. See 
Best Execution of Equity Securities, UBS (June 2021), available at 
https://www.ubs.com/content/dam/static/wmamericas/bestexecution.pdf.
---------------------------------------------------------------------------

    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.\653\ Some national securities 
exchanges have eliminated this order type from their rule book.\654\ 
Furthermore, the use of stop orders has typically been associated with 
individual investors,\655\ who use these orders to try to protect a 
gain or to limit potential losses of a currently held position.\656\ 
Table 4 breaks down a sample of stop loss order volume by account type 
and stop loss order type using CAT data for March 2022.\657\ The data 
confirms that the use of stop orders by institutional investors is very 
rare (only 0.23% of market and 0.0003% of limit orders are submitted 
with stop prices), while their use is relatively more common for 
individual investors, particularly for market orders, around 6.44% of 
which are submitted with stop prices.
---------------------------------------------------------------------------

    \653\ See, e.g., Memorandum from SEC Division of Trading and 
Markets on Certain Issues Affecting Customers in the Current Equity 
Market Structure (Jan. 26, 2016), available at https://www.sec.gov/spotlight/equity-market-structure/issues-affecting-customers-emsac-012616.pdf, citing NYSE Order Type Usage Chart illustrating that 
stop orders, along with good-til-canceled, agency cross and manual 
orders, accounted for only 0.19% of total matched volume for Q3 2015 
and Q4 2015. See also How to Survive the Markets Without Stop-Loss 
Orders, NASDAQ (Dec. 2, 2015), available at https://www.nasdaq.com/articles/how-survive-markets-without-stop-loss-orders-2015-12-02, 
stating that stop orders represent around 2% of all orders placed on 
national securities exchanges.
    \654\ See, e.g., Securities Exchange Act Release No. 76649 (Dec. 
15, 2015), 80 FR 79365 (Dec. 21, 2015) (SR-NYSE-2015-60) (``NYSE 
Notice''); Securities Exchange Act Release No. 76655 (Dec. 15, 
2015), 80 FR 79382 (Dec. 21, 2015) (SR-NYSEMKT-2015-103).
    \655\ See, e.g., Annie Massa & Sam Mamudi, Black Rock Calls for 
Halting Stock Market to Avoid Volatility, Bloomberg Bus. (Oct. 7, 
2015), available at http://www.bloomberg.com/news/articles/2015-10-07/blackrock-calls-for-halting-the-stock-market-to-avoid-volatility 
(citing industry concerns with ``the widespread use of stop orders 
by retail investors'').
    \656\ See, e.g., Memorandum from SEC Division of Trading and 
Markets on Certain Issues Affecting Customers in the Current Equity 
Market Structure (Jan. 26, 2016), available at https://www.sec.gov/spotlight/equity-market-structure/issues-affecting-customers-emsac-012616.pdf. Meanwhile, professional or institutional investors are 
more likely to have the resources to be able to actively monitor 
their orders, and are therefore less likely to use stop orders. See, 
e.g., How to Survive the Markets Without Stop-Loss Orders, NASDAQ 
(Dec. 2, 2015), available at https://www.nasdaq.com/articles/how-survive-markets-without-stop-loss-orders-2015-12-02.
    \657\ See supra note 609 for dataset description. Stop orders 
are identified using the reporting requirements for stop orders in 
the CAT Reporting Technical Specifications for Industry Members. See 
CAT Reporting Technical Specifications for Industry Members, 
Consolidated Audit Trail, 64 (July 29, 2022), available at https://www.catnmsplan.com/sites/default/files/2022-07/07.29.2022_CAT_Reporting_Technical_Specifications_for_Industry_Members_v4.0.0r16_CLEAN_0.pdf.

                        Table 4--Stop Order Volume by Account and Order Types, March 2022
----------------------------------------------------------------------------------------------------------------
                                                           Types of stop orders (% of total stop orders)
                                    Orders with  ---------------------------------------------------------------
     Investor and order type      stop prices (%                  Stop on quote/  Trailing stop/
                                     of total       Stop/ stop     stop limit on   trailing stop       Total
                                      orders)          limit           quote           limit
----------------------------------------------------------------------------------------------------------------
Institutional:
    Market......................            0.23            49.4             0.5            11.3            61.3
    Limit.......................          0.0003            37.8             0.4             0.5            38.7
Individual:
    Market......................            6.44            68.3             9.0            10.3            87.6
    Limit.......................            0.03            10.1             1.7             0.6            12.4
----------------------------------------------------------------------------------------------------------------
Table 4: Stop Order Volume by Account and Order Types, March 2022. This table shows the percentage of orders
  that are submitted with stop prices (as a percentage of total orders) separately for accounts associated with
  institutional and individual investor types and for market and limit orders, using a sample of CAT data for
  all NMS stocks from March 2022. Also shown is a breakdown of stop order submission volume according to six
  common types of stop orders. See supra note 657 for information on the dataset and identification of stop
  orders.

(3) Non-Exempt Short Sale Orders
    Commission staff has taken the position that staff would view all 
non-exempt short sale orders as special handling orders.\658\ As a 
result, these orders are currently not included as part of Rule 605 
statistics, which may exclude a large portion of orders that are likely 
relevant for market participants.
---------------------------------------------------------------------------

    \658\ See 2013 FAQs.
---------------------------------------------------------------------------

    Non-exempt short sale orders are orders that are subject to price 
restrictions under Rule 201 of Regulation SHO,\659\ 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.'' \660\ 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 orders.'' \661\ The 
exclusion of tick-sensitive orders from Rule 605 reporting requirements 
ensures that these orders do not skew execution quality statistics, as 
the prevention of

[[Page 3846]]

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.
---------------------------------------------------------------------------

    \659\ See supra note 246 for more information about Rule 201 of 
Regulation SHO.
    \660\ ``Short exempt'' orders include short sale orders from 
market makers and short sales priced above the current national best 
bid at the time of submission. See 17 CFR 242.201(c) and (d).
    \661\ See supra section II.B.1.(b) for a discussion of the 
definition of covered orders.
---------------------------------------------------------------------------

    However, in the years since Rule 201's adoption, it has become 
clear that Rule 201 price test restrictions are not often triggered. 
Staff found that, between April 2015 and March 2022, a Rule 201 trigger 
event only occurred on 1.7% of trading days for an average stock.\662\ 
Around 18% of Rule 201 triggers occur the day after a previous trigger 
event, and around 46% 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.
---------------------------------------------------------------------------

    \662\ This analysis looked at the percentage of trading days 
that experienced a Rule 201 trigger event for the period January 
2012 to February 2021 for all listed stocks on NYSE or NASDAQ 
exchanges and then averaged across stocks. The Commission restricted 
its sample to common stocks identified in CRSP (share code 10 or 
11), from CRSP 1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. 
Chi. Booth Sch. Bus. (2022). The Commission also excluded financial 
stocks (SIC code 6000-6999), as financial stocks may have different 
properties than other types of stocks, including characteristics 
related to short selling (e.g., Markus K. Brunnermeier & Martin 
Oehmke, Predatory Short Selling, 18 Rev. Fin. 2153 (2014)). Rule 201 
circuit breaker data retrieved from ftp://ftp.nyxdata.com/NYSEGroupSSRCircuitBreakers/ and ftp://ftp.nasdaqtrader.com/SymbolDirectory/shorthalts/.
---------------------------------------------------------------------------

(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.\663\ 
However, the current exclusion of all orders submitted outside of 
regular market hours from the definition of ``covered order,'' \664\ in 
addition to excluding orders that execute outside of regular hours, 
also extends 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 current exclusion of all orders submitted 
outside of regular trading hours from Rule 605 may lead to the 
exclusion of an important segment of individual investor orders.
---------------------------------------------------------------------------

    \663\ See Adopting Release, 65 FR at 75421.
    \664\ See 17 CFR 242.600(b)(77).
---------------------------------------------------------------------------

    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.\665\
---------------------------------------------------------------------------

    \665\ See, e.g., Special Study: Electronic Communication 
Networks and After-Hours Trading, SEC (June 2000), available at 
https://www.sec.gov/news/studies/ecnafter.htm.
---------------------------------------------------------------------------

    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.'' \666\ 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.\667\ Since these orders are not intended 
to, 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 Adopting 
Release.
---------------------------------------------------------------------------

    \666\ Jennifer Wu, Michael Siegel & Joshua Manion, Online 
Trading: An Internet Revolution, Sloan School of Management 
Massachusetts Institute of Technology Research Notes, p. 4 (1999).
    \667\ See, e.g., Extended Hours Overview, Charles Schwab, 
available at https://www.schwab.com/public/schwab/nn/qq/about_extended_hours_trading.html; Extended-Hours Trading, 
Robinhood, available at https://robinhood.com/us/en/support/articles/extendedhours-trading/.
---------------------------------------------------------------------------

    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 \668\ was analyzed to break order volume down into different 
trading sessions according to when the order was eligible to 
trade.\669\ The Commission considers only those orders that have an 
effective time during regular market hours to be eligible for Rule 605 
reporting, and excludes orders that are otherwise excluded from current 
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.
---------------------------------------------------------------------------

    \668\ See supra note 619 for dataset description.
    \669\ These trading sessions include (1) regular hours only; (2) 
extended hours only; (3) both regular and extended hours with an 
effective time during regular market hours; and (4) both regular and 
extended hours with an order effective time during extended hours. 
See Tick Size Pilot Program Appendix B and C Frequently Asked 
Questions, Q4.11, available at https://www.finra.org/sites/default/files/Tick-Size-Pilot-Appendix-B-and-C-FAQ.pdf.
---------------------------------------------------------------------------

    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 eligible to execute during regular trading 
hours.\670\ In order to estimate the extent to which this occurs, a 
sample of CAT data \671\ was analyzed to examine submission volumes of 
NMLOs submitted outside of regular trading hours that were designated 
as only eligible to trade during regular trading hours,\672\ and 
compared them to

[[Page 3847]]

the volumes and characteristics of NMLOs submitted during a sample 10-
minute time window from 9:40 a.m. to 10:40 a.m. This analysis confirms 
that pre-open orders eligible to trade during regular trading hours 
likely make up only a very small percentage of order volume, 
representing only around 4.8% of the volume of orders submitted during 
a single ten-minute period of the trading day. However, further 
analysis reveals that these orders contain a high concentration of 
individual investor orders. Specifically, pre-open share volume 
contains a much larger fraction of individual investor shares (29.5%) 
than the sample time window during regular trading hours (1.9%), at 
least for off-exchange market centers for which individual investor 
orders could be identified.\673\ 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.
---------------------------------------------------------------------------

    \670\ Note that most retail brokers do not permit market orders 
during extended hours trading. See, e.g., Extended Hours Overview, 
Charles Schwab, available at https://www.schwab.com/public/schwab/nn/qq/about_extended_hours_trading.html; Extended-Hours Trading, 
Robinhood, available at https://robinhood.com/us/en/support/articles/extendedhours-trading/.
    \671\ The sample consists of 390 stocks for the period of March 
2021. Note that this sample of NMLOs collected from CAT may include 
NMLOs that would not be included in Rule 605 reports, if they never 
touch the NBBO at any point during their lifespan. Characteristics 
include whether the order was submitted to an exchange or off-
exchange market center, distance from the prevailing quote midpoint 
(or, in the case of pre-open orders, from the open price) in basis 
points (bps), and order size in terms of number of shares. For off-
exchange orders, the Commission is also able to characterize whether 
the order was initially submitted by an individual investor.
    \672\ The definition of marketability for the purposes of this 
analysis for pre-open orders is determined using the NBBO that is 
first disseminated after the time of order receipt, such that orders 
to be executed at a market opening price are excluded. See supra 
note 231 and accompanying text for more information about defining 
the marketability of orders submitted outside of regular market 
hours.
    \673\ As the account type (i.e., individual or institutional) 
data field is only available upon order origination and is not 
transferred to the executing market center, staff was not able to 
differentiate individual investors in the CAT data for exchanges.
---------------------------------------------------------------------------

(c) Information Required by Current Rule 605 Reporting Requirements
    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 included in Rule 605 
reports. 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
    The Commission believes that defining order size categories in 
terms of numbers of shares has led these order size categories to be 
less informative about differences in execution qualities across 
differently-sized orders. To illustrate, consider that some Regulation 
NMS rules exclude orders or trades that are sized above $200,000, as 
these orders typically warrant different treatment than smaller 
orders.\674\ For a $50 stock, a $200,000 order would be equivalent to 
around 4,000 shares, meaning that typically-sized orders (i.e., orders 
that are not excluded from the previously described Regulation NMS 
rules) below $200,000 (and above $500, given that orders below 100 
shares are excluded) are split between three order size categories: 100 
to 499 shares, from 500 to 1999 shares, and from 2000 to 4999 shares. 
Market participants are therefore able to use these order size 
categories to compare across orders of different sizes. However, for a 
$500 stock, a $200,000 order would only be equivalent to 400 shares. 
Therefore, for the purposes of Rule 605 reporting, nearly all 
typically-sized orders in this high-priced stock are either grouped in 
the smallest order size category (100 to 499 shares \675\), or, if they 
would fall below the smallest order size category of 100 shares, 
excluded altogether from reporting requirements.\676\ As all orders 
tend to be clustered into a single category, market participants are 
unable to use these categories to compare across orders of different 
sizes in higher-priced stocks. Similarly, at least one market 
participant argues that the definition of the current order size 
categories in terms of number of shares together with the exclusion of 
orders of less than 100 shares,\677\ has led to the exclusion of more 
orders with low dollar values as the average stock price 
increases.\678\
---------------------------------------------------------------------------

    \674\ See, e.g., Rule 606(a)(1) of Regulation NMS (requiring 
reports on the routing of customer orders) and Rule 600(b)(25) of 
Regulation NMS (defining ``customer order'' to exclude an order with 
a market value of $200,000 or more); Rule 604(b)(4) of Regulation 
NMS (providing an exception for orders of block size from required 
limit order display) and Rule 600(b)(12) of Regulation NMS (defining 
``block size'' as, in part, an order for a quantity of stock having 
a market value of at least $200,000).
    \675\ See 17 CFR 242.605(a)(1). See also supra note 40 and 
corresponding text for a definition of the current order size 
categories included in Rule 605 reporting requirements.
    \676\ In addition, even prior to the implementation of the MDI 
Rules, a small number of NMS stocks have a round lot size smaller 
than 100. See supra note 266.
    \677\ See supra section VII.C.2.(b)(1)(a) for a discussion of 
the exclusion of orders that are less than 100 shares from current 
Rule 605 reporting requirements.
    \678\ See Phil Mackintosh, Modern Retail Needs Modern Rules, 
NASDAQ (May 27, 2021, 11:54 a.m.), available at https://www.nasdaq.com/articles/modern-retail-needs-modern-rules-2021-05-27/.
---------------------------------------------------------------------------

    Furthermore, the Commission's 2020 adoption of the MDI Rules 
included a new definition of ``round lot'' that causes some round lots 
to be excluded from reporting requirements, absent an update to Rule 
605's order size categories.\679\ Specifically, the current size 
categories as defined under Rule 605, which exclude orders with fewer 
than 100 shares, exclude a portion of round lots for stocks with prices 
greater than $250.
---------------------------------------------------------------------------

    \679\ See supra note 577 for a definition of these tiers.
---------------------------------------------------------------------------

(2) Non-Marketable Limit Order Categories
    The Commission preliminarily believes that the current 
categorization of NMLOs may include orders whose executions are more 
likely to depend on their limit prices and price movements in the 
market, and exclude orders whose executions are more likely to depend 
on their handling by the market center. This could lead to the 
excessive exclusion of limit orders whose execution quality may be 
relevant to both individual and institutional investors.\680\
---------------------------------------------------------------------------

    \680\ Both institutional and individual investors likely make 
use of NMLOs. One academic study, using data on retail orders 
between 2003 and 2007 from two OTC market centers, estimated that 
NMLOs made up around 39% of individual investor order flow. See Eric 
K. Kelley & Paul C. Tetlock, How Wise are Crowds? Insights from 
Retail Orders and Stock Returns, 68 J. Fin. 1229 (2013). Other 
academic papers suggest that NMLO usage by institutional investors 
may also be high. See, e.g., Amber Anand, Sugato Chakravarty & 
Terrence Martell, Empirical Evidence on the Evolution of Liquidity: 
Choice of Market Versus Limit Orders by Informed and Uninformed 
Traders, 8 J. Fin. Mkt. 288 (2005); Ron Kaniel & Hong Liu, So what 
orders do informed traders use?, 79 J. Bus. 1867 (2006).
---------------------------------------------------------------------------

    When proposing to exclude away-from-the-quote NMLOs with a limit 
price more than ten cents away from the NBBO, the Commission reasoned 
that the execution quality statistics for these types of orders 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.\681\ Meanwhile, the current ``near-the-quote'' limit 
order category \682\ is meant to include limit orders that are 
submitted away from the NBBO, but that still have a relative likelihood 
of being executed (hence the minimum distance requirement from the 
NBBO). However, it is important to note that the likelihood of 
execution of both greatly depends on the movement of the NBBO. An order 
submitted even 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.
---------------------------------------------------------------------------

    \681\ See Proposing Release, 65 FR 48406 (Aug. 8, 2000) at 
48414.
    \682\ See 17 CFR 242.600(b)(14).
---------------------------------------------------------------------------

    Figure 7 breaks down a sample of MIDAS NMLO submission data from 80 
stocks in March 2022 \683\ into NMLO

[[Page 3848]]

types, 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).\684\ The figure shows that 
away-from-the-quote NMLOs represent nearly a quarter of all non-
marketable share volume.
---------------------------------------------------------------------------

    \683\ See supra note 634 for a description of the dataset.
    \684\ Results may be different following the implementation of 
the MDI Rules. Specifically, the NBBO is anticipated to narrow for 
stocks priced above $250 as a result of the new definition of round 
lots, which would likely decrease the number of inside-the-quote 
NMLOs and increase the number of quotes at or outside of the quotes 
for these stocks. See supra section VII.C.1.(d)(2) for further 
discussion.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

Figure 7: Order Submission Share Volume by NMLO Type, March 2022
[GRAPHIC] [TIFF OMITTED] TP20JA23.007

    Figure 8 presents data on the fill rates of NMLO orders, broken 
down by NMLO type, using the same sample of MIDAS NMLO submission 
data.\685\ The figure shows that near-the-quote and away-from-the-quote 
NMLOs appear very similar in terms of fill rates (0.6% and 0.18%, 
respectively), particularly compared to other types of NMLOs (e.g., 
inside-the-quote NMLOs have an average fill rate of around 2.7% to 
5.1%). The fact that near-the-quote and away-from-the-quote NMLOs have 
similar fill rates is consistent with the possibility that the current 
exclusion of NMLOs priced more than 10 cents away from the NBBO is 
based on a threshold that does not optimally differentiate between 
orders that have a meaningful chance to execute.\686\ Meanwhile, orders 
that never have a meaningful opportunity to execute (e.g., because they 
never touch the NBBO) may be included in Rule 605 statistics. To get an 
idea of the extent to which such orders are currently included in Rule 
605 statistics, note that, according to Figure 8, more than 99% of 
near-the-quote NMLOs do not execute, which, according to Figure 7, 
represents around 36% 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 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.\687\
---------------------------------------------------------------------------

    \685\ The distribution of orders into various NMLO categories 
may change following the implementation of the MDI Rules. See supra 
note 684 and section VII.C.1.d)(2). However, it is not clear how a 
change in the distribution of orders into various NMLO categories 
would affect the average fill rates of these NMLO categories.
    \686\ Commenters supported including NMLOs further away from the 
quote in Rule 605 reports but noted the difficulty of providing 
meaningful execution quality statistics for such orders. See supra 
notes 296-297 and accompanying text.
    \687\ See infra section VII.E.2.(b) for a discussion of how NMLO 
orders that are cancelled quickly after submission may impact fill 
rates.
---------------------------------------------------------------------------

Figure 8: Fill Rates of NMLOs, March 2022

[[Page 3849]]

[GRAPHIC] [TIFF OMITTED] TP20JA23.008

    Furthermore, defining the threshold for inclusion in Rule 605 
reporting requirements in nominal terms (i.e., 10 cents) means that 
NMLO coverage varies depending on the stock price: high-price stocks 
with smaller relative tick sizes have less NMLO coverage, since 10 
cents represents a relatively tighter band around the NBBO.\688\ This 
is shown in Figure 9, which breaks down the NMLO submission volumes in 
Figure 8 by both order type and average share prices. The figure shows 
that away-from-the-quote NMLOs represent 24.4% of total NMLO share 
volumes for the group of stocks with the highest share prices, but only 
8.4% for the group of stocks with the lowest share prices. 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.
---------------------------------------------------------------------------

    \688\ Results may be different following the implementation of 
the MDI Rules. Specifically, NMLO coverage for stocks priced above 
$250 may decrease even further, as the narrowing of the NBBO for 
these stocks would result in even tighter price bands. See supra 
section VII.C.1.(d)(2) for further discussion.
---------------------------------------------------------------------------

Figure 9: Order Submission Share Volume by NMLO Type and Stock Price 
Quartiles, March 2022

[[Page 3850]]

[GRAPHIC] [TIFF OMITTED] TP20JA23.009

(3) Beyond-the-Midpoint Limit Orders
    Currently, Rule 605 reports may not accurately reflect how the 
execution quality of inside-the-quote NMLOs may vary across market 
centers. The Commission preliminarily understands that some inside-the-
quote limit orders may have different execution quality characteristics 
than other types of NMLOs, and that this may vary across market 
centers. In particular, the Commission preliminarily understands that 
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. However, because they are not a marketable 
order type (i.e., they do not fully cross the spread), some statistics 
are not currently calculated for inside-the-quote limit orders, 
including price improvement statistics and effective spreads.
    In order to examine this possibility, Table 5 presents results from 
an analysis of the execution quality of beyond-the-midpoint NMLOs 
compared to other order types, including market, marketable limit, and 
other types of inside-the-quote NMLOs, using a sample of orders 
executed by the six most active wholesalers from CAT data for the 
period of Q1 2022.\689\ The results show that beyond-the-midpoint NMLOs 
executed by wholesalers tend to have much faster time-executions and 
higher fill rates than other types of inside-the-quote NMLOs, and are 
also somewhat more likely to be given price improvement. Grouping 
beyond-the-midpoint orders together with other NMLOs obscures the 
differences in these market centers' treatment of these types of 
orders, including potential differences in price improvement.
---------------------------------------------------------------------------

    \689\ See supra note 609 for dataset description. This dataset 
is from prior to the implementation of the MDI Rules and the 
distribution of orders into various NMLO categories, including 
beyond-the-midpoint orders, may change following the implementation 
of the MDI Rules. See supra note 684 and section VII.C.1.(d)(2). 
However, it is not clear how a change in the distribution of orders 
into various NMLO categories would affect the average fill rates and 
time-to-execution of these NMLO categories. The percent of price-
improved orders may also change, depending on how wholesalers adjust 
their price improvement practices in stocks with narrower spreads. 
However, it is unclear how the percentage of price-improved beyond-
the-midpoint NMLOs would change relative to other types of NMLOs.

    Table 5--Execution Quality Characteristics of Beyond-the-Midpoint NMLOs Executed by Wholesalers, Q1 2022
----------------------------------------------------------------------------------------------------------------
                                                   Average time-  Median time-to-                 Price-improved
                   Order type                      to-execution      execution    Fill rates (%)     orders (%
                                                     (seconds)       (seconds)                    total  orders)
----------------------------------------------------------------------------------------------------------------
Market..........................................           21.19            0.04            91.0            78.1
Marketable Limit................................          233.95            3.22            94.0            55.9
Beyond-the-Midpoint NMLOs.......................         1503.31          145.49            94.1             4.6

[[Page 3851]]

 
At-the-Midpoint and Below-the-Midpoint NMLOs....         4189.13         1480.60            81.7             1.1
----------------------------------------------------------------------------------------------------------------
Table 5: Execution Quality Characteristics of Beyond-the-Midpoint NMLOs Executed by Wholesalers, Q1 2022. This
  table shows execution quality metrics for different order types handled by the top six wholesalers using CAT
  data during the period of Q1 2022. See supra note 609 for dataset description. This analysis uses data from
  prior to the implementation of the MDI Rules and results may be different following the implementation of the
  MDI Rules. See supra note 689 and section VII.C.1.d)(2).

(4) Time-to-Execution
    The rapid increase in execution speeds in modern markets has 
decreased the usefulness of time-to-execution information that is 
currently required in Rule 605 reports.\690\ Currently, time-to-
execution information is required in Rule 605 reports in two ways: 
first, for market and marketable limit orders, the share-weighted 
average time-to-executions for orders executed with price improvement, 
at the quote, and with price dis-improvement, calculated based on 
timestamps recorded in seconds; and second, for all orders, the number 
of shares executed within certain pre-defined time-to-executions 
categories.\691\
---------------------------------------------------------------------------

    \690\ See supra note 133 and accompanying text discussing 
concerns raised by commenters about the current provisions in Rule 
605 for time-to-execution information.
    \691\ See supra note 343 for a definition of these time-to-
execution categories.
---------------------------------------------------------------------------

    First, calculating average time-to-execution statistics using 
timestamps recorded in terms of seconds does not reflect changes in 
market speeds. Figure 10 uses data from the SEC's MIDAS analytics tool 
\692\ to plot the percentage of on-exchange NMLOs that, conditional on 
being executed,\693\ are fully executed within one second or less from 
the time of submission between Q4 2012 and Q1 2022. The figure shows 
that this percentage has increased over time across different market 
capitalization groups, and that in Q1 2022 more than half (51.6%) 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 much of the variation in time-to-execution across market 
centers in today's markets.
---------------------------------------------------------------------------

    \692\ See dataset Conditional Cancel and Trade Distributions, 
SEC, available at https://www.sec.gov/marketstructure/downloads.html. If the order is not fully executed, it is treated as 
canceled at the close. See Quote Life Report Methodology, SEC, 
available at https://www.sec.gov/marketstructure/quote-life-report-methodology.
    \693\ I.e., Figure 10 plots the number of fully executed NMLOs 
executed within one second relative to the total number of fully 
executed on-exchange NMLOs. Note that, in contrast, Figure 8 plots 
the number of executed NMLO shares divided by the total number of 
submitted NMLO shares.
---------------------------------------------------------------------------

Figure 10: Percentage of NMLOs Executed Within One Second, Q1 2012-Q4 
2022
[GRAPHIC] [TIFF OMITTED] TP20JA23.010


[[Page 3852]]


    Second, given that many orders are executed on a sub-second basis, 
the current time-to-execution buckets prescribed by Rule 605 are not 
able to fully capture variations in time-to-executions across order 
types.\694\ To illustrate this, Figure 11 groups on-exchange NMLO 
executions collected from MIDAS for the period of March 2022 \695\ into 
time-to-execution buckets that correspond to those currently defined in 
Rule 605. The figure shows that, while the distribution of orders looks 
reasonable for away-from-the-quote and near-the-quote NMLOs, for which 
executions 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, 84.2% to 85.7% 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 Rule 605 (5 to 30 minutes) has only 1.1% to 1.3% of 
executions. Therefore, these time-to-execution categories likely do not 
fully capture variations in the execution times of these orders across 
reporting entities.
---------------------------------------------------------------------------

    \694\ See supra note 343 for a definition of these time-to-
execution categories.
    \695\ See supra note 634 for data description. Note that this 
dataset includes only NMLOs submitted to exchanges that do not 
immediately execute and are subsequently posted to the limit order 
book. The results of this analysis may not reflect the execution 
quality of inside-the-quote NMLOs that execute immediately, e.g., 
against hidden liquidity on the limit order book. Furthermore, this 
dataset is from prior to the implementation of the MDI Rules and the 
distribution of orders into various NMLO categories may change 
following the implementation of the MDI Rules. See supra note 684 
and section VII.C.1.(d)(2). However, it is not clear how a change in 
the distribution of orders into various NMLO categories would affect 
the average time-to-execution of these NMLO categories.
---------------------------------------------------------------------------

Figure 11: Distribution of NMLO Execution Times, March 2022
[GRAPHIC] [TIFF OMITTED] TP20JA23.011

    MIDAS data includes only orders and quotes that are posted on 
national securities exchanges' LOBs and trades that are executed 
against those orders,\696\ 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.\697\
---------------------------------------------------------------------------

    \696\ See supra note 634. MIDAS data includes information about 
off-exchange trade executions, but not information about any off-
exchange order submissions, so it is also not possible to use MIDAS 
data to calculate the time-to-execution of off-exchange orders.
    \697\ See supra note 619 for data description. Note that, as the 
Tick Size Pilot only collected data for small cap stocks, these 
execution times are not necessarily representative of all stocks. 
For example, larger market cap stocks are typically more liquid and 
likely execute faster. Also, as this is an older data set (April 
2016 until March 2019), it may be that market speeds have changed 
since this time. However, as it is likely that market speeds have 
only gotten faster since this time period, it could represent a 
lower bound on execution times and therefore still give an idea of 
how relevant the current Rule 605 time-to-execution buckets are for 
market and marketable limit orders. Lastly, this dataset also 
includes off-exchange orders, while the MIDAS data only includes on-
exchange orders, which could result in different execution times 
between the two datasets. Furthermore, this dataset is from prior to 
the implementation of the MDI Rules and the distribution of orders 
into various NMLO categories may change following the implementation 
of the MDI Rules. See supra note 684 and section VII.C.1.(d)(2). 
However, it is not clear how a change in the distribution of orders 
into various NMLO categories would affect the average time-to-
execution of these NMLO categories.

---------------------------------------------------------------------------

[[Page 3853]]

Figure 12 shows the distribution of time-to-execution statistics for 
market and marketable limit orders, along with the three categories of 
non-marketable limit orders currently required in Rule 605 reports 
(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 Rule 605.

Figure 12: Distribution of Order Execution Times, April 2016-March 2019
[GRAPHIC] [TIFF OMITTED] TP20JA23.012

    Echoing the results using MIDAS data in Figure 11, Figure 12 shows 
that, for at-the-quote and near-the-quote limit orders, executions are 
reasonably well distributed across the different time-to-execution 
buckets and there is positive volume in the longer time-to-execution 
buckets that are included in both the Rule 605 and Tick Size Pilot 
categorizations (30 to 59 seconds, 60 to 299 seconds, and 5 to 30 
minutes). However, similar to the results for inside-the-quote NMLOs, 
for market and marketable limit orders, execution times are mostly 
bunched up at the faster end of their time buckets; in fact, the vast 
majority of these orders are executed in under one second, falling 
within the shortest Rule 605 category of shares executed from 0 to 9 
seconds. Likewise, the longer time-to-execution buckets that are 
included in both the Rule 605 and Tick Size Pilot categorizations are 
virtually empty. Therefore, as with inside-the-quote NMLOs, current 
Rule 605 time-to-execution categories are missing information about 
potential differences across reporting entities in terms of the 
execution times of the market and marketable limit orders that they 
handle, which limits the usefulness of time-to-execution information 
for investors.\698\
---------------------------------------------------------------------------

    \698\ Academic literature suggests that time-to-execution 
information would be especially useful for institutional investors 
with short-lived private information, who profit from trading 
against other, slower institutions. See, e.g., Ohad Kadan, Roni 
Michaely & Pamela C. Moulton, Trading in the Presence of Short-Lived 
Private Information: Evidence from Analyst Recommendation Changes, 
53 J. Fin. Quantitative Analysis 1509 (2018). Time-to-execution 
information would also benefit institutions that engage in market 
making, as one study shows these institutions are likely to rely on 
speed to reduce their exposure to adverse selection and to relax 
their inventory constraints. See Jonathan Brogaard, Bjorn 
Hagstr[ouml]mer, Lars Nord[eacute]n & Ryan Riordan, Trading Fast and 
Slow: Colocation and Liquidity, 28 Rev. Fin. Stud. 3407 (2015).
---------------------------------------------------------------------------

(5) Effective and Realized Spreads
    The Commission believes that current requirements in Rule 605 
related to measures of effective and realized spreads may lead to 
uninformative or incomplete information.
    First, because of the increase in the speed at which markets 
operate,\699\ the requirement to use a five-minute benchmark to 
calculate realized spreads \700\ may limit the ability of the Rule 605 
realized spreads to measure what they are intended to measure, i.e., 
the adverse selection risk associated with providing liquidity at a 
market center. Liquidity providers face adverse selection risk when 
they accumulate inventory, for example by providing liquidity to more 
informed traders, because of the risk of market prices moving away from 
market makers before they are able to unwind their positions.\701\ 
Realized spreads are calculated by comparing an order's transaction 
price to the NBBO midpoint five minutes later (i.e., an estimate of the 
average expected trade price). Smaller (or even negative) realized 
spreads reflect that market prices have moved away from market makers, 
which is usually a reflection of order flow with

[[Page 3854]]

greater adverse selection risk. Therefore, all else being equal, if a 
market center reports favorable execution quality measures but a low or 
negative realized spread, this would reflect that the market center is 
still providing liquidity even during adverse market conditions.
---------------------------------------------------------------------------

    \699\ See supra section VII.C.2.(c)(4) for a discussion of 
evidence of increased market trading speeds.
    \700\ See 17 CFR 242.600(b)(9). See also supra note 359 and 
accompanying text for a further discussion of the definition of the 
realized spread.
    \701\ For example, if a liquidity provider provides liquidity to 
an informed trader, who is selling its shares because it knows that 
the share price is about to drop, the market maker will accumulate a 
long position in the stock. If the market maker were to immediately 
try to unwind this position in the market, the share price may have 
already dropped and the market maker will have to sell at a lower 
price than what it paid for the shares.
---------------------------------------------------------------------------

    Selecting an appropriate time horizon to calculate the realized 
spread must strike a balance between too short, which could distort the 
measures by transitory price impact, and too long, which could measure 
noise \702\ or the cumulative impact of subsequent market changes which 
are unrelated to the order's execution quality. An ideal measurement 
horizon would be one that aligns with the amount of time an average 
liquidity provider holds onto the inventory positions established from 
providing liquidity, which is not easily observable. A number of 
academic studies argue that the five-minute horizon is too long for a 
high-frequency environment.\703\ As one paper puts it, ``five minutes 
is a `lifetime', and so is not a meaningful time frame in which to 
evaluate trading.'' \704\ Another paper shows that realized spreads 
will generally increase as the time horizon that they are calculated 
over is shortened, highlighting that realized spreads are highly 
dependent on the time horizon over which they are calculated.\705\
---------------------------------------------------------------------------

    \702\ The term ``noise'' is used throughout in the statistical 
sense and refers to unexplained or unrelated variability in 
observations that degrades the efficiency of computed statistics or 
estimators.
    \703\ See, e.g., O'Hara 2015; O'Hara et al.; Conrad and Wahal.
    \704\ See O'Hara 2015. The author argues that the use of a five-
minute time horizon to calculate realized spreads leads to spreads 
that are nearly always negative, which is inconsistent with their 
interpretation as returns to market-making. The implication is that 
the five-minute time horizon is too noisy.
    \705\ See Conrad and Wahal.
---------------------------------------------------------------------------

    In order to see how using different time horizons for calculations 
of realized spreads can affect comparisons across market centers, using 
TAQ data for a sample of 400 stocks in February 2021,\706\ the 
Commission calculated the average realized spreads across 15 different 
market centers, measured using six different time horizons: 1 second, 5 
seconds, 10 seconds, 15 seconds, 1 minute, and 5 minutes. The results 
are presented in Figure 13, and support the findings from the empirical 
literature, that the choice of time horizon is non-trivial and realized 
spreads are generally increasing as the time horizon decreases.\707\
---------------------------------------------------------------------------

    \706\ Using CRSP data from the last trading day in February 
2021, the Commission selected 400 stocks, 100 each from 4 size 
quartiles: under $100 million, $100 million to $1 billion, $1 
billion to $10 billion, and over $10 billion. Within each market cap 
group, the Commission split the stocks into 4 quartiles based on 
price and selected 25 stocks from each price quartile evenly spaced 
within the quartile. The Commission manually replaced 3 stocks in 
the smallest size quartile with a price and sized matched stock 
because they had very little trading volume. The Commission limited 
its analysis to trades during regular market hours without an 
irregular sale condition. Analysis derived based on data from CRSP 
1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. 
Bus. (2022).
    \707\ This analysis uses data from prior to the implementation 
of the MDI Rules and results may be different following the 
implementation of the MDI Rules. Specifically, 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 
realized spreads. While specific numbers might change, the 
Commission does not expect the relative variation in realized 
spreads across different time horizons to change as a result of the 
implementation of MDI. See supra section VII.C.1.(d)(2) for further 
discussion.
---------------------------------------------------------------------------

Figure 13: Average Realized Spreads by Market Center and Time Horizon, 
February 2021
[GRAPHIC] [TIFF OMITTED] TP20JA23.013

BILLING CODE 8011-01-C

[[Page 3855]]

    These differences can have implications for comparisons across 
market centers as well. As shown in Figure 13, while Market Centers 8 
and 9 have positive realized spreads using the shortest time horizon, 
their spreads are mostly negative at longer time horizons. As a result, 
an assessment of whether these market centers have higher or lower 
realized spreads (i.e., more or less adverse liquidity conditions) as 
compared to, say, Market Center 6, depends on the time horizon used. 
Therefore, the choice of interval can not only affect the 
interpretation of realized spreads as a measure of liquidity 
conditions, but also affect comparisons across market centers.
    From the results of this analysis, it is unclear whether the choice 
of any specific measurement horizon results in realized spreads more 
accurately measuring adverse selection risk, as the ``ideal'' 
measurement horizon is not easily observable. However, given the higher 
frequency of trading today, it is likely that the use of a five-minute 
horizon for realized spreads limits the extent to which these measures 
are able to capture adverse selection risk, making it more difficult to 
compare conditions for liquidity providers across market centers.
    Second, reporting entities are currently not required to include 
information about the effective spreads of NMLOs in Rule 605 reports, 
which means that neither individual nor institutional investors have 
access to information about this dimension of execution quality for 
their NMLOs. The effective spread is calculated by comparing the trade 
execution price to the midpoint of the prevailing NBBO at the time of 
order receipt, which is used as an estimate of the stock's value.\708\ 
For market and marketable limit orders, the effective spread captures 
how much more than the stock's estimated value a trader has to pay for 
the immediate execution of its order. For NMLOs, instead of capturing a 
cost of immediacy, the effective spread captures how much the limit 
order provider expects to earn (i.e., pay less than or receive more 
than the stock's estimated value, depending on whether its order is to 
buy or sell) from the execution of its limit order.\709\ This measure 
of the expected benefits to liquidity provision contains information 
that may otherwise be useful to investors, but is currently missing in 
Rule 605 reports.\710\
---------------------------------------------------------------------------

    \708\ See, e.g., Bjorn Hagstr[ouml]mer, Bias in the Effective 
Bid-Ask Spread, 142 J. Fin. Econ. 314 (2021). See infra section 
VII.E.3.(c)(3) discussing potential issues with using the midpoint 
to calculate effective spreads.
    \709\ The interpretation of effective spreads for NMLOs is 
different from that of realized spreads. Effective spreads capture 
what liquidity providers expect to earn from providing liquidity, 
assuming that prices do not change before the liquidity provider is 
able to unwind its position and realized its profit. Meanwhile, 
realized spreads capture what it actually earns, taking into account 
that the market price may have moved against the liquidity provider 
before it could unwind its position. See supra note 701 and 
accompanying text. Therefore, while the effective spread measures 
the expected benefits to liquidity provision, the realized spreads 
measure its riskiness.
    \710\ Both individual and institutional investors provide 
liquidity through the use of NMLOs. See supra note 680.
---------------------------------------------------------------------------

    Lastly, the fact that Rule 605 reports only contain information on 
average realized and average effective spreads in terms of dollar 
amounts makes it difficult for market participants to account for 
differences in share prices when comparing across market centers.\711\ 
While spreads in dollar terms can be useful for participants because 
they can reflect a cost of (or benefit to) trading in terms that are 
easy to interpret, it is also the case that, since the effective spread 
is a per-share cost, the real costs to investors captured by the 
effective spread can be very different, depending on the stock 
price.\712\ All else being equal, spread measures tend to be higher in 
dollar terms for higher-priced stocks. As different reporting entities 
handle and/or transact in different mixes of stocks, this may make it 
difficult for market participants who may want to compare reporting 
entities' overall price performance or their performance for baskets of 
stocks to aggregate across effective spreads.\713\
---------------------------------------------------------------------------

    \711\ In theory, market participants could also control for 
differences in share prices by matching up stock-level information 
from Rule 605 reports to, e.g., information on the stock's average 
stock price from that month. However, this would require market 
participants who wish to control for differently-priced stocks to go 
through the extra step of gathering and matching stock price 
information to Rule 605 data, which may be an unreasonable 
expectation, particularly for individual investors with limited 
resources. Furthermore, while a monthly average might well capture 
the prevailing stock price for any given execution for a stock with 
low price volatility, it might not be a good representation of the 
prevailing stock price for executions in stocks with high price 
volatility.
    \712\ To illustrate, consider an investor that wants to acquire 
a $10,000 position in a $250 stock with an effective spread of 
$0.01; the investors will have to pay about $0.40 to purchase 40 
shares of the stock. Now consider an investors who wants to acquire 
a $10,000 position in a $2.50 stock with an effective spread of 
$0.01; the investor would have to pay around $4.00 to acquire 400 
shares. In other words, even though the dollar effective spread was 
the same, it was ten times more expensive for the investor to 
accumulate a position worth the same dollar amount in the lower-
priced stock.
    \713\ While the main purpose of Rule 605 is to facilitate 
comparisons across reporting entities on the basis of execution 
quality within a particular security, the Commission understands 
that access to aggregated information is useful for market 
participants. The proposed amendment to require reporting entities 
to prepare summary reports that aggregate execution quality 
information for S&P 500 stocks, along with all NMS stocks, would 
give market participants access to aggregate effective spreads for 
one commonly used basket of stocks. Meanwhile, per-stock percentage 
spread information would enhance market participants' ability to 
aggregate effective spread information across baskets of stocks 
other than the S&P 500.
---------------------------------------------------------------------------

    Also, measuring spreads in absolute terms may lead to comparisons 
across reporting entities that do not take into account potential 
differences in the timing of order flow, particularly for stocks whose 
prices vary significantly over the course of the monthly reporting 
period. For example, say that a stock's price increased dramatically 
over the course of a month from $2.50 to $250 and that, by chance, 
Market Center A executed more order flow for that stock at the 
beginning of the month, while Market Center B executed more order flow 
for that stock at the end of the month. In its Rule 605 report for that 
month, Market Center A showed an average effective spread of $0.01, 
while Market Center B showed an average effective spread of $0.10. 
Measured in dollar terms, Market Center B would seem to have offered 
worse execution prices than Market Center A, since it is associated 
with higher effective spreads. However, relative to the stock price, 
Market Center B would actually have the offered the better prices (a 
percentage effective spread of 0.04%) compared to Market Center A (a 
percentage effective spread of 0.4%).\714\ This illustrates that a 
market center's spread measures may be higher in dollar terms, but not 
necessarily because it offered worse execution performance; instead, 
these differences in spread measures may simply reflect changes in the 
stock's dollar price and the timing of market center's order flow.
---------------------------------------------------------------------------

    \714\ To illustrate how the percentage effective spread can 
reflect different costs in real terms, consider if one customer 
acquired a $10,000 stake in the stock at the beginning of the month 
(i.e., $10,000/$2.50 = 4,000 shares); a per-share effective spread 
of $0.01 means that the customer's cost of acquiring the position 
would have been $40. Meanwhile, another customer acquired a $10,000 
stake at the end of the month (i.e., $10,000/$250 = 40 shares); a 
per-share effective spread of $0.10 means that the customer's cost 
would have been only $4.
---------------------------------------------------------------------------

(6) Price and Size Improvement
    The current measure of price improvement required for Rule 605 
reports may not succeed in always capturing price improvement relative 
to the best available prices. Currently, market centers are required to 
report price improvement as the difference between the trade price and 
the NBBO.

[[Page 3856]]

However, 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.\715\ If an order executes against a resting odd-lot 
with a price better than the NBBO, the execution would result in 
positive price improvement according to the current Rule 605 reporting 
requirements. In cases where this occurs, this positive price 
improvement is the result of an inadequate benchmark price being used, 
and not the same as if the market center were to actively offer the 
order at a price better than the best available market price, which is 
what price improvement is typically intended to measure.
---------------------------------------------------------------------------

    \715\ See Bartlett et al. (2022). The authors found that this 
percentage increases monotonically in the stock price, for example, 
for bid prices, increasing from 5% for the group of lowest-price 
stocks in their sample, to 42% for the group of highest-priced 
stocks.
---------------------------------------------------------------------------

    Furthermore, such positive price improvement may actually reflect 
price dis-improvement, once all available displayed liquidity is taken 
into account. For example, if a market center internalizes an order 
with $0.05 of price improvement relative to the NBBO, but odd-lots are 
available on another market center at prices that are $0.10 better than 
the NBBO, the market center would post a price improvement measure of 
$0.05, even though the investor could have received a better price if 
the market center had routed the order to execute against the available 
odd-lot liquidity instead of internalizing the order. As a result, 
current measures of Rule 605 may overstate the amount of price 
improvement offered by some market centers.
    Information about price improvement is different from information 
about whether orders received an execution of more than the displayed 
size at the quote, i.e., ``size improvement.'' The price improvement 
metrics currently required by Rule 605 do not necessarily capture a 
market center's ability to fill orders beyond the liquidity available 
at the NBBO.\716\ For example, consider a situation in which the market 
is $10.05 x $10.10 with 100 consolidated shares available at the NBO of 
$10.10 and 100 consolidated shares available at the next best ask price 
of $10.15. Say that a trader submits a marketable buy order for 200 
shares to a market center, which fills the entire order at the best ask 
price of $10.10. The market center's Rule 605 statistics would reveal a 
price improvement metric of $0 for this order, despite the fact that 
the trader saved money by avoiding having to walk the book, which would 
have resulted in a total price of (100 * $10.10) + (100 * $10.15) = 
$2,025. As a result of the market center's ability to offer this ``size 
improvement,'' the trader saved an average of $10.125 $- $10.10 = 
$0.025 per share. This information about execution quality is not 
reflected in the market center's price improvement statistics.
---------------------------------------------------------------------------

    \716\ An analysis of data from the Tick Size Pilot B.II Market 
and Marketable Limit Order dataset reveals that nearly 7% of orders 
had sizes greater than the liquidity available at the NBBO between 
April 2016 and March 2019. See infra note 723 for data description. 
See also supra note 406 and accompanying text. This analysis uses 
data from prior to the implementation of the MDI Rules and results 
may be different following the implementation of the MDI Rules. 
Specifically, the MDI Rules could result in a smaller number of 
shares at the NBBO for stocks in higher-priced round lot tiers, 
increasing the number of orders with sizes greater than the NBBO. 
See supra section VII.C.1.(d)(2) for further discussion.
---------------------------------------------------------------------------

    As the Commission stated in the Adopting Release, the average 
effective spread captures some information about size improvement.\717\ 
The effective spread is calculated by comparing the trade execution 
price with the midpoint of the NBBO, rather than with the NBBO itself. 
In this way, it captures the full range of available liquidity at a 
market center and not merely the displayed orders that determine the 
NBBO. The effective spread will be larger for orders that are larger 
than liquidity available at the NBBO and are required to walk the book. 
Therefore, generally speaking, a market center that offers greater size 
improvement will tend to have a lower average effective spread (i.e., 
these measures will be negatively correlated).\718\ However, as this 
measure contains information about both size and price, it may be 
difficult to disentangle information about size improvement from 
information about price improvement when interpreting average effective 
spreads.\719\ Therefore, investors that particularly value the ability 
of market centers to offer size improvement, such as investors trading 
in larger order sizes, would not currently be able to use the metrics 
currently contained in Rule 605 reports to easily discern which market 
center would better handle their order according to this dimension of 
execution quality.\720\
---------------------------------------------------------------------------

    \717\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75425.
    \718\ For example, assume that a trader submits a marketable buy 
order for 100 shares to a $10.05 x $10.10 market with 100 
consolidated shares available at the NBO of $10.10 and 100 
consolidated shares available at the next best ask price of $10.15. 
In this case, the effective spread would be 2 * ($10.10 - $10.075) = 
$0.05, reflecting that the trader had to pay an average of $0.05 
more per share than the NBBO midpoint. Now consider the situation in 
which the trader instead submits a marketable buy order for 200 
shares to a market center (``Market Center A'') that walks the order 
up the book. In this case the effective spread will be twice as 
high, 2 * ($10.125 - $10.075) = $0.10. This higher effective spread 
reflects the need for Market Center A to use volume beyond the best 
quote to fill the order. If, on the other hand, instead of walking 
the 200-share order up the book, a market center (``Market Center 
B'') fills the entire buy order at the current NBO of $10.10; the 
effective spread would only be $0.05. The ability of Market Center B 
to execute an order for more than the displayed size at the quote is 
therefore reflected in an effective spread that is lower than that 
of Market Center A.
    \719\ To illustrate, consider the example in supra note 718, 
but, instead of 200 shares, the trader's order was for 100 shares 
and Market Center A executed the order with an average price dis-
improvement of $0.025; the effective spread for Market Center A 
would similarly be $0.10. Furthermore, consider a situation in which 
the market is wider at $10.12 x $10.02 and Market Center B executes 
the 100-share order with an average price improvement of $0.025 per 
share, while Market Center A executes it without any price 
improvement. Both of these cases would lead to the same effective 
spreads (an effective spread of $0.10 for Market Center A, and an 
effective spread of $0.05 for Market Center B) as the above-
described scenario in which Market Center B offered size improvement 
and Market Center A did not, but for situations in which the order 
size is less than or equal to the displayed size at the quote.
    \720\ For example, compare the example of Market Center B 
offering size improvement to a 200-share order in note 718, supra, 
to the example of Market Center B offering price improvement to a 
100-share order in note 719, supra. A trader that tends to submit 
200-share orders would want to know a market center's ability to 
offer the first scenario, while a trader that tends to submit 100-
share orders would want to know the market center's ability to offer 
the second scenario. However, in both examples the Rule 605 report 
would show an effective spread statistic of $0.05 for orders in the 
order size category of 100-499 shares, which means that these 
traders would not be able to use this statistic to discern a market 
center's execution quality according to the dimension of execution 
quality that they find most valuable.
---------------------------------------------------------------------------

    (7) Marketable IOCs
    The Commission preliminarily believes that grouping marketable IOCs 
together with other marketable limit orders may lead to a downward skew 
on the execution quality metrics (specifically, derived estimates of 
fill rates) for market centers that handle a large amount of IOCs, 
which would hinder the extent to which these metrics could be used to 
accurately compare execution quality across market centers. At least 
one commenter to the 2010 Concept Release on Equity Market Structure 
pointed out that IOCs may have a different submitter profile 
(typically, institutional investors) and different execution quality 
characteristics than other types of orders.\721\ Furthermore, an 
analysis using CAT data \722\ of retail orders received at larger 
retail brokers during June 2021 indicate that approximately only 0.02% 
of individual investor

[[Page 3857]]

orders are submitted with an IOC instruction.
---------------------------------------------------------------------------

    \721\ See supra note 326 and accompanying text.
    \722\ See supra note 609 for dataset description.
---------------------------------------------------------------------------

    To examine whether IOC orders have different execution quality 
characteristics than other types of orders, an analysis was performed 
using data from the Tick Size Pilot B.II Market and Marketable Limit 
Order dataset,\723\ which includes a flag indicating whether a market 
or marketable limit order has been marked as IOC. The results are 
presented in Table 6 and show that IOCs indeed may have different 
execution quality, as they typically have much lower fill rates (3.22%) 
than other market and marketable limit orders (15.94%), particularly 
for larger-sized orders. Therefore, the inclusion of IOCs along with 
other types of market and marketable limit orders may skew the 
execution quality of these other orders types, particularly since IOCs 
make up more than 90% of market and marketable share volume.
---------------------------------------------------------------------------

    \723\ See Tick Size Pilot Plan. This dataset contains 
information for approximately 2,400 small cap stocks for a period 
from April 2016 to March 2019. Orders with special handling codes 
are discarded, as are orders marked as short sales (``SS''). Note 
that, as the Tick Size Pilot collected data only for small cap 
stocks, these time-to-executions are not necessarily representative 
of all stocks. For example, larger market cap stocks may be traded 
more actively by institutional investors, and therefore would likely 
have higher IOC volumes.

                   Table 6--Immediate-or-Cancel (IOC) Share Volume, October 2018-October 2019
----------------------------------------------------------------------------------------------------------------
                                                                IOC volume (%
                                                                   of share     Fill rate (IOC)  Fill rate (non-
                                                                   volume)                             IOC)
----------------------------------------------------------------------------------------------------------------
Market Centers Other than Wholesalers:
    Less than 100 shares.....................................             88.1             39.6             15.4
    100 to 499 shares........................................             88.9             14.8             11.5
    500 to 1,999 shares......................................             84.6              5.4              6.5
    2,000 to 4,999 shares....................................             89.3              3.0              8.1
    5,000 to 9,999 shares....................................             91.6              1.3              7.5
    10,000 or more shares....................................             92.8              0.3              3.8
Wholesalers:
    Less than 100 shares.....................................             33.6             30.1             67.1
    100 to 499 shares........................................             70.7             13.4             48.1
    500 to 1,999 shares......................................             66.6              5.6             95.0
    2,000 to 4,999 shares....................................             54.8              4.3             93.7
    5,000 to 9,999 shares....................................             59.0              2.1             84.5
    10,000 or more shares....................................             83.8              0.3             60.7
All Market Centers and Order Sizes...........................            90.04             3.22            15.94
----------------------------------------------------------------------------------------------------------------
Table 6: Immediate-Or-Cancel (IOC) Share Volume, October 2018-October 2019. This table shows the percentage of
  market and marketable limit orders submitted with IOC instructions, along with the fill rates of those orders,
  using data from the Tick Size Pilot B.II Market and Marketable Limit Order dataset. See supra note 723 for
  data description. This dataset contains an ``IOC'' flag, which is equal to ``Y'' if the order is an IOC order.
  The Commission excluded orders outside of regular trading hours and identified retail wholesaler orders as
  orders originating from seven trading center codes that the Commission understands to be retail wholesalers.

    This is especially likely to be the case for wholesalers. The 
Commission understands that IOC orders received by wholesalers are 
typically institutional orders that are pinged in the wholesalers' SDPs 
to see if any contra-side volume is available. This is supported by 
Table 6, which shows that the differences between fill rates for IOC 
and non-IOC orders are particularly stark for these market centers: 
While wholesaler fill rates range between 60% and 95% for non-IOC 
orders, they are mostly below 30% for IOC orders, and even smaller for 
larger order sizes, dropping to just 0.3% for orders for 10,000 shares 
or more. This is again consistent with the idea that wholesalers' IOC 
orders may represent institutional orders that are routed to their 
SDPs. Co-mingling SDP activity with other market center activity may 
obscure differences in execution quality or distort the general 
execution quality metrics for the market center.\724\ Similarly, 
grouping together IOC orders along with other types of market and 
marketable orders could impose a significant downwards skew on the fill 
rates, in particular for larger order sizes and orders handled by 
wholesalers. This may impact market centers' incentives to achieve 
better execution quality for marketable orders.\725\
---------------------------------------------------------------------------

    \724\ See supra section VII.C.2.(a)(2) for further discussion of 
co-mingling SDP activity with other market center activity.
    \725\ For example, if a market center's Rule 605 reports reveals 
low fill rates for market orders simply because it handles a large 
amount of marketable IOCs, it may not be incentivized to improve its 
fill rates for other types of market orders since the higher fill 
rates of these orders would be obscured by the low fill rates of 
marketable IOCs.
---------------------------------------------------------------------------

(8) Riskless Principal Orders
    The Commission believes that current reporting of riskless 
principal transactions \726\ leads to the duplicative reporting of 
these orders, and creates uncertainty about how many orders are 
internalized by off-exchange market centers, particularly wholesalers.
---------------------------------------------------------------------------

    \726\ See supra note 416 and accompanying text for a definition 
and discussion of riskless principal transactions.
---------------------------------------------------------------------------

    In a riskless principal transaction, a market center routes a 
principal order to a second market center, typically an exchange or 
ATS, in order to fulfill a customer order; upon execution at the second 
market center, the first market center executes the customer 
transaction on the same terms as it received from the principal 
execution at the second market center. Currently, for the purposes of 
Rule 605 reporting, both the first and second market centers in this 
example would report the riskless principal transaction as having been 
executed at the 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).\727\
---------------------------------------------------------------------------

    \727\ See supra note 417 and accompanying text. In contrast, for 
the purposes of SIP reporting, the away market center is required to 
report the principal transaction to the tape, while the receiving 
market center would post a non-tape (regulatory or clearing-only) 
report to reflect the offsetting riskless customer transaction. When 
the initial leg of the transaction takes place on and is reported 
through an exchange, members are instructed not to report the 
customer transaction for public dissemination purposes, as that 
would result in double (tape) reporting of the same transaction. See 
Trade Reporting Frequently Asked Questions, answers to Questions 
302.2 and 302.4, available at https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq.

---------------------------------------------------------------------------

[[Page 3858]]

    The Commission believes that, particularly in the case of riskless 
principal transactions that are handled by wholesalers, grouping 
transactions that are handled on a riskless principal basis together 
with other orders executed at the market center under Rule 
605(a)(1)(i)(D) may obscure information about the extent to which 
wholesalers internalize orders. Wholesalers primarily choose between 
two options to execute the individual investor orders that they handle: 
they either internalize orders by executing orders against their own 
capital, or they execute orders on a riskless principal basis.\728\ 
While wholesalers' internalized orders are not exposed to competition 
from other interested parties quoting on external market centers, their 
riskless principal executions expose individual investor orders to 
trading interest from market participants other than the wholesaler, 
which has potential implications for differences in execution quality 
between these two order types. Currently, both types of orders would be 
categorized together as orders executed at the market center under Rule 
605(a)(1)(i)(D), so market participants would not be able to tell from 
Rule 605 reports whether a wholesaler internalizes the majority of its 
individual investor order flow, or executes the majority as riskless 
principal. Thus, key information that would be useful for investors 
(particularly individual investors, whose orders are overwhelmingly 
handled by wholesalers \729\) when interpreting and comparing 
information about wholesalers' execution quality is currently missing 
from Rule 605 reports.
---------------------------------------------------------------------------

    \728\ See infra section VII.C.3.(b)(1) for further discussion of 
the market for trading services, which includes wholesalers.
    \729\ See supra note 614 for results from an analysis of retail 
brokers' routing practices.
---------------------------------------------------------------------------

(d) Accessibility of Current Rule 605 Reports
    Rule 605 currently requires market centers to post their monthly 
reports on an internet website that is free of charge and readily 
accessible to the public.\730\ There is currently no system or 
requirement in place for the centralized posting of Rule 605 reports, 
which results in search costs for market participants. In order to 
collect a complete or mostly complete set of Rule 605 reports to, for 
example, select the reporting entity offering the best execution 
quality in a given stock, a market participant would need to perform 
the following tasks, for each of the estimated 236 reporting entities 
that are currently required to prepare Rule 605 reports: \731\ first, 
search the internet for the website(s) of the reporting entity; second, 
find the area of the reporting entity's website(s) that links to its 
Rule 605 report; and third, find the correct link and download the 
appropriate report (or multiple reports, if the information for 
multiple months is desired).
---------------------------------------------------------------------------

    \730\ See 17 CFR 242.605(a)(2) (requiring market centers to make 
their Rule 605 reports ``available for downloading from an internet 
website that is free and readily accessible to the public. . . .'').
    \731\ See supra section VI.C for a discussion of the estimated 
number of reporting entities under the proposed amendments.
---------------------------------------------------------------------------

    The process of collecting Rule 605 reports may be simplified by the 
NMS Plan's requirement that each market center must designate a single 
Participant to act as the market center's Designated Participant, who 
is tasked with maintaining a comprehensive list of the hyperlinks 
provided by its market centers.\732\ Furthermore, certain reporting 
entities' use of third-party vendors to prepare and/or collect Rule 605 
reports may also simplify the process of collecting Rule 605 reports, 
as these vendors typically maintain a centralized repository of the 
reports that they handle.\733\ However, because an individual vendor or 
Designated Participant may only offer a subset of Rule 605 reports or 
hyperlinks to reports, which may not be a representative sample of 
reports, it is still the case that collecting the complete or even a 
mostly comprehensive set of Rule 605 reports could entail search 
costs.\734\ In order to collect a complete set of reports, market 
participants may still need to search the websites of and collect 
reports from multiple vendors or Designated Participants.
---------------------------------------------------------------------------

    \732\ See Section VIII of the Rule 605 NMS Plan. For a 
description of ``Designated Participant'' as defined in the Plan, 
see supra note 47.
    \733\ See, e.g., Disclosure of SEC--Required Order Execution 
Information, S&P Global, available at https://vrs.vista-one-solutions.com/sec605rule.aspx.
    \734\ For these reasons and others, EMSAC has suggested 
considering a centralized location for 605 reports. See EMSAC 
Recommendations Regarding Rule 605 and 606, SEC, 4, available at 
https://www.sec.gov/spotlight/emsac/emsac-recommendations-rules-605-606.pdf (stating that ``To further improve standardization and the 
consistency of reporting, the SEC could consider centralizing report 
creation in an unbiased and trusted source such as FINRA.''). The 
Commission also notes that FINRA has proposed requiring members to 
submit Rule 606(a) order routing reports to FINRA for publication on 
the FINRA website. See Report from FINRA Board of Governors Meeting, 
FINRA (Mar. 2022), available at https://www.finra.org/media-center/newsreleases/2022/report-finra-board-governors-meeting-march-2022 
(describing proposed amendments to centrally host SEC Rule 606(a) 
reports).
---------------------------------------------------------------------------

3. Markets for Brokerage and Trading Services for NMS Stocks Under 
Current Rule 605 Disclosure Requirements
(a) Brokerage Services for NMS Stocks
(1) Current Structure of the Market for Brokerage Services
    Based on information from broker-dealers' FOCUS Report Form X-17A-5 
Schedule II, there were 3,498 registered broker-dealers as of Q2 2022. 
A portion of these broker-dealers focus their business on individual 
and/or institutional investors in the market for NMS stocks.\735\ These 
include both carrying broker-dealers, who maintain custody of customer 
funds and securities, and introducing broker-dealers, who accept 
customer orders and introduce their customers to a carrying broker-
dealer that will hold the customers' securities and cash.\736\ The 
Commission estimates that there are approximately 153 broker-dealers 
that carry at least one customer trading in NMS stocks and 
options,\737\ and 1,110 broker-dealers that introduce at least one 
customer trading in NMS stocks and options.\738\
---------------------------------------------------------------------------

    \735\ Some broker-dealers service only the accounts of other 
brokers, which are excluded from the definition of customers. See 
supra note 140 for a definition of ``customer.''
    \736\ See supra note 174 for a description of introducing and 
carrying broker-dealers. Some firms operate a hybrid introducing/
carrying broker-dealer by introducing on a fully disclosed basis to 
a carrying broker-dealer those customers that trade securities for 
which the broker-dealer is not prepared to provide a full range of 
services. See, e.g., Securities Exchange Act Release No. 70073 (Aug. 
21, 2013), 78 FR 51910 (Aug. 21, 2013) at 51911, 51949, and 51968.
    \737\ This number is based on the number of broker-dealers that 
report carrying at least one customer on their 2021 FOCUS Schedule I 
reports.
    \738\ This number is based on estimates using broker-dealers 
FDIDs identified in CAT data during the 2021 calendar year. As CAT 
data only includes information about NMS stocks and options, broker-
dealers that introduce or carry customers trading in other assets 
classes are not included in these numbers. See infra note 1008 for a 
discussion of the data and methodology for identifying introducing 
broker-dealers.
---------------------------------------------------------------------------

    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, 
who generally wants to receive the best possible execution of their 
order.\739\ These broker-dealers can generally decide how to route that 
order for execution to an exchange, a wholesaler, or an ATS, where the 
trade

[[Page 3859]]

may be executed or potentially routed further. The high level of 
fragmentation of NMS stock trading \740\ means that broker-dealers have 
a variety of choices for order routing and execution, and the venue 
that a broker-dealer chooses may have a tangible effect on the 
execution quality of an order.
---------------------------------------------------------------------------

    \739\ Some investors may not value order-level execution quality 
in all cases. For example, it is the Commission's understanding that 
when an institutional customer submits a large order to be executed 
on behalf of one account (e.g., a single mutual fund or pension 
fund), it expects the broker-dealer that handles and executes such 
large order to do so in a manner that ensures best execution is 
provided to the ``parent'' order. See infra section 
VII.C.3.(a)(1)(b) for further discussion.
    \740\ See infra section VII.C.3.(b)(1) for a breakdown of 
trading in NMS stocks across various types of trading venues.
---------------------------------------------------------------------------

    A broker-dealer has a legal duty to seek best execution of customer 
orders. The duty of best execution predates the federal securities laws 
and is derived from an implied representation that a broker-dealer 
makes to its customers.\741\ The duty is established from ``common law 
agency obligations of undivided loyalty and reasonable care that an 
agent owes to [its] principal.'' \742\ This obligation requires that a 
``broker-dealer seek to obtain for its customer orders the most 
favorable terms reasonably available under the circumstances.'' \743\
---------------------------------------------------------------------------

    \741\ See, e.g., Newton v. Merrill, Lynch, Pierce, Fenner & 
Smith, Inc., 135 F.3d 266, 270 (3d Cir.), cert. denied, 525 U.S. 811 
(1998).
    \742\ See id.
    \743\ See id. See also Securities Exchange Act Release No. 
37619A (Sept. 6, 1996), 61 FR 48290 (Sept. 12, 1996) (``Order 
Execution Obligations Adopting Release''). A Report of the Special 
Study of Securities Markets stated that ``[t]he integrity of the 
industry can be maintained only if the fundamental principle that a 
customer should at all times get the best available price which can 
reasonably be obtained for him is followed.'' See SEC Report of the 
Special Study of Securities Markets, H.R. Doc. No. 95, 88th Cong., 
1st Sess. Pt. II, 624 (1963) (``Special Study'').
---------------------------------------------------------------------------

    Investors may incur switching costs when changing broker-dealers, 
such as the cost of withdrawing or transferring funds and potential 
administrative fees. Switching broker-dealers could also involve time 
delays resulting in lost investment opportunities or revenues and other 
opportunity costs.\744\ Furthermore, some customers that rely on 
broker-dealers' non-execution-related services, such as providing 
recommendations, holding customers' funds and securities and/or 
providing analyst research, may find it more costly to switch broker-
dealers, as these services would be more difficult to transfer across 
broker-dealers. However, the Commission understands that some broker-
dealers, including some that cater to individual investors, will 
compensate new customers for transfer fees that their outgoing broker-
dealer may charge them, which would result in lower (or even zero) 
switching costs.\745\ The Commission understands that some investors, 
particularly institutional investors, are likely to use multiple 
broker-dealers,\746\ which would tend to lead to lower switching costs 
as a customer that is unhappy with one broker-dealer could simply use 
one of their other broker-dealers to handle those orders.
---------------------------------------------------------------------------

    \744\ See, e.g., Understanding the Brokerage Account Transfer 
Process, FINRA, available at https://www.finra.org/investors/learn-to-invest/brokerage-accounts/understanding-brokerage-account-transfer-process.
    \745\ See, e.g., Scott Connor, Thinking about Switching to TD 
Ameritrade? Transferring is Easier than You Might Think, TD 
Ameritrade (Oct. 17, 2019), available at https://tickertape.tdameritrade.com/investing/how-to-switch-brokers-17755 
(``If your broker does charge you a transfer fee, TD Ameritrade will 
refund you up to $100.'').
    \746\ For example, one academic paper finds that institutional 
investors tend to break up larger orders and spread them out across 
multiple broker-dealers, as a strategy to avoid information leakage. 
See, e.g., Munhee Han & Sanghyun (Hugh) Kim, Splitting and 
Shuffling: Institutional Trading Motives and Order Submissions 
Across Brokers (working paper Sept. 30, 2020), available at https://ssrn.com/abstract=3429452 (retrieved from SSRN Elsevier database).
---------------------------------------------------------------------------

    The Commission understands that the structure of the market for 
brokerage services can broadly be separated into two distinct markets--
brokerage services for individual investors on the one hand, and 
brokerage services for institutional investors on the other--that 
differ somewhat in terms of their market structure.
(a) Brokerage Services for Individual Investors
    As of the end of 2021, there were approximately 1,037 registered 
broker-dealers that originated orders on behalf of individual investors 
in the market for NMS stocks.\747\ Unlike institutional investors, 
individual investors generally use a single broker to handle their 
orders. Retail brokers can broadly be divided into ``discount'' brokers 
and ``full-service'' brokers.\748\ Competition between discount brokers 
for the business of individual investors in particular has recently 
resulted in many new entrants and a decline in commissions to zero or 
near zero.\749\ Instead of commissions on certain transaction, these 
discount brokers earn revenue through other means, including, among 
other products and services, interest on margin accounts and from 
lending securities, as well as broker-wholesaler arrangements involving 
PFOF paid by the wholesaler to the retail broker. Discount broker-
dealers can distinguish themselves by the accessibility and 
functionality of their trading platform, which can be geared towards 
less experienced or more sophisticated investors, and by providing more 
extensive customer service as well as tools for research and education 
on financial markets.
---------------------------------------------------------------------------

    \747\ This number is estimated using the CAT data described 
infra in note 1008. Individual investor accounts are identified in 
CAT as accounts belonging to the ``Individual Customer'' account 
type, defined as accounts that do not meet the definition of FINRA 
Rule 4512(c) and are also not proprietary accounts. See supra note 
609 for more information about account types in CAT.
    \748\ Note that there is not necessarily a precise delineation 
between full-service and discount brokers. Discount brokers 
generally provide execution-only services, typically at a reduced or 
zero commission rate. Full-service brokers (as they are commonly 
called) typically charge commissions in exchange for a package of 
services, including execution, incidental investment advice, and 
custody. See, e.g., Interpretive Rule Under the Advisers Act 
Affecting Broker-Dealers, Advisers Act Release No. 2652 (Sept. 24, 
2007), notes 2 and 20.
    \749\ See, e.g., Samuel Adams & Connor Kasten, Retail Order 
Execution Quality under Zero Commissions, (working paper Jan. 7, 
2021), available at https://ssrn.com/abstract=3779474 (retrieved 
from SSRN Elsevier database), describing how ``on October 1st, 2019, 
Charles Schwab announced that they would cut commissions from $4.95 
per trade to zero on all retail trades starting on October 7th. 
Within hours, TD Ameritrade followed by announcing they would cut 
commissions to zero from $6.95 beginning on October 3rd. By January 
3rd, Vanguard, Fidelity, and E*TRADE had joined the trend in 
offering free equity trades for retail investors.''
---------------------------------------------------------------------------

(b) Brokerage Services for Institutional Investors
    As of the end of 2021, there were approximately 909 registered 
broker-dealers that originated institutional orders in the market for 
NMS stocks.\750\ One feature that distinguishes the market for 
institutional brokerage services is that a significant portion of 
institutional investor orders are generally ``not held'' orders.\751\ A 
broker-dealer has time and price discretion in executing a not held 
order, and institutional investors in particular rely on such 
discretion for various reasons including minimizing price impact.\752\ 
Due to the large size of institutional trading interests, broker-
dealers will often split orders when handling their orders, often 
through the use of SORs. Specifically, a broker-dealer or its SOR will 
split up a ``parent'' order into multiple ``child'' orders, with the 
goal of executing the child orders in a way that achieves the

[[Page 3860]]

best execution for the parent order.\753\ For example, a broker-dealer 
may not execute a child order at the best price, if doing so could 
result in a larger price impact and increases the overall cost of 
working a parent order. For this reason, most institutional parent 
orders are handled by broker-dealers on a not held basis, which would 
exclude these orders from Rule 605 execution quality disclosure 
requirements.\754\ However, since 2018, broker-dealers are required by 
Rule 606(b)(3) to provide individualized reports of execution quality 
of not held orders upon request.\755\
---------------------------------------------------------------------------

    \750\ This number is estimated using the CAT data described in 
infra note 1008. Institutional investor accounts are identified in 
CAT as accounts belonging to the ``Institutional Customer'' account 
type, defined as accounts that meet the definition in FINRA Rule 
4512(c). See supra note 609 for more information about account types 
in CAT.
    \751\ See supra note 538 discussing an analysis showing that 
institutional investors are more likely than individual investors to 
use not held orders.
    \752\ See 2018 Rule 606 Amendments Release, 83 FR 58338 nn.60-61 
and corresponding text. Meanwhile, a broker-dealer must attempt to 
execute a held order immediately, which typically better suits 
individual investors who seek immediate executions and rely less on 
broker-dealer order handling discretion.
    \753\ See Tyler Beason & Sunil Wahal, The Anatomy of Trading 
Algorithms, (working paper Jan. 21, 2021), available at https://ssrn.com/abstract=3497001 (retrieved from SSRN Elsevier database).
    \754\ Note that some child orders may be held orders and thus 
would be required to be included in Rule 605 reports.
    \755\ See supra note 60 and accompanying text discussing broker-
dealers requirements under Rule 606(b)(3) to provide individualized 
reports of execution quality upon request for not held orders.
---------------------------------------------------------------------------

(2) Competition Between Broker-Dealers on the Basis of Execution 
Quality
    Broker-dealers compete with one another along a variety of 
dimensions,\756\ including the execution quality that they offer, and 
make their execution quality known in a variety of ways. For example, 
at least one broker-dealer published execution quality reports using 
the FIF template,\757\ and furthermore some broker-dealers disclose 
their own execution quality metrics on their websites.\758\ Broker-
dealers may seek to improve their competitive position on the basis of 
execution quality by, for example, investing in the speed and quality 
of their routing technology. Broker-dealers may also compete on the 
basis of execution quality by reevaluating their routing strategies to 
increase the extent to which they route orders to the market centers 
offering better execution quality.
---------------------------------------------------------------------------

    \756\ For example, broker-dealers may compete by charging lower 
commissions for trading, or by offering a wider range of services or 
functionalities, such as trading in additional asset classes such as 
options.
    \757\ See supra note 554.
    \758\ See supra note 506 for examples.
---------------------------------------------------------------------------

    As discussed above,\759\ when making routing decisions, some 
broker-dealers may face conflicts of interest that misalign their 
interests with their customers' interest in receiving better execution 
quality. These conflicts of interest could result, for example, from 
broker-dealer affiliations with market centers. Some broker-dealers 
operate or are otherwise affiliated with ATSs, which implies a possible 
conflict of interest relative to their customers' best interests in 
that these broker-dealers may give preference to routing orders to 
their own ATSs, where they typically pay lower transaction fees, even 
if their customer would have received better execution quality if the 
order were routed to another trading venue. At least one academic study 
has shown that broker-dealers that route orders to their ATSs obtain 
worse execution quality.\760\ Similarly, presence of liquidity fees and 
rebates on some market centers may incentivize broker-dealers to make 
routing decisions based on where they can receive the highest rebate 
(or pay the lowest fee), rather than where they can receive better 
execution quality on behalf of their customer.\761\ For example, a 
recent research paper analyzed the relation between maker-taker fee 
schedules and order routing, and found a negative relation between take 
fees and limit order execution quality.\762\ Another potential conflict 
of interest, particularly with regard to individual investor order 
flow, includes the receipt of PFOF, which may result in broker-dealers 
routing orders to wholesalers as a result of the terms of the PFOF 
arrangements.\763\
---------------------------------------------------------------------------

    \759\ See supra section VII.C.2.(a)(1).
    \760\ See Amber Anand, Mehrdad Samadi, Jonathan Sokobin & Kumar 
Venkataraman, Institutional Order Handling and Broker-Affiliated 
Trading Venues, 34 Rev. Fin. Studies 3364 (2021).
    \761\ See, e.g., Robert H. Battalio, Shane A. Corwin, & Robert 
H. Jennings, Can Brokers Have It All? On the Relation Between Make-
Take Fees and Limit Order Execution Quality, 71 J. Fin. 2193 (2016).
    \762\ See id. The authors ``document a strong negative relation 
between take fees and several measures of limit order execution 
quality. Based on this evidence, [they] conclude that the decision 
of some national brokerages to route all nonmarketable limit orders 
to a single exchange paying the highest rebate is not consistent 
with the broker's responsibility to obtain best execution for 
customers.''
    \763\ The study by Schwarz et al. (2022) in supra note 529 does 
not find a relationship between the amount of PFOF a retail broker 
receives and the amount of price improvement their customers' orders 
receive. However, the authors noted that the variation in the 
magnitude of price improvement they saw across retail brokers was 
significantly greater than the amount of PFOF the retail broker 
received, which could indicate their sample was not large enough to 
observe a statistically significant effect.
---------------------------------------------------------------------------

    If information asymmetries, such as those resulting from 
insufficient public information about broker-dealer execution 
quality,\764\ prevent investors from observing differences in execution 
quality across broker-dealers, this would limit the extent to which 
broker-dealers would need to keep these conflicts of interest in check 
and compete on the basis of execution quality.
---------------------------------------------------------------------------

    \764\ See supra section VII.C.2.(a)(1) discussing broker-
dealers' current execution quality reporting requirements.
---------------------------------------------------------------------------

(b) Trading Services for NMS Stocks
(1) Current Structure of the Market for Trading Services
    Trading services for NMS stocks are highly fragmented among 
different types of market centers.\765\ Table 7 shows that in Q1 of 
2022, NMS stocks were traded on 16 national securities exchanges and 
off-exchange at 32 NMS Stock ATSs and at over 230 other FINRA members, 
including 6 wholesalers that internalize the majority of individual 
investor marketable orders.\766\ National securities exchanges execute 
approximately 60% of total share volume in NMS stocks, while off-
exchange market centers execute approximately 40% of total share 
volume.\767\ The majority of off-exchange volume is executed by 
wholesalers, who execute almost one quarter of total share volume 
(23.9%) and about 60% of off-exchange volume. Some OTC market makers, 
such as wholesalers, operate SDPs through which they execute 
institutional orders in NMS stocks against their own inventory.\768\ 
SDPs accounted for approximately 4% of total trading volume in Q1 
2022.\769\ As of June 2022, the Commission estimates that there are 
currently 236 market centers to which Rule 605 applies.\770\
---------------------------------------------------------------------------

    \765\ Some academic studies attribute the highly fragmented 
nature of this market to implementation of Regulation NMS. See, 
e.g., Maureen O'Hara & Mao Ye, Is Market Fragmentation Harming 
Market Quality?, 100 J. Fin. Econ. 459 (2011); Amy Kwan, Ronald 
Masulis & Thomas H. MacInish, Trading Rules, Competition for Order 
Flow and Market Fragmentation, 115 J. Fin. Econ. 330 (2015).
    \766\ See Concept Release on Equity Market Structure, 75 FR 
3594, 3598-3560 (Jan. 21, 2010) (for a discussion of the types of 
trading centers); see also Form ATS-N Filings and Information, 
available at https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm. These wholesalers were determined based on marketable 
order routing information from retail broker Rule 606(a)(1) reports.
    \767\ This analysis uses data from prior to the implementation 
of the MDI Rules. The implementation of the MDI Rules may result in 
a change in the flow of orders across trading venues, which may 
result in numbers that are different from those reported here. 
However, the Commission is uncertain of the magnitude of these 
effects. See supra section VII.C.1.(d)(2) for further discussion.
    \768\ See Rosenblatt Securities (2022), US Equity Trading Venue 
Guide. Wholesalers and OTC market makers can execute orders 
themselves or route orders to be executed on other venues. An SDP 
always acts as the counterparty to any trade that occurs on the SDP. 
See, e.g., Where Do Stocks Trade?, FINRA (Dec. 3, 2021), available 
at https://www.finra.org/investors/insights/where_do_stocks_trade">https://www.finra.org/investors/insights/where_do_stocks_trade.
    \769\ See Rosenblatt Securities (2022), US Equity Trading Venue 
Guide.
    \770\ See supra section VI.C for a discussion of this estimate. 
Some market centers may not be required to prepare Rule 605 reports, 
for example, if they do not handle any covered orders.

[[Page 3861]]



                     Table 7--NMS Stock Traded Share Volume Percentage by Market Center Type
----------------------------------------------------------------------------------------------------------------
                                                                                                   Off-exchange
                                                                                Share volume (%  share volume (%
                      Market center type                          Venue count       of total      of total off-
                                                                                    volume)         exchange)
----------------------------------------------------------------------------------------------------------------
NMS Stock ATSs................................................              32             10.2             25.2
National Securities Exchanges.................................              16             59.7  ...............
Wholesalers...................................................               6             23.9             59.4
Other FINRA Members...........................................             232              6.3             15.6
----------------------------------------------------------------------------------------------------------------
Table 7: NMS Stock Traded Share Volume Percentage by Market Center Type. This table reports the percentage of
  all NMS stock executed share volume and the percentage of NMS stock share volume executed off-exchange for
  different types of market centers for Q1 2022, including lists the number of venues in each market center
  category. Exchange share volume and total market volume are based on CBOE Market Volume Data on monthly share
  volume executed on each exchange available at: https://cboe.com/us/equities/market_statistics/historical_market_volume/. NMS Stock ATS, wholesaler and FINRA member share volume are based on monthly data
  from FINRA OTC (Non-ATS) Transparency Data Monthly Statistics, available at: https://otctransparency.finra.org/otctransparency/OtcData otctransparency/OtcData; and FINRA ATS Transparency Data Monthly Statistics, available at: https://otctransparency.finra.org/otctransparency/AtsBlocksDownload. This analysis uses data from prior to the
  implementation of the MDI Rules and specific numbers reported may be different following the implementation of
  the MDI Rules. See supra note 767 and section VII.C.1.(d)(2).

    These market centers, among other things, match traders with 
counterparties, provide a framework for price negotiation and provide 
liquidity to those seeking to trade, to supply investors with execution 
services at efficient prices. Market centers' primary customers are the 
broker-dealers that route their own orders or their customers' orders 
for execution at the trading center, and market centers compete with 
each other for these customers on a number of dimensions, including 
execution quality.
    Broker-dealers may face switching costs from changing the primary 
trading venues to which they route orders. For example, the extent to 
which broker-dealers may have long-term contractual arrangements to 
route orders to specific market centers would hamper their ability to 
switch trading venue. The common practice across national securities 
exchanges of setting fee and rebate schedules where specific tiers are 
determined by execution volume \771\ may also make it difficult of 
broker-dealers to transfer order flow between market centers. Volume-
based tiering gives broker-dealers an incentive to concentrate orders 
on a given exchange, not because that exchange may offer the best 
execution quality but because doing so can allow a broker-dealer to 
execute sufficient volume on the exchange to qualify for a better tier 
and receive a lower fee or higher rebate. In addition, for national 
securities exchanges, upfront connectivity fees associated with 
establishing a connection to a new exchange could also discourage 
switching.
---------------------------------------------------------------------------

    \771\ Some national securities exchanges typically currently use 
volume calculated on a monthly basis to determine the applicable 
threshold or tier rate. See, e.g., fee schedules of NASDAQ PSX, 
available at https://listingcenter.nasdaq.com/rulebook/phlx/rules/Phlx%20Equity%207 (as of July 2022) (calculating fees based on 
``average daily volume during the month''); and Cboe EDGA, EDGA 
Equities Fee Schedules, available at https://www.cboe.com/us/equities/membership/fee_schedule/edga/ (as of Apr. 1, 2022) 
(calculating fees based on ``average daily volume'' and ``daily 
volume'' on a monthly basis).
---------------------------------------------------------------------------

    While national securities exchanges cater to a broader spectrum of 
investors, ATSs and OTC market makers, including wholesalers, tend to 
focus more on providing trading services for either institutional or 
individual investor order flow. For example, an analysis of retail 
brokers' routing practices showed that a group of six wholesalers 
handled more than 87% of the customer orders of retail brokers in Q1 
2022.\772\ Meanwhile, SDPs are mainly used for institutional orders, to 
avoid exposure to potentially more informed order flow on other trading 
venues.\773\
---------------------------------------------------------------------------

    \772\ See supra note 614 for more details about this analysis.
    \773\ See, e.g., Yashar H. Barardehi, et al., Internalized 
Retail Order Imbalances and Institutional Liquidity Demand (working 
paper revised May 23, 2022), available at https://ssrn.com/abstract=3966059 (retrieved from SSRN Elsevier database).
---------------------------------------------------------------------------

(2) Competition Between Trading Venues on the Basis of Execution 
Quality
    Trading venues compete with one another on the basis of the 
execution quality that they offer, as well as on the basis of other 
potential factors.\774\ As discussed above, Rule 605 reports are 
currently 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,\775\ and there is evidence that broker-
dealers factor in information about the execution quality of market 
centers from Rule 605 reports when making their order routing 
decisions. One academic study attributes a significant decline in 
effective and quoted spreads following the implementation of Rule 605 
to an increase in competition between market centers, who improved the 
execution quality that they offered in order to attract more order 
flow.\776\ Market centers may seek to improve their competitive 
position on the basis of execution quality by, for example, investing 
in the speed and quality of their execution technology.
---------------------------------------------------------------------------

    \774\ For example, national securities exchanges may adjust fees 
and rebates to incentivize broker-dealers to route more order flow 
to them. The use of liquidity rebates have also allowed national 
securities exchanges to compete with off-exchange market centers for 
order flow by making it more expensive to offer price improvement 
over the displayed NBBO. See Transaction Fee Pilot for NMS Stocks, 
84 FR 5202 (Feb. 20, 2019) at 5255.
    \775\ See supra section VII.C.1.(a).
    \776\ See Zhao & Chung.
---------------------------------------------------------------------------

    Market centers have less of an incentive to compete and innovate on 
execution quality to the extent that broker-dealers route orders for 
reasons other than execution quality. As discussed above, if 
information asymmetries, such as those resulting from insufficient 
public information about broker-dealer execution quality, prevent 
investors from observing differences in execution quality across 
broker-dealers, this would limit the extent to which broker-dealers 
would need to compete on the basis of execution quality.\777\ Market 
centers also have less of an incentive to compete on the basis of 
execution quality to the extent that broker-dealers and other market 
participants are less able to use Rule 605 reports to compare execution 
quality across market centers, for example, as a result of erosions to 
the information content of Rule 605 statistics due to changes in market 
conditions,\778\ or to the extent that Rule

[[Page 3862]]

605 does not include some relevant order sizes or types.\779\
---------------------------------------------------------------------------

    \777\ See supra section VII.C.3.(a)(2).
    \778\ For example, market centers may be less incentivized to 
compete on the basis of execution speed to the extent that, as a 
result of rapid increases in the speed of trading, market 
participants are less able to use time-to-execution measures from 
Rule 605 reports to compare across market centers. See supra section 
VII.C.2.(c)(4) for further discussion.
    \779\ For example, market centers may be less likely to compete 
on the basis of execution quality for orders of less than 100 
shares, since these orders are not required to be included in Rule 
605 reports. See supra section VII.C.2.(b)(1)(b) for further 
discussion.
---------------------------------------------------------------------------

D. Economic Effects

    The proposed amendments modifying the reporting requirements under 
Rule 605 may result in numerous beneficial economic effects. These 
economic effects would mainly derive from improvements in the 
transparency of execution quality of broker-dealers and market centers, 
which would promote competition among these reporting entities on the 
basis on execution quality. However, the proposed amendments to Rule 
605 may also result in initial and ongoing compliance costs to 
reporting entities.
    As discussed above, this section measures the economic effects of 
the proposed amendments relative to a regulatory baseline that includes 
the implementation of the MDI Rules.\780\ Furthermore, this section 
reflects the Commission's assessment of the anticipated economic 
effects, including potentially countervailing or confounding economic 
effects from the MDI Rules.\781\ However, 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 comprehensive quantitative 
analysis of the economic effects that includes the effects of the MDI 
Rules is not available. It is possible that the economic effects 
relative to the baseline could be different once the MDI Rules are 
implemented. Where implementation of the above-described MDI Rules may 
affect certain numbers, the description of the economic effects below 
notes those effects.
---------------------------------------------------------------------------

    \780\ See supra section VII.C.1.(d).
    \781\ See supra section VII.C.1.(d)(2) for a discussion of the 
Commission's anticipated economic effects of the MDI Rules as stated 
in the MDI Adopting Release.
---------------------------------------------------------------------------

1. Benefits
    The Commission believes that the proposed amendments would promote 
increased transparency of order execution quality as a result of the 
expansion and modernization of Rule 605 disclosure requirements, as 
well as a requirement for reporting entities to prepare summary 
reports, which would improve market participants' ability to use Rule 
605 reports and the information contained therein to compare execution 
quality across reporting entities. This in turn would lead to increased 
competition between reporting entities on the basis of execution 
quality, leading to improvements in the execution quality received by 
investors as competition between reporting entities would be create 
incentives to offer better execution quality in order to attract and 
retain customers and order flow.
(a) Increase in Transparency and Access to Information About Execution 
Quality
    The Commission believes that the proposed amendments would promote 
increased transparency of order execution quality, particularly for 
larger broker-dealers who were not previously required to disclose 
execution quality information under Rule 605, but also for all 
reporting entities, whose execution quality information would be more 
relevant and easier to access as a result of improvements to existing 
Rule 605 disclosure requirements.
(1) Expanding the Scope of Reporting Entities
(a) Expanding Requirements for Larger Broker-Dealers
    The proposed amendment expanding the scope of Rule 605 reporting 
entities to include larger broker-dealers \782\ would increase 
transparency into the differences in execution quality achieved by 
these broker-dealers when they route customer orders to execution 
venues.\783\ Broker-dealers that route customer orders have many 
choices about where to route customer orders for execution,\784\ and 
their routing decisions affect the execution quality that their 
customers' orders receive.\785\ To ensure that they are directing their 
orders to the broker-dealer(s) that are able to achieve better 
execution quality, investors, along with other market participants, 
have a vested interest in their ability to accurately assess the 
execution quality that their broker-dealers are able to achieve. 
However, in the current regulatory environment, the ability of some 
customers to assess the execution quality that their broker-dealers are 
providing for their held orders may be limited.\786\
---------------------------------------------------------------------------

    \782\ See supra section III.A for further discussion of the 
proposed amendments related to the expansion of Rule 605 reporting 
entities to include larger broker-dealers.
    \783\ The EMSAC and commenters generally supported expanding the 
Rule's scope beyond market centers, including to broker-dealers. See 
supra notes 103-119 and accompanying text. The Commission believes 
that these effects would principally accrue to larger broker-
dealers, who would be required to prepare Rule 605 reports, but may 
spill over to effect smaller broker-dealers as well. See discussion 
in infra section VII.D.1.(d)(1).
    \784\ See supra section VII.C.3.(b)(1), discussing fragmentation 
in the market for trading services for NMS stocks.
    \785\ See, e.g., supra note 529 and accompanying text, 
describing a recent academic working paper finding significant 
variations in execution quality across broker-dealers.
    \786\ See supra section VII.C.2.(a)(1) for a discussion of 
limitations to investors' abilities to use Rule 606 and Rule 605 
reports to estimate the execution quality achieved by broker-
dealers. Note that institutional investors may have access to 
alternative sources of information about execution quality. See 
supra section VII.C.1.(c)(2) for a discussion.
---------------------------------------------------------------------------

    As a result of the proposed amendments, customers of these broker 
dealers, along with other market participants, would no longer need to 
make inferences about these broker-dealers' execution quality based on 
broker-dealer routing information from Rule 606 data combined with 
market centers' execution quality information from Rule 605 data, but 
would have access to direct information about the aggregate execution 
quality achieved by these broker-dealers.\787\ Customers could then use 
this information to compare across broker-dealers and select those 
broker-dealers offering better execution quality. Furthermore, combined 
with information about broker-dealers' payment relationships with 
execution venues in quarterly reports prepared pursuant to Rule 
606(a)(1), information about the aggregate execution quality obtained 
by larger broker-dealers that are in the business of routing customer 
orders would give market participants and other interested parties 
access to key information that would facilitate their ability to 
evaluate how these payment relationships may affect execution quality.
---------------------------------------------------------------------------

    \787\ This effect would be enhanced by the requirement that 
broker-dealers publish Rule 605 reports for their broker-dealer 
activities separately from activities related to the market 
center(s) that they may operate, which would allow investors to 
access execution quality information that is exclusively related to 
the firm's broker-dealer operations. See supra note 182 and 
accompanying text.
---------------------------------------------------------------------------

    Under the proposed amendments, larger broker-dealers would be 
required to categorize the execution quality information required by 
Rule 605 using the same categories that market centers would be 
required to use, including by individual security, different types of 
orders, and different order sizes. As with market centers, 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

[[Page 3863]]

overall execution quality level.\788\ For example, Figure 14, which 
uses a week of CAT data \789\ to break down broker-dealer order flow 
into different order types, shows that broker-dealers indeed handle a 
variety of order types, including both marketable and non-marketable 
orders, for both their individual and institutional investor customers. 
Giving market participants access to this information in Rule 605 
reports would ensure that they are able to control for these 
differences in order flow characteristics when assessing and comparing 
execution quality information across broker-dealers.
---------------------------------------------------------------------------

    \788\ See supra note 513 for an example of how differences in 
order flow characteristics may impact inferences about execution 
quality.
    \789\ See supra note 609 for dataset description.
---------------------------------------------------------------------------

Figure 14: Broker-Dealer Order Volume by Order Type, January 3-7, 2022
[GRAPHIC] [TIFF OMITTED] TP20JA23.014

    The proposed amendment for larger broker-dealers to report both the 
number of shares executed at the receiving broker-dealer and the number 
of shares executed at any other venue \790\ would ensure that Rule 605 
reports capture the execution quality of all orders that larger broker-
dealers receive for execution as part of their customer-facing broker-
dealer function. The majority of executions resulting from a firm's 
broker-dealer operations would likely be categorized as away-executed 
shares in the Rule 605 reports associated with its broker-dealer 
operations.\791\ While these shares would not be categorized as being 
directly executed by the broker-dealer, it is likely that market 
participants understand that execution quality can depend significantly 
on the broker-dealers' order handling and routing practices.
---------------------------------------------------------------------------

    \790\ See 17 CFR 242.605(a)(1)(i)(D) and (E). As discussed 
herein, the Commission is proposing to modify Rule 605(a)(1)(i)(D) 
to also cover the number of shares executed at the receiving broker 
or dealer. See supra note 155 and accompanying text.
    \791\ To the extent that a broker-dealer also acts as a market 
center, any executions that it handles would be required to be 
published in the Rule 605 report(s) that it files in its capacity as 
a market center.
---------------------------------------------------------------------------

    The proposed amendments would also require larger broker-dealers to 
report the same execution quality information as market centers, 
including information about execution prices, execution speeds, and 
fill rates,\792\ as well as, as a result of the proposed amendments, 
information about size improvement.\793\ The Commission acknowledges 
that there are certain ways in which broker-dealers may systematically 
differ from market centers in terms of their execution quality 
statistics; for example, due to their need to reroute orders that they 
receive for execution, broker-dealers are likely to have a longer 
execution time as measured from the time of order receipt, as compared 
to market centers who can execute orders immediately without the need 
to reroute. However, these differences are generally well-known to 
market participants, who would be able to account for these differences 
in assessing execution quality. Furthermore, it is unlikely that market 
participants would use information in Rule 605 reports to compare 
broker-dealers to market centers, as information about the execution 
quality of these two types of reporting entities is useful to different 
market participants for fundamentally different purposes. In terms of 
the principal-agent problems described in the Market Failure 
section,\794\ information about execution quality for broker-dealers 
solves a different principal-agent problem than information about 
execution quality for market centers. Broker-dealers' Rule 605 reports 
would be more likely to be used by broker-dealers' customers to compare 
execution quality across broker-dealers to alleviate the principal-
agent problem that exists between broker-dealers and their customers. 
In contrast, market

[[Page 3864]]

centers' Rule 605 reports would continue to be more useful for broker-
dealers to compare execution quality across market centers to alleviate 
the principal-agent problem that exists between broker-dealers and the 
market centers to which they route their customers' orders.
---------------------------------------------------------------------------

    \792\ See supra section VII.C.1.(a) for a discussion of the 
economic significance of the execution quality information currently 
required by Rule 605 to be disclosed by market centers.
    \793\ See proposed Rule 605(a)(1)(i)(F) and discussion in supra 
section IV.B.4.(e).
    \794\ See supra section VII.B.
---------------------------------------------------------------------------

    The Commission is mindful that Rule 605's execution quality reports 
contain a large volume of statistical data, and as a result it may be 
difficult for individual investors to review and digest the reports. By 
requiring larger brokers-dealers to report stock-by-stock order 
execution information in a uniform manner, the current proposal would 
make it possible for market participants and other interested parties 
to make their own determinations about how to group stocks or orders 
when comparing execution quality across broker-dealers. Requiring 
larger broker-dealers to produce more detailed execution quality data 
would also help ameliorate potential concerns about overly general 
statistics, or about the specific categorization of orders and 
selection of metrics in the summary reports, by allowing market 
participants and other interested parties to conduct their own analysis 
based on alternative categorizations of the underlying data. Should 
certain market participants not have the means to directly analyze the 
detailed statistics,\795\ independent analysts, consultants, broker-
dealers, the financial press, and market centers likely will continue 
to respond to the needs of investors by analyzing the disclosures and 
producing more digestible information using the data to the extent that 
they currently do so.\796\ Furthermore, requiring all market centers 
and larger broker-dealers to prepare summary reports with aggregated 
execution quality information \797\ as well as Rule 605 reports would 
strike a balance between ensuring that market participants have access 
to detailed execution quality information, and providing an overview of 
execution quality information that may be more accessible for some 
market participants.\798\
---------------------------------------------------------------------------

    \795\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75419 
(stating that most individual investors likely would not obtain and 
digest the reports themselves). See also supra note 112 and 
accompanying text (EMSAC committee member stating that retail 
investors will not look at the Rule 605 reports); Angel Letter at 3 
(commenter stating that Rule 605 data is too raw for most investors 
to interpret); and See Consumer Federation II at 10 (commenter 
stating that most retail investors may not use the disclosures 
directly).
    \796\ See, e.g., supra notes 545-547, describing the use of Rule 
605 data in academic literature, in comment letters related to 
Commission and SRO rulemaking, and the financial press.
    \797\ See proposed Rule 605(a)(2).
    \798\ Several EMSAC committee members argued in favor of 
requiring broker-dealers to file Rule 605 reports rather than only 
summary reports. See supra notes 112-114 and accompanying text.
---------------------------------------------------------------------------

(b) Specifying and Expanding Requirements for Market Centers
    In addition to the proposed amendment expanding the scope of Rule 
605 reporting entities to include larger broker-dealers, the Commission 
believes that additional proposed modifications to the scope of 
reporting entities would also promote increased transparency.
    A proposed amendment specifies that broker-dealers that operate 
ATSs must prepare Rule 605 reports for their ATSs that are separate 
from the reports for their other trading activities.\799\ Another 
proposed amendment requires that market centers operating SDPs post 
separate reports for each entity.\800\ These amendments would address 
directly what Rule 605 requires with respect to reporting by firms that 
operate multiple market centers, thus increasing the transparency of 
each reporting entity's execution quality and limiting the co-mingling 
of information about multiple types of reporting entities into a single 
report, which, to the extent that it occurs, may currently add noise to 
or skew Rule 605 reports. For example, requiring market centers that 
operate SDPs to report statistics separately for each line of business 
would increase the transparency of the operating market centers' fill 
rates by eliminating the downwards skew from including ``pinging'' 
orders submitted to the SDP into their Rule 605 reports.\801\ Market 
participants would be better informed about the execution quality of 
each reporting entity, which would facilitate comparisons across 
reporting entities.
---------------------------------------------------------------------------

    \799\ See proposed Rule 605(a)(1). See also supra note 214 and 
accompanying text. See supra note 212 and accompanying text for 
discussion of suggestions from the EMSAC and commenters related to 
reporting requirements for ATSs.
    \800\ See proposed Rule 605(a)(1). See also supra note 219 and 
accompanying text.
    \801\ See supra section VII.C.2.(a)(2) for a discussion of why 
the co-mingling of wholesaler and SDP orders for the purposes of 
Rule 605 reporting will effect a downwards skew on the fill rates 
derived from the wholesalers' Rule 605 reports.
---------------------------------------------------------------------------

    If the Order Competition Rule Proposal is adopted,\802\ the 
proposed amendment requiring separate Rule 605 reports for qualified 
auctions \803\ would also promote increased transparency. First, it 
would allow for easier comparisons of how execution quality varies 
across qualified auctions. Second, it would limit the extent to which 
co-mingling qualified auction statistics with other orders executed on 
a market center add noise to or skew that market center's Rule 605 
report. For example, orders submitted to a qualified auction may be 
more likely to receive price improvement, and may have systematically 
different fill rates and time-to-executions, as compared to similar 
orders executed in other trading mechanisms.\804\
---------------------------------------------------------------------------

    \802\ See Order Competition Rule Proposal.
    \803\ See proposed Rule 605(a)(1). See also supra note 203 and 
accompanying text.
    \804\ See supra section III.B for further discussion.
---------------------------------------------------------------------------

    The proposed amendment expanding the order size categories required 
by Rule 605 to include information about fractional shares \805\ would 
also expand the scope of reporting entities to include an estimated 20 
additional market centers \806\ that currently exclusively execute 
fractional shares and that were previously not required to file Rule 
605 reports due to fractional shares falling below the smallest order 
size category in the current Rule 605. This would increase transparency 
about the execution quality achieved by these market centers.
---------------------------------------------------------------------------

    \805\ See proposed Rule 600(b)(19).
    \806\ See supra note 486 for further discussion of this 
estimate.
---------------------------------------------------------------------------

(2) Modifications to Rule 605 Disclosure Requirements
    The Commission believes that, as a result of the proposed 
amendments expanding and modernizing Rule 605 disclosure requirements, 
the metrics contained in Rule 605 would be more informative about 
execution quality, which would increase transparency into the 
differences in execution quality achieved by reporting entities. These 
improvements in transparency would stem from modifications aimed at 
clarifying and expanding the scope of Rule 605 reporting entities, 
modernizing the information required to be reported under Rule 605, and 
improving the accessibility of the information contained in Rule 605 
reports.
(a) Expanding the Definition of Covered Orders
    The proposed amendments expanding the definition of covered orders 
to include additional order types would increase transparency about the 
execution quality that reporting entities achieve for these additional 
order types, including orders submitted outside of regular trading 
hours, orders submitted with stop prices, and non-exempt short sale 
orders.\807\
---------------------------------------------------------------------------

    \807\ Commenters have suggested various ways to expand or modify 
the definition of covered order, including broadening its scope to 
capture additional order types. See supra notes 122-125 and 
accompanying text.

---------------------------------------------------------------------------

[[Page 3865]]

    First, the proposed amendment expanding the definition of ``covered 
orders'' to include NMLOs submitted outside of regular trading hours 
that become executable during regular trading hours \808\ would lead to 
a more complete picture of reporting entities' execution 
characteristics.\809\ While an analysis using CAT data shows that pre-
open/post-close orders that are executable during regular hours are 
likely only a small portion of total order flow, these orders have a 
higher concentration of individual investor shares (29.5%) than the 
sample time window during regular trading hours (1.9%).\810\ Therefore, 
including information about the execution quality of these orders would 
be very relevant for individual investors, who would be able to make 
more informed decisions when choosing a broker-dealer if these orders 
are included in broker-dealers' execution quality disclosures. 
Likewise, broker-dealers would be able to make more informed decisions 
about where to route NMLOs submitted outside of regular trading hours, 
knowing that these orders are being factored into a market center's 
overall statistics.
---------------------------------------------------------------------------

    \808\ See proposed Rule 600(b)(30). See also supra note 230 and 
accompanying text.
    \809\ One commenter to the 2018 Rule 2016 Amendments and 
petitioner for rulemaking recommending inclusion of orders submitted 
prior to market open in Rule 605 reporting requirements. See supra 
notes 123-125.
    \810\ See analysis described in supra Section VII.C.2.(b)(4).
---------------------------------------------------------------------------

    Second, the proposed amendment removing the exclusion of orders 
with stop prices from the definition of ``covered orders'' \811\ would 
increase transparency about the execution quality of this type of 
order.\812\ This would be particularly beneficial for this order type, 
as the handling of stop orders can vary significantly across broker-
dealers and across the market centers to which they route.\813\ 
Furthermore, 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. This 
risk is particularly acute for stop orders that use market orders, as 
the execution price an investor receives for this market order can 
deviate significantly from the stop price in a fast-moving market where 
prices change rapidly.\814\ As shown in Table 4, stop orders that 
trigger the submission of market orders are the most common type of 
stop orders used by individual investors (representing 87.7% of their 
stop orders), who are more likely than institutional investors to 
submit stop orders (i.e., 6.44% of individual investors' market orders 
are submitted with stop prices vs. 0.23% of those of institutional 
investors). Therefore, information about the execution quality of stop 
orders would be particularly useful for individual investors, who could 
use this information to identify and direct stop orders to those 
broker-dealers with the practices and abilities that allow them to 
achieve higher execution quality for these orders. As broker-dealers 
would be incentivized to improve their handling of stop orders,\815\ 
they would be able to use information about the execution quality of 
stop orders achieved by market centers to route stop orders to those 
market centers with the practices and abilities that allow them to 
achieve higher execution quality for these orders.\816\ Furthermore, 
the proposed amendment to include stop orders as a separate order type 
category rather than grouping them together with other order types 
\817\ also would prevent them from skewing the execution quality of 
other orders downwards, given that stop orders are more likely to 
execute in adverse market conditions.
---------------------------------------------------------------------------

    \811\ See proposed Rule 600(b)(30) (eliminating the express 
carve out of orders submitted with stop prices from the definition 
of ``covered order''). See also supra note 243 and accompanying 
text.
    \812\ A petitioner stated that including stop orders within the 
Rule's scope would provide a more complete view of the orders 
certain broker-dealers may use when assessing the execution quality 
market centers provide. See supra note 123 and accompanying text.
    \813\ See supra note 652 and accompanying text for a discussion 
of differential treatment of stop orders.
    \814\ See, e.g., SEC Investor Bulletin: Stop, Stop-Limit, and 
Trailing Stop Orders, (July 13, 2017), available at https://www.sec.gov/oiea/investor-alerts-bulletins/ib_stoporders.html. This 
risk can be attenuated with the use of stop limit orders, which sets 
a minimum price at which the stop order can be executed. However, 
the limit price may prevent the stop limit order from executing if 
the stock price falls below the limit price before the stop limit 
order can execute.
    \815\ See infra section VII.D.1.(b)(1)(a) for a discussion of 
the proposed amendments' impact on competition between broker-
dealers on the basis of execution quality for stop orders.
    \816\ As discussed in supra section VII.C.2.(b)(2), the 
Commission understands that the handling of stop orders can vary 
significantly across market centers.
    \817\ See proposed Rule 600(b)(20) (defining ``categorized by 
order type'' to include a category for ``executable orders submitted 
with stop prices'') (emphasis added). See also discussion in supra 
section IV.B.2.(a).
---------------------------------------------------------------------------

    Lastly, the proposal to clarify that non-exempt short sale orders 
should be included in Rule 605 statistics \818\ would lead to a more 
complete picture of reporting entities' execution characteristics, as 
short sales make up a large portion of trades and by implication are 
likely also a significant component of order flow.\819\ An analysis of 
short volume data found that, between August 2009 and February 2021, 
short selling was an average of 47.3% of trading volume for non-
financial common stocks.\820\ To the extent that the proportion of 
short selling trade volume is comparable to the proportion of short 
selling order volume, these data points show that short selling is 
prevalent in equity markets. Therefore, the inclusion of non-exempt 
short sale orders would result in reporting entities' execution quality 
statistics reflecting more relevant orders for individual and 
institutional investors, who both engage in short selling. While the 
costs to maintain margin accounts and borrow stocks may prevent some 
individual investors from participating in the short sale market, one 
academic working paper found that, between January 2010 and December 
2016, 6.36% of all off-exchange short selling \821\ could be attributed 
to retail traders, and 10.92% of retail trading was made up of short 
sales.\822\ Meanwhile, evidence suggests

[[Page 3866]]

that short selling by institutional investors is largely the purview of 
hedge funds,\823\ which are estimated to make up around 85% of the 
short selling market.\824\ One academic paper finds that short sellers' 
choice of trading venue is highly dependent on its market design and 
that, due to their information advantages, short sellers prefer trading 
venues that offer high execution speeds over those that offer low 
trading costs.\825\ Therefore, including information about the 
execution quality that reporting entities achieve for short sale orders 
into Rule 605 disclosures would be relevant for a variety of investors 
who engage in short selling.
---------------------------------------------------------------------------

    \818\ See supra note 254 and accompanying text.
    \819\ See also supra note 123 and accompanying text (petitioner 
recommending inclusion of short sales in Rule 605).
    \820\ Short volume data is provided by CBOE Group (CBOE BYX 
Exchange, CBOE BZX Exchange, CBOE EDGA Exchange, CBOE EDGX 
Exchange), FINRA (FNYX,FNSQ, FNQC), NASDAQ Group (Nasdaq BX, Nasdaq 
PSX and Nasdaq Stock Market), and NYSE Group (New York Stock 
Exchange, NYSE Arca, NYSE American, NYSE Chicago, and NYSE 
National). See https://www.cboe.com/us/equities/market_statistics/short_sale/ (CBOE data); https://www.finra.org/finra-data/browse-catalog/short-sale-volume-data (FINRA data); https://nasdaqtrader.com/Trader.aspx?id=shortsale (NASDAQ data); ftp://ftp.nyxdata.com/ (NYSE data). Common stocks include those with a 
CRSP share code of 10 or 11. Financial stocks (SIC code 6000-6999) 
and stocks that do not have an active trading status in CRSP (trade 
status = A) are excluded. Analysis derived based on data from CRSP 
1925 US Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth Sch. 
Bus. (2022). The daily level of short selling is calculated for each 
stock as the daily number of shares sold short divided by the daily 
trading volume, averaged across stocks, and finally averaged across 
all days in the sample (August 3, 2009 to February 5, 2021). Note 
that this number matches that of other studies. For example, Figure 
F.1 in the Congressional Study on Short Sale Reporting shows that 
the level of short selling as a percentage of trading volume grew 
from 2007 to close to 50% by 2013. See Short Sale Position and 
Transaction Reporting (June 5, 2014), available at https://www.sec.gov/files/short-sale-position-and-transaction-reporting%2C0.pdf.
    \821\ One academic paper found that short selling by individual 
investors made up a much smaller percentage of overall shorting 
volume on NYSE (1% to 2%). The authors attribute the low number of 
on-exchange retail shorting to brokerage routing decisions. See 
Ekkehart Boehmer, Charles M. Jones & Xiaoyan Zhang, Which Shorts are 
Informed?, 63 J. Fin. 491 (2008).
    \822\ See Ekkehart Boehmer & Wanshan Song, Smart Retail Traders, 
Short Sellers, and Stock Returns. Short Sellers, and Stock Returns 
(working paper Oct. 23, 2020) available athttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=3723096 (retrieved from SSRN Elsevier 
database).
    \823\ See Peter Molk & Frank Partnoy, Institutional Investors as 
Short Sellers?, 99 B.U. L. Rev. 837, 839 (2019). Molk and Partnoy's 
paper ``identif[ies] the regulatory and other barriers that keep key 
categories of institutions[, specifically, mutual funds, insurance 
companies, banks, sovereign wealth funds, endowments, and 
foundations,] from acquiring significant short positions.'' Id. at 
843. In addition, a Division of Economic and Risk Analysis White 
Paper survey of all mutual fund Form N-SAR filings in 2014 found 
that ``[w]hile 64% of all funds were allowed to engage in short 
selling, only 5% of all funds actually did so.'' See Daniel Deli et 
al., Use Of Derivatives By Registered Investment Companies, SEC 8 
(2015), available at https://www.sec.gov/files/derivatives12-2015.pdf.
    \824\ See Yawen Jiao, Massimo Massa & Hong Zhang, Short Selling 
Meets Hedge Fund 13F: An Anatomy of Informed Demand, 122 J. Fin. 
Econ. 544 (2016), citing a 2009 report from Goldman Sachs.
    \825\ See Adam V. Reed, Mehrdad Samadi & Jonathan Sokobin, 
Shorting in Broad Daylight: Short Sales and Venue Choice, 55 J. Fin. 
Quantitative Analysis 2246 (Nov. 2020).
---------------------------------------------------------------------------

(b) Modernizing the Required Information
(i) Categorization by Order Size
    The proposed amendments modernizing the information required by 
Rule 605 would promote increased transparency by increasing the 
relevance of the information contained in Rule 605 reports, including 
information about order size categories.\826\
---------------------------------------------------------------------------

    \826\ The EMSAC and commenters have also suggested bringing 
smaller and larger order sizes within scope. See supra notes 126-132 
and accompanying text.
---------------------------------------------------------------------------

    The proposed amendments expanding Rule 605's order size categories 
to include information about a wider range of order sizes,\827\ 
including odd-lots, orders less than one share, and larger-sized 
orders,\828\ would increase the extent to which Rule 605 captures 
information about orders that are relevant to both individual and 
institutional investors. Analyses showed that the inclusion of orders 
for less than 100 shares into Rule 605 reporting requirements would 
include up to an additional 18.2% of NMLOs (2.8% of NMLO share 
volume),\829\ and the inclusion of fractional shares would include up 
to an additional 10.4% of executions received by individual investors 
into Rule 605 reports.\830\ Fractional shares would benefit from 
increased transparency. While the Commission lacks information on the 
execution quality of fractional shares, the execution quality of orders 
for less than one share may vary across broker-dealers. In particular, 
many market centers do not offer the functionality to accept or execute 
such orders, and so their execution quality will depend on how the 
broker-dealer handles these orders, such as internalizing such orders 
or aggregating them together for the purpose of rerouting to market 
centers.\831\ Lastly, the inclusion of information about larger-sized 
orders would include up to an additional 7.8% of NMLO share 
volume,\832\ which would likely mostly be relevant for institutional 
investors, to the extent that some of these orders may not be split 
into smaller child orders.\833\
---------------------------------------------------------------------------

    \827\ Commenters have suggested amending the scope of the Rule 
to include odd-lot orders (see supra note 271 and accompanying 
text), as well as larger-sized orders (see supra notes 283-285 and 
accompanying text).
    \828\ See proposed Rule 600(b)(20). Furthermore, see supra 
section IV.B.1.(b)(2) for a discussion of the Commission's proposal 
to rescind the exemptive relief for orders of 10,000 or more shares 
and include these orders within the scope of Rule 605 reports.
    \829\ See Figure 5 in supra section VII.C.2.(b)(1)(a). As 
discussed in this section, odd-lots are submitted by both individual 
and institutional investors.
    \830\ See analysis in supra section VII.C.2.(b)(1)(b).
    \831\ See supra note 643 and accompanying text.
    \832\ See analysis in supra section VII.C.2.(b)(1)(c).
    \833\ This effect on competition may be limited if most large 
institutional orders are not held orders and would thus be excluded 
from Rule 605 reporting requirements, and/or are broken up into 
smaller child orders that are likely to be smaller and may already 
be included in Rule 605 reporting requirement. See supra note 650 
and accompanying text.
---------------------------------------------------------------------------

    In addition, the proposed amendments to define order size 
categories in terms of number of round lots \834\ would increase the 
transparency regarding distribution of order sizes that a reporting 
entity handles, particularly for higher-priced stocks. The new MDI 
Rules tie the definition of round lot to a stock's average closing 
price during the previous month, with higher-priced stocks associated 
with lower-sized rounds lots,\835\ to account for the fact that order 
sizes will tend to be smaller in higher-priced stocks. Continuing the 
example from section VII.C.2.(c)(1), under the new MDI Rules, a $500 
stock would have a round lot size of 40 shares. Therefore, for a $500 
stock, instead of all typically-sized orders below $200,000 \836\ 
(i.e., 400 shares, or 10 round lots) being clustered in a single order 
size category, these orders would potentially be spread among four out 
of six of the proposed order size categories: (i) less than a share; 
(ii) odd-lot; (iii) 1 round lot to less than 5 round lots; (iv) 5 round 
lots to less than 20 round lots. This would result in a more meaningful 
categorization of orders that would better enable market participants 
to compare execution qualities across orders of different sizes. As a 
result, market participants would be better able to take into account 
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, making these metrics more 
informative for making apples-to-apples comparisons of execution 
quality across reporting entities.
---------------------------------------------------------------------------

    \834\ See proposed Rule 600(b)(19).
    \835\ See supra note 577 and accompanying text describing the 
new definition of round lots.
    \836\ This refers to the exclusion of orders greater than 
$200,000 from some Regulation NMS rules. See supra note 674.
---------------------------------------------------------------------------

(ii) Categorization by Order Type
    The proposed amendments modifying the order type categories 
required by Rule 605, including modifications to the coverage of NMLOs, 
and including separate order type categories for beyond-the-midpoint 
orders and marketable IOCs, would promote increased transparency by 
increasing the relevance of the information contained in Rule 605 
reports.
    First, the proposed amendment to modify Rule 605's coverage of 
NMLOs so that reporting entities are required to disclosure execution 
quality information only for those NMLOs that become executable \837\ 
(i.e., eventually touch the NBBO) would facilitate comparisons between 
market centers, by more accurately excluding NMLOs that do not receive 
a meaningful opportunity to execute; for example because the price 
moved away from the order and/or the order was cancelled before its 
limit price was reached.\838\ On the other

[[Page 3867]]

hand, investors could expect a NMLO with a limit price equal to the 
prevailing NBBO to have a reasonable chance of executing, even if the 
limit price is more than $.10 away from the NBB or NBO at the time of 
order receipt. This would facilitate comparisons between market centers 
by ensuring that the execution quality statistics for NMLOs more 
meaningfully capture a market center's performance in handling NMLOs, 
rather than reflecting market conditions potentially outside of the 
market center's control, such as movements of the NBBO.
---------------------------------------------------------------------------

    \837\ See proposed Rule 600(b)(42) (defining ``executable'') and 
proposed Rule 600(b)(20) (defining ``categorized by order type'' to 
include categories for ``executable orders submitted with stop 
prices'' and ``executable non-marketable limit orders'') (emphasis 
added). See also supra notes 240-241 and 303-304.
    \838\ See supra notes 296-297 and accompanying text for 
discussion of commenters' suggestions regarding Rule 605 reporting 
requirements for NMLOs.
---------------------------------------------------------------------------

    This is evident from an analysis comparing the fill rates of all 
near-the-quote and away-from-the-quote NMLOs to the fill rates of 
executable NMLOs, calculated using the sample of MIDAS data.\839\ 
Results are presented in Figure 15.\840\ While the fill rates of all 
near-the-quote and away-from-the-quote NMLOs are very low and similar 
to one another (0.2% and 0.6%, respectively), the fill rates of 
executable near-the-quote and away-from-the-quote NMLOs are much 
higher, and also very different from one another. In fact, at 32.9%, 
the average fill rate of executable away-from-the-quote NMLOs is 
relatively high, and actually much higher than the average fill rate of 
executable near-the-quote orders (5.5%).\841\ This reflects that even 
away-from-the-quote orders are likely to execute if prices move such 
that they have a meaningful opportunity to execute.
---------------------------------------------------------------------------

    \839\ See supra note 634 for a description of the dataset. Staff 
found that, first, only a small percentage of NMLOs eventually touch 
the NBBO: only 15.01% of near-the-quote NMLOs and 2.08% of away-
from-the-quote NMLOs were executable during their lifespan.
    \840\ This analysis uses data from prior to the implementation 
of the MDI Rules and results may be different following the 
implementation of the MDI Rules. However, it is not clear how a 
change in the distribution of orders into various NMLO categories 
would affect the average fill rates of these NMLO categories. See 
supra note 685 and section VII.C.1.(d)(2). Also, note that, by 
definition, all at-the-quote and inside-the-quote NMLOs are 
executable by definition of having a limit price equal to or better 
than the NBBO, and so the fill rates of executable at-the-quote and 
inside-the-quote NMLOs would be identical to those for all at-the-
quote and inside-the-quote NMLOs presented in Figure 8.
    \841\ This is likely because many near-the-quote NMLOs are 
cancelled before their limit prices are reached. In fact, examining 
the distribution of cancellations of these orders reveals that 27.5% 
of near-the-quote NMLO shares are cancelled within 100 milliseconds, 
vs. only 13.5% of away-from-the-quote NMLOs.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

Figure 15: Fill Rates of Executable Away-From-the-Quote and Near-the-
Quote NMLOs, March 2022
[GRAPHIC] [TIFF OMITTED] TP20JA23.015

BILLING CODE 8011-01-C
    Second, the proposed amendment to include a separate order type 
category for beyond-the-midpoint limit orders \842\ would increase 
transparency on how reporting entities handle these types of orders 
(e.g., whether or not they offer these orders price improvement) and 
reduce the extent to which including information about these orders 
along with other types of NMLOs may skew the execution quality 
statistics of other types of NMLOs. The Commission understands that 
different reporting entities may treat beyond-the-midpoint

[[Page 3868]]

NMLOs differently from other types of NMLOs, and that as a result 
beyond-the-midpoint NMLOs have systematically different execution 
quality characteristics than other types of NMLOs, and even other types 
of inside-the-quote NMLOs. For example, beyond-the-midpoint limit 
orders may be offered price improvement at some market centers, such as 
wholesalers, so the execution quality of these orders would be highly 
dependent on to which type of market center the broker-dealer routes 
such orders.\843\ Requiring reporting entities to report execution 
quality statistics separately for beyond-the-midpoint orders would 
reveal differences in reporting entities' handling of this type of 
order.
---------------------------------------------------------------------------

    \842\ See proposed Rule 600(b)(20) (defining ``categorized by 
order type'' to include a category for ``beyond-the-midpoint limit 
orders''). See also supra note 312 and accompanying text.
    \843\ See Table 5 in supra section VII.C.5.(c), showing that 
beyond-the-midpoint orders handled by wholesalers tend to have 
higher fill rates, faster execution time, and higher price 
improvement relative to other types of NMLOs.
---------------------------------------------------------------------------

    Lastly, the proposed amendment assigning marketable IOCs to a 
separate order type category so that they no longer would be commingled 
with other order types \844\ would increase the transparency of 
execution quality information, both for IOCs and for other types of 
marketable orders.\845\ Assigning marketable IOCs to a separate order 
type category would increase transparency about the execution quality 
that reporting entities achieve for these types of orders. Supporting 
the idea that IOCs tend to have different execution quality profiles 
than other types of marketable orders, an analysis showed that IOCs on 
average have much lower fill rates (3.22%) than other market and 
marketable limit orders (15.94%), and that fill rates vary across 
market centers and according to order characteristics such as 
size.\846\ Information about the execution quality of IOCs would allow 
broker-dealers handling these types of orders to be able to better 
assess which market center on average offers better execution quality 
to these types of orders. These broker-dealers could thus make more 
informed decisions about where to route these orders. Furthermore, due 
to their different execution profiles, removing IOCs from other 
marketable order categories would cause the execution quality metrics 
for other types of marketable orders to more accurately reflect 
reporting entities' handling of other types of market orders.\847\ The 
effect on the execution quality metrics of other types of marketable 
orders would likely be significant, as an analysis of IOCs found that 
they make up more than 90% of market and marketable share volume.\848\
---------------------------------------------------------------------------

    \844\ See proposed Rule 600(b)(20) (defining ``categorized by 
order type'' to include a category for ``marketable immediate-or-
cancel orders''). See also discussion in supra section IV.B.2.(c).
    \845\ The EMSAC, as well as commenters on the 2010 Equity Market 
Structure Concept Release and the 2018 Rule 606 Amendments, 
suggested separating IOCs within the categorization by order type. 
See supra note 324 and accompanying text.
    \846\ For example, market centers other than wholesalers tend to 
have higher fill rates for IOC odd-lots (39.6%) than non-IOC odd-
lots (15.4%), the opposite is true for wholesalers (30.1% vs. 
67.1%). See Table 6 in supra section VII.C.5.(g).
    \847\ See supra note 725 and accompanying text for an example of 
how co-mingling IOCs with other order types could lower marker 
centers' incentives to improve execution quality for other 
marketable orders.
    \848\ See Table 6 in supra section VII.C.5.(g) and corresponding 
discussion.
---------------------------------------------------------------------------

(iii) Timestamp Conventions
    Several of the proposed amendments would promote increased 
transparency by modifying the conventions used to calculate time-to-
execution information for the purposes of Rule 605 reporting, including 
increasing the granularity of the timestamp, replacing the current 
time-to-execution buckets in Rule 605 with statistics capturing 
information about the distribution of time-to-execution, and modifying 
the conventions for recording the time-to-execution of NMLOs.\849\
---------------------------------------------------------------------------

    \849\ See supra notes 339-340, 358 and accompanying text 
discussing suggestions from commenters related to the current 
provisions in Rule 605 for timestamps.
---------------------------------------------------------------------------

    First, the proposed amendment increasing the granularity of the 
timestamp conventions used for the time of order receipt and time of 
order execution from seconds to milliseconds \850\ would make the 
current time-to-execution statistics in Rule 605, including the average 
share-weighted time-to-execution of shares executed with positive price 
improvement, without price improvement and also with negative price 
improvement, more informative about the execution speeds offered by a 
market center. Given the data and trading speeds enabled by modern 
technology in which execution speeds measured in seconds are likely to 
miss much of the variation in time-to-executions across reporting 
entities in today's markets, particularly for market and marketable 
orders,\851\ adding granularity to the timestamps used to calculate the 
time-to-execution speed measures included in Rule 605 reports would 
benefit market participants in their efforts to compare time-to-
executions across reporting entities.
---------------------------------------------------------------------------

    \850\ See proposed Rule 600(b)(108) and (109). See also supra 
notes 333-334 and accompanying text.
    \851\ See supra section VII.C.2.(c)(4) for a discussion of how 
the granularity of the time-to-execution categories currently 
defined in Rule 605 has lost relevance over time.
---------------------------------------------------------------------------

    Second, the proposal to eliminate the current time-to-execution 
buckets \852\ would eliminate a method for presenting information about 
time-to-executions that has lost relevance over time, as, for reasons 
described above, these categories are not granular enough with respect 
to variations in time-to-executions across reporting entities. Instead, 
the Commission proposes requiring, in addition to average time to 
execution statistics as currently included in Rule 605,\853\ both 
share-weighted median and 99th percentile time-to-execution statistics 
in order to provide information about the distribution of execution 
speeds achieved by a reporting entity.\854\ Given that outliers could 
skew the share-weighted average time to execution, information about 
the distribution of execution speeds in addition to the average would 
still be useful. However, time-to-execution buckets are of limited 
utility, especially since time-to-execution buckets that are 
appropriate for some order types, such as NMLOs, may not be granular 
enough for other order types, such as market and marketable 
orders.\855\ Statistics capturing the distribution of time-to-
executions would represent a more flexible and useful method for 
capturing information about the time-to-executions of a variety of 
order types.
---------------------------------------------------------------------------

    \852\ See 17 CFR 242.605(a)(1)(i)(F), (G), (H), (I) and (J) 
(detailing time-to-execution buckets of 0-9 seconds, 10 to 29 
seconds, 30 to 59 seconds, 60 to 299 seconds and 5 to 30 minutes 
after the time of order receipt).
    \853\ See 17 CFR 242.605(a)(1)(ii)(D), (F), and (I), requiring 
share-weighted average period from the time of order receipt to the 
time of order execution for shares executed with price improvement, 
at the quote, and outside the quote, respectively.
    \854\ See proposed Rule 605(a)(1)(ii)(D), (E), (H), (I), (M), 
and (N), and proposed Rule 605(a)(1)(iii)(D) and (E), requiring 
share-weighted median and share-weighted 99th percentile time to 
execution information. See also supra note 349 and accompanying 
text.
    \855\ See Figure 12 and corresponding discussion in section 
VII.C.2.(c)(4), supra, describing an analysis showing that, for at-
the-quote and near-the-quote limit orders, executions are reasonably 
well distributed across the different time-to-execution buckets but, 
for market and marketable limit orders, time-to-executions are 
mostly bunched up at the faster end of their time buckets.
---------------------------------------------------------------------------

    Finally, the proposed amendments would measure time-to-execution 
for NMLOs from the time that the order becomes executable, rather than 
from the time of order receipt.\856\ This would ensure that this metric 
would be more likely to capture the portions of execution speed that 
are within a

[[Page 3869]]

reporting entity's control, rather than dependent on market 
conditions.\857\
---------------------------------------------------------------------------

    \856\ See proposed Rule 605(a)(1)(iii)(C), (D), and (E).
    \857\ See supra note 513 for an example of how market conditions 
can influence the time-to-execution of NMLOs.
---------------------------------------------------------------------------

(iv) Modifications to Information Required for All Types of Orders
    The proposed amendments modernizing the information required for 
all order types would promote increased transparency by increasing the 
relevance of the information contained in Rule 605 reports. This holds 
as well for the proposed amendments modifying the calculations of 
average realized spreads, expanding existing requirements to report 
average effective spreads, adding additional metrics such as percentage 
realized and effective spreads, effective over quoted spreads, and size 
improvement, and modifying the categorization of riskless principal 
trades.
    First, the proposed amendment to modify the time horizon used to 
calculate the realized spread from a single horizon of five minutes to 
two horizons of 15 seconds and 1 minute \858\ would increase the 
relevance of this measure and allow it to more accurately reflect the 
speed of modern markets.\859\ This would allow market participants to 
better compare execution quality across market centers. Realized 
spreads are meant to capture information about the adverse selection 
risk associated with providing liquidity,\860\ and in this way are a 
useful measure for evaluating reporting entities' order handling 
practices during times of market stress or high adverse selection. 
However, the current requirement to use a five-minute time horizon to 
calculate realized spreads for the purposes of Rule 605 disclosures is 
too long of a horizon to reflect the speed of modern markets, and 
likely results in noisy measures of the realized spread.\861\ Instead, 
the proposed time horizons of 15 seconds and 1 minute are more 
appropriate time horizons given current trading speeds. Analysis found 
that the proposed time horizons of 15 seconds and 1 minute capture most 
of the information about realized spreads, in particular for the 
largest stocks.\862\ This supports results from the academic 
literature, as one paper similarly posits that the five-minute time 
horizon should be replaced with a horizon of no more than 15 seconds 
for large stocks and 60 seconds for small stocks.\863\
---------------------------------------------------------------------------

    \858\ See proposed Rule 605(a)(1)(i)(G) and(I). See also supra 
note 375 and accompanying text.
    \859\ See supra note 377 discussing commenters' suggestions 
regarding to Rule 605's provisions related to the realized spread.
    \860\ See supra note 701 and accompanying text for a discussion 
about what the realized spread is intended to measure.
    \861\ See discussion in supra section VII.C.2.(c)(5).
    \862\ See discussion of analyses in supra section IV.B.4.(a).
    \863\ See Conrad and Wahal.
---------------------------------------------------------------------------

    Second, the proposed amendment to require market centers to include 
information about average effective spreads for NMLOs and orders 
submitted with stop prices,\864\ in addition to market and marketable 
limit orders, would increase transparency about the availability of 
favorable executions for these types of orders. For NMLOs, the average 
effective spread captures how much customers can expect to be 
compensated for providing liquidity.\865\ If a market center is 
offering lower (or, more precisely, more negative) effective spreads 
for NMLOs on average, that means that the market center is able to 
execute NMLOs even when the NBBO spread is wide, e.g., because it is 
able to attract trading interest even during potentially adverse market 
conditions.\866\ This can represent profitable trading opportunities 
for providers of limit orders, who would otherwise need to raise (in 
case of a buy limit order) or lower (in case of a sell limit order) 
their limit prices in order to attract a counterparty. Therefore, 
information about effective spreads for NMLOs would allow providers of 
limit orders (and their broker-dealers) to make comparisons across 
market centers based on the profitability of their limit order 
strategies. For orders submitted with stop prices, the average 
effective spread would reflect similar information to the extent that 
these are NMLOs. For marketable orders submitted with stop prices,\867\ 
the average effective spread would capture information about how much 
more than the stock's estimated value a trader has to pay for the 
immediate execution of their order, similarly to how the effective 
spread currently included in Rule 605 for market and marketable limit 
orders can be interpreted.
---------------------------------------------------------------------------

    \864\ See proposed Rule 600(b)(10). See also supra note 386 and 
accompanying text.
    \865\ See supra note 709 and accompanying text for more details 
about interpreting effective spreads for NMLOs.
    \866\ Note that the ability of market centers to execute NMLOs 
at a wide spread is limited by the prohibited of trade-throughs of 
protected quotes under Rule 611 of Regulation NMS.
    \867\ See supra Table 4 for a break-down of orders submitted 
with stop prices according to order type.
---------------------------------------------------------------------------

    The proposed amendments would require the average effective spread 
of a NMLO or an order submitted with a stop price to be calculated 
using the midpoint as of the time of the order's executability, rather 
than the time of order execution.\868\ Providing the average effective 
spread would allow market participants to measure what liquidity 
providers expect to earn, which is more informative about expectations 
of the reporting entities' skill at handling and/or executing orders as 
compared to a measurement of what liquidity providers actually earn, 
which can be impacted by market conditions outside of a reporting 
entities' control.\869\
---------------------------------------------------------------------------

    \868\ See proposed Rule 600(b)(10). The time an order becomes 
executable would be used for NMLOs, beyond-the-midpoint limit 
orders, and orders submitted with stop prices.
    \869\ Market participants can use the realized spread to 
estimate what limit order providers actually earn from liquidity 
provision. See supra note 709.
---------------------------------------------------------------------------

    Third, the proposed amendment requiring reporting entities to 
report average effective spreads and average realized spreads in 
percentage terms,\870\ in addition to the current requirement to report 
them in dollar terms,\871\ would allow market participants to evaluate 
and compare the actual per-share dollar premium paid (or amount earned) 
captured by the spread, and use average percentage measures to compare 
aggregate spreads across broker-dealers that handle different mixes of 
stocks and/or stocks with significant price volatility. Since average 
spread measures represent a per-share cost, the real costs to (or 
premiums earned by) investors captured by average spread measures can 
be very different, depending on the stock price.\872\ Percentage 
average spread measures, on the other hand, would better account for 
these differences in stock prices.\873\ As different reporting entities 
handle and/or transact in different mixes of stocks with varying 
prices, including information about average percentage spreads would 
make it possible for market participants who may want to compare 
reporting entities' overall spread measures or their spread measures 
for baskets of stocks to aggregate average spreads for a variety of

[[Page 3870]]

stocks with varying prices.\874\ This would facilitate a more apples-
to-apples comparison of both average effective and average realized 
spreads across reporting entities.
---------------------------------------------------------------------------

    \870\ See proposed Rule 605(a)(1)(i)(H), (J), and (L).
    \871\ See 17 CFR 242.605(a)(1)(i)(K) and 17 CFR 
242.605(a)(1)(ii)(A).
    \872\ See supra note 712 and accompanying text for an example 
showing that the total cost of accumulating the same position in 
terms of dollar value in two stocks with the same per-share dollar 
effective spread can differ significantly in terms of total 
transaction costs if one stock is priced much lower than the other.
    \873\ See example in supra note 712. While the $250 stock and 
the $2.50 stock would have the same average effective spread, the 
average percentage effective spreads of these stocks would be 0.004% 
and 0.4%, respectively, which indicates that investors would face 
higher costs from accumulating a position in the $2.50 stock than 
they would from accumulating an equal-value position in the $250 
stock.
    \874\ While the main purpose of Rule 605 is to facilitate 
comparisons across reporting entities on the basis of execution 
quality within a particular security, the Commission understands 
that access to aggregated information is useful for market 
participants. The proposed amendment to require reporting entities 
to prepare summary reports that aggregate execution quality 
information for S&P 500 stocks, along with all NMS stocks, would 
give market participants access to aggregate effective spreads for 
one commonly used basket of stocks. Meanwhile, per-stock percentage 
spread information would enhance market participant's ability to 
aggregate effective spread information across baskets of stocks 
other than the S&P 500.
---------------------------------------------------------------------------

    Fourth, the proposed amendment requiring reporting entities to 
include information on effective over quoted spreads \875\ would 
increase market participants' access to information about price 
improvement. The Commission understands that the effective over quoted 
spread (E/Q) is a measure often used in industry practice.\876\ As 
such, it represents a measure of price improvement that is likely to be 
easily understood and interpreted by market participants. While E/Q can 
already be calculated from data currently available in Rule 605 
reports,\877\ extrapolating an average monthly quoted spread and using 
that to calculate an average monthly E/Q produces a noisier E/Q measure 
than an average E/Q calculated on a per transaction basis.\878\ 
Therefore, including this measure would improve upon the accessibility 
of price improvement information contained in Rule 605 reports by 
making more readily available a measure that is already used and well 
understood by industry participants.
---------------------------------------------------------------------------

    \875\ See proposed Rule 605(a)(1)(i)(M). See also supra note 401 
and accompanying text.
    \876\ See, e.g., About Us: Brokerage Built for You, Vanguard, 
available at https://investor.vanguard.com/about-us/brokerage-order-execution-quality.
    \877\ See supra note 399.
    \878\ To see this, consider a market center that, in a given 
month, executes two orders of sizes s1 and s2, 
with effective spreads E1 and E2 and quoted 
spreads Q1 and Q2. The true share-weighted 
average E/Q would be [s1/(s1 + s2) x (E1/Q1)] + [s2/(s1 + s2) x (E2/
Q2)]. On the other hand, approximating the average E/Q from share-
weighted average effective and quoted spreads would yield [s1/(s1 Q1 
+ s2 Q2) x E1] + [s2/(s1 Q1 + s2 Q2) x E2]. In other words, it 
yields the weighted effective spread divided by a share-weighted 
average quoted spread, rather than a share-weighted average of the 
effective divided by quoted spread.
---------------------------------------------------------------------------

    Fifth, the proposed amendment expanding Rule 605 reporting 
requirements to include a measure of size improvement would provide 
market participants with more information about an additional dimension 
of execution quality that is currently not fully captured by Rule 605 
statistics.\879\ The proposed amendment would require reporting 
entities to report, for executions of covered shares, a benchmark 
metric calculated as the consolidated reference quote size, capped at 
the size of the order,\880\ which a market participant could compare to 
the market center's reported number of shares executed at or better 
than the quote.\881\ This would reflect the market center's ability to 
offer size improvement, which would be particularly beneficial for 
larger-sized orders, as these orders are the most likely to exceed the 
liquidity available at the best quotes and therefore benefit the most 
from size improvement.
---------------------------------------------------------------------------

    \879\ Liquidity providers have expressed support for a size 
improvement measure (see supra note 405) and have made suggestions 
regarding measures (see supra notes 411-413).
    \880\ See proposed Rule 605(a)(1)(i)(F). As discussed in supra 
section IV.B.4.(e), this metric is meant to capture whether the 
depth available at the best market prices is sufficient to fully 
execute against a given order, or whether the order would need to 
walk the book in order to fully execute.
    \881\ Continuing the example from section VII.C.2.(c)(6), while 
the market center's Rule 605 report would reveal a price improvement 
metric of $0 for this order, the market center's benchmark metric 
would reveal a consolidated reference quote size of 100 shares, 
which a market participant could compare to the market center's 
reported number of shares executed at or better than the quote, 
which would reveal 200 shares.
---------------------------------------------------------------------------

    If information about size improvement is already captured by 
current Rule 605 statistics, the addition of the above-described 
benchmark metric capturing size improvement would not necessarily 
represent a benefit to transparency. To examine the extent to which a 
size improvement measure calculated using this benchmark metric would 
contain information that is different from measures currently required 
by Rule 605, data from the Tick Size Pilot B.II Market and Marketable 
Limit Order dataset \882\ was analyzed to calculate the average 
correlation \883\ between price improvement, effective spreads, and the 
size improvement share count divided by the benchmark share count 
(``size enhancement rate'').\884\ As national securities exchanges and 
off-exchange market centers differ in the extent to which they can 
offer size and price improvement, staff performed this analysis 
separately for these two different types of market centers.
---------------------------------------------------------------------------

    \882\ See supra note 723 for dataset description. The Commission 
limited this analysis to a randomly selected sample of 100 stocks 
and for the time period of March 2019. This dataset was then merged 
with MIDAS data to obtain the consolidated depth available at the 
NBBO at the time of the market and marketable limit order 
submissions, along with data on odd-lots and consolidated volume at 
prices outside of the NBBO. This analysis uses data from prior to 
the implementation of the MDI Rules and the specific numbers may be 
different following the implementation of the MDI Rules. In 
particular, for certain stocks, the NBBO quoted spread is expected 
to narrow, the liquidity available at the NBBO may decrease, and the 
NBBO midpoint may change, though the Commission is uncertain of the 
direction of this effect. This may impact statistics that are based 
on these values, including measures of price and size improvement 
and effective spreads. See supra section VII.C.1.(d)(2). However, it 
is unclear whether or how these effects would impact the 
correlations between these measures documented in this analysis.
    \883\ Correlation is calculated using the Pearson correlation 
coefficient, which measures the linear correlation between two sets 
of data, ranging from -1 to 1, with -1 representing perfect negative 
correlation and 1 representing perfect positive correlation. To 
construct a measure of average correlation, the Commission first 
calculated the Pearson correlation coefficient for each pair of 
execution quality metrics, for each market center--stock 
combination. Then the Commission took the value-weighted average 
correlation coefficient across all stocks for each market center, 
using dollar volume as weights. Then the Commission averaged the 
resulting correlation coefficients across market centers using an 
equal-weighted average.
    \884\ See section IV.B.4.(e) for a definition of the size 
improvement share count, which captures the number of shares greater 
than the depth available at the NBBO to which the market center was 
able to offer the best displayed price. The size improvement share 
count is divided by the proposed benchmark share count to obtain the 
size enhancement rate to control for differences in market 
conditions. For example, if Market Center A has 1,000,000 shares 
executed at or better than the best displayed price and a benchmark 
share count of 800,000, and Market Center B has 2,000,000 shares 
executed at or better than the best displayed price and a benchmark 
share count of 1,800,000, both market centers would have a size 
improvement share count of 200,000, but Market Center A would be 
offering the a higher rate of size improvement since they had fewer 
shares available to them at the consolidated depth (i.e., a lower 
benchmark share count). To capture this, the size improvement share 
count is divided by the benchmark share count, such that Market 
Center A would have a size enhancement rate of 200,000/800,000 = 25% 
and Exchange B would have size enhancement rate of 200,000/1,800,000 
= 11%. This difference recognizes that Exchange A and Exchange B 
provided the same number of size improved shares but Exchange A had 
lower consolidated depth available when it needed to execute.
---------------------------------------------------------------------------

    Results are presented in Table 8 and show that, for both national 
securities exchanges and off-exchange market centers, effective spreads 
are modestly (negatively) correlated with price improvement, confirming 
that effective spreads contain some of the same information as price 
improvement measures. Likewise, at least for national securities 
exchanges, effective spreads are modestly (negatively) correlated with 
the size enhancement rate, confirming that effective spreads contain 
some information about size improvement. However, this correlation is 
nearly zero for off-exchange market centers, implying that effective 
spreads are a poor measure of size improvement

[[Page 3871]]

particularly for these types of market centers.

     Table 8--Average Correlation Between Measures of Price and Size
                               Improvement
------------------------------------------------------------------------
                                             National
                                            securities     Off-exchange
              Correlations                   exchanges    market centers
                                             (percent)       (percent)
------------------------------------------------------------------------
Price Improvement and Effective Spreads.           -25.7           -20.5
Size Enhancement Rate and Effective                -12.0             0.1
 Spreads................................
Price Improvement and Size Enhancement              31.3             5.9
 Rate...................................
------------------------------------------------------------------------
Table 8: Average Correlation between Measures of Price and Size
  Improvement. This table presents correlations between three measures
  of price improvement and size improvement: price improvement,
  calculated as the signed difference between the execution price and
  the NBBO; the effective spread, calculated as twice the signed
  difference between the execution price and the NBBO midpoint; and the
  size enhancement rate, calculated as the size improvement share count
  divided by the benchmark share count (see supra note 884 and
  accompanying text for a detailed description of this measure). See
  supra note 723 for dataset description and supra note 883 for
  methodology. This analysis uses data from prior to the implementation
  of the MDI Rules and results may be different following the
  implementation of the MDI Rules. See supra note 882 and section
  VII.C.1.(d)(2).

    While price improvement and the size enhancement rate are 
moderately correlated for national securities exchanges, implying that 
information from these two measures overlaps to some extent, this 
correlation is comparatively low for off-exchange market centers. The 
fact that price improvement and the size enhancement rate are not 
perfectly overlapping (i.e., are not perfectly correlated) implies that 
each of these measures to some degree conveys different information 
about execution quality, particularly for off-exchange market centers. 
Therefore, including information that could be used to calculate a size 
improvement measure such as the size enhancement rate into Rule 605 
reporting requirements would provide market participants with more 
information about an additional dimension of execution quality that is 
not fully captured by current Rule 605 statistics.
    Lastly, the proposed amendment specifying that market centers 
should include riskless principal trades in the category of trades 
executed away from the market center \885\ would increase transparency 
about internalization by wholesalers, as information on the extent to 
which wholesalers internalize order flow is currently obscured by the 
inclusion of riskless principal trades into the category of trades 
executed at, rather than away from, the market center.\886\ Market 
participants would be more informed about potential differences in 
execution quality between wholesalers that largely internalize order 
flow as compared to those whose orders are subject to competition from 
other interested parties quoting on external market centers.
---------------------------------------------------------------------------

    \885\ See proposed Rule 605(a)(1)(i)(D). See also supra note 418 
and accompanying text.
    \886\ See supra section VII.C.2.(c)(8) for a discussion of how 
classifying riskless principal trades in the category of executions 
taking place at the market center may obscure the extent to which 
wholesalers internalize order flow.
---------------------------------------------------------------------------

(v) Modifications to Information Required for Market, Marketable Limit, 
Marketable IOC, and Beyond-the-Midpoint Limit Orders
    Several of the proposed amendments would modernize the information 
required for market, marketable limit, marketable IOC, and beyond-the-
midpoint limit orders, which would promote transparency by increasing 
the relevance of the information contained in Rule 605 reports for 
these types of orders, including information about time-to-execution 
and price improvement.
    First, the proposed amendment requiring reporting entities to 
report, for shares executed with price improvement, executed at the 
quote, or executed outside the quote, a wider range of time-to-
execution statistics, including the average,\887\ median,\888\ and 99th 
percentile \889\ period from the time of order receipt to the time of 
order execution, would increase transparency about the execution speeds 
offered by a reporting entity. Given that outliers could skew the 
share-weighted average time to execution, information about the 
distribution of execution speeds in addition to the average would be 
useful.\890\ Therefore, including a variety of statistics (mean, median 
and 99th percentile) would help ensure that market participants have 
sufficient information about the distribution of time-to-execution in 
order to account for any outliers. This would facilitate comparisons 
across reporting entities on the basis of execution speeds.
---------------------------------------------------------------------------

    \887\ For shares executed with price improvement, executed at 
the quote, or executed outside the quote, respectively, see proposed 
Rules 605(a)(1)(ii)(C), 605(a)(1)(ii)(G), and 605(a)(1)(ii)(L).
    \888\ For shares executed with price improvement, executed at 
the quote, or executed outside the quote, respectively, see proposed 
Rules 605(a)(1)(ii)(D), 605(a)(1)(ii)(H), and 605(a)(1)(ii)(M).
    \889\ For shares executed with price improvement, executed at 
the quote, or executed outside the quote, respectively, see proposed 
Rules 605(a)(1)(ii)(E), 605(a)(1)(ii)(I), and 605(a)(1)(ii)(N).
    \890\ Consider, for example, a reporting entity (``Reporting 
Entity A'') that executes one hundred equally-sized orders with a 
time-to-execution of 1 millisecond, but a single order at a time-to-
execution of 100,000 milliseconds (100 seconds), and compare to a 
reporting entity (``Reporting Entity B'') that executes the same 
size and amount of orders all at a time-to-execution of 1,001 
milliseconds. Both reporting entities' average time-to-execution 
statistic would be 1,001 milliseconds. However, comparing these two 
statistics would not reveal that Reporting Entity A nearly always 
offers a faster execution time than Reporting Entity B, except for a 
single outlier. Median time-to-execution statistics, however, would 
reveal that Reporting Entity A has a median time-to-execution of 1 
millisecond, while Reporting Entity B has a median time-to-execution 
of 1,001 milliseconds, which would allow for comparison accounting 
for Reporting Entity A's outlier.
---------------------------------------------------------------------------

    Second, the proposed amendment requiring, for marketable order 
types (i.e., market, marketable limit, marketable IOC, and beyond-the-
midpoint limit orders), reporting entities to disclose price 
improvement statistics using the best available displayed price as the 
benchmark \891\ would give market participants access to price 
improvement information relative to a benchmark price that more 
accurately reflects liquidity available in the market. For example, if 
a market center internalizes an order with $0.05 of price improvement 
relative to the NBBO, but odd-lots are available on another market 
center at prices that are $0.10 better than the NBBO, this measure 
would reflect a price dis-improvement of $0.05. This would indicate 
that the investor could have received a better price if the market 
center had routed the order to execute against the available odd-lot 
liquidity.

[[Page 3872]]

This would thus allow market participants (including broker-dealers) to 
identify those market centers that execute orders at prices better than 
the best available displayed price, taking into account all available 
displayed liquidity.\892\
---------------------------------------------------------------------------

    \891\ See proposed Rule 600(b)(14) (defining the ``best 
available displayed price'') and proposed Rule 605(a)(1)(ii)(O) 
through (S). See also supra section IV.5 for further discussion of 
these amendments.
    \892\ If only the NBBO is used as the benchmark for the proposed 
price improvement statistic relative to the best available displayed 
price, because, for example, odd-lots inside the NBBO are not 
available or because information about the best odd-lot orders 
available in the market inside the NBBO is not or is not yet 
available in consolidated market data, then these additional price 
improvement statistics would be the same as the price improvement 
statistics currently included in Rule 605 and would not have 
significant economic effects. See supra note 423.
---------------------------------------------------------------------------

(vi) Additional Required Information for Executable NMLOs, Executable 
Stop Orders, and Beyond-the-Midpoint Limit Orders
    The proposed amendments would increase the relevance of the 
information contained in Rule 605 reports for executable NMLOs, 
executable stop orders, and beyond-the-midpoint limit orders. 
Specifically, the proposed amendment requiring reporting entities to 
report the number of shares that executed while an executable NMLO was 
in force \893\ would promote transparency regarding differences in the 
execution probabilities of NMLOs between reporting entities.\894\ 
Market participants would be able to determine if a reporting entity is 
unable to achieve an execution in an executable NMLO despite the fact 
that a large number of shares are executing at that NMLO's limit price 
elsewhere in the market, enabling investors and their broker-dealers to 
make better informed routing decisions. Furthermore, the proposed 
amendment requiring the reporting of the number of orders that received 
either a complete or partial fill would provide important additional 
information about the nature of a market center or broker-dealer's NMLO 
and stop order executions--e.g., whether a high executed cumulative 
count represents, on average, larger execution sizes or a higher count 
of orders receiving executions.\895\
---------------------------------------------------------------------------

    \893\ See proposed Rule 605(a)(1)(iii)(B). See also supra 
section IV.B.6 for further discussion of this proposed amendment.
    \894\ One commenter suggested a similar execution quality metric 
called a ``non-marketable benchmark.'' See supra notes 442-443 and 
accompanying text.
    \895\ For example, say that a reporting entity discloses in its 
Rule 605 reports that it received 100 orders sized 100 round lots or 
greater in a stock with a 100-share round lot, with a and that these 
orders had a cumulative number of shares of 1,000,000, and 
furthermore that it executed 990,000 of those shares. Information on 
the number of complete or partial fills would help to clarify 
whether the reporting entity, e.g., executed 99 orders of 10,000 
shares each, or a single order of 990,000 shares.
---------------------------------------------------------------------------

(3) Proposed Summary Execution Quality Reports
    The proposed amendment requiring reporting entities to prepare 
human-readable summary reports \896\ would facilitate comparisons 
across reporting entities on the basis of execution quality by 
increasing the accessibility of the information contained in Rule 605 
reports.\897\ The data generated under Rule 605 is complex, and the raw 
data may be difficult for some market participants to interpret and 
aggregate. Summary reports would give market participants access to 
standardized information that could be used to quickly compare across 
reporting entities. This would be particularly useful for those 
investors that may not have access to the resources to retrieve and 
process the raw data in Rule 605 reports, such as some individual 
investors.
---------------------------------------------------------------------------

    \896\ See proposed Rule 605(a)(2). See also supra note 462 and 
accompanying text.
    \897\ In several contexts in which the Commission has received 
general feedback on equity market structure, commenters have 
suggested that the Commission require a simplified execution quality 
report, particularly for retail investors. See supra notes 135-138 
and corresponding text. Commenters have also suggested that the 
Commission require broker-dealers to produce a summary report. See 
supra notes 451-454.
---------------------------------------------------------------------------

    However, as 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,\898\ 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.\899\ The Commission believes that 
the statistics required in the summary reports would strike this 
balance.
---------------------------------------------------------------------------

    \898\ See supra note 513 for an example of how differences in 
order flow characteristics may impact inferences about execution 
quality.
    \899\ See, e.g., Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 
75423.
---------------------------------------------------------------------------

(b) Improvements in Execution Quality
    The Commission believes that the proposed amendments would serve to 
improve execution quality for both individual and institutional 
investors, as these investors would be able to make better informed 
decisions about where to route their orders to achieve better quality 
executions. Execution quality would further improve, as the flow of 
orders and customers to those reporting entities offering better 
execution quality would promote increased competition on the basis of 
execution quality, both in the market for brokerage services and in the 
market for trading services. This would result in improvements to 
overall levels of execution quality, as well as improvements to 
particular components of execution quality, such as execution prices, 
execution speeds, size improvement, and fill rates.
    The magnitude of the improvements in order execution quality that 
individual and institutional investors may experience may be lower when 
the MDI Rules are implemented, because the availability of faster 
consolidated market data with more data on odd-lot information, auction 
information, and depth of book information from competing consolidators 
could result in improved execution quality for customer orders if their 
broker-dealers currently utilize SIP data and switch to consuming the 
expanded consolidated market data. However, there is uncertainty with 
respect to how these benefits would change because there is uncertainty 
regarding how the price improvement wholesalers would provide retail 
investors would change as well as uncertainty regarding how the NBBO 
midpoint will change for stocks with prices above $250 when the MDI 
Rules are implemented.\900\ The Commission believes that the Proposal 
would still lead to improvements in individual and institutional 
investor order execution quality, as well as improvements in price 
discovery, relative to a baseline in which The MDI Rules are 
implemented.
---------------------------------------------------------------------------

    \900\ See supra section VII.C.1.(d)(2) for further details on 
how the rules adopted in Market Data Infrastructure could affect the 
NBBO.
---------------------------------------------------------------------------

(1) Increased Competition on the Basis of Execution Quality
    The Commission believes that the proposed amendments would have the 
general effect of increasing levels of execution quality, as both 
broker-dealers and market centers would experience increased 
competition on the basis of execution quality. The Commission expects 
that these improvements in overall levels of execution quality would 
likely be the result of improvements to broker-dealer routing practices 
and improvements to market centers' execution practices, as well as 
generally improvements in market participants' ability to use Rule 605 
reports to compare information across reporting entities as a result of 
better and more accessible data.

[[Page 3873]]

(a) Improvements to Broker-Dealer Routing Practices
    The Commission believes that execution quality would improve as a 
result of increased competition between broker-dealers on the basis of 
execution quality.\901\ The proposed amendment expanding the scope of 
Rule 605 reporting entities to include larger broker-dealers would 
promote increased transparency regarding the execution quality achieved 
by broker-dealers.\902\ Hence, market participants would be better able 
to compare execution quality information across broker-dealers. 
Customers could then use this information to compare across broker-
dealers and select those broker-dealers offering better execution 
quality. The flow of customers to the broker-dealers that provide 
better execution quality would improve the execution quality of 
customers that route their orders to high-quality broker-dealers and 
also increase the extent to which broker-dealers rely on execution 
quality information when making their order routing decisions in order 
to compete with other broker-dealers for customer order flow.
---------------------------------------------------------------------------

    \901\ The Commission believes that these effects would 
principally accrue to larger broker-dealers, who would be required 
to prepare Rule 605 reports, but may spill over to effect smaller 
broker-dealers as well. See discussion in infra section 
VII.D.1.(d)(1).
    \902\ See supra section VII.D.1.(a)(1)(a) for a discussion of 
how the proposed amendment requiring larger broker-dealers to 
publish Rule 605 reports would promote increased transparency about 
the execution quality of larger broker-dealers.
---------------------------------------------------------------------------

    Broker-dealers would increase their competitive position with 
respect to execution quality by investing in or otherwise adjusting 
their routing practices to increase the extent to which they route 
orders to the market centers offering better execution quality and 
limit the extent to which they route orders for other potential 
reasons. For example, broker-dealers that face conflicts of interest 
that would otherwise misalign their interests with their customers' 
interest in receiving the best possible execution quality would be 
better incentivized to manage these conflicts as a result of an 
increase in their need to compete on the basis of execution 
quality.\903\ Specifically, as the gains to broker-dealers of 
conflicted routing practices would be more likely to be outweighed by a 
loss of customer order flow, because they offer lower execution 
quality, these broker-dealers would base more of their routing 
decisions on the execution quality of market centers, rather than on 
which market centers are more likely to benefit them (e.g., because of 
higher PFOF or lower access fees).
---------------------------------------------------------------------------

    \903\ See supra section VII.C.2.(a)(1) for a discussion of 
potential conflicts of interest in broker-dealer routing decisions.
---------------------------------------------------------------------------

    The magnitude of the improvements in order routing practices may be 
lower when the MDI Rules are implemented, because the availability of 
faster consolidated market data with more data on odd-lot information, 
auction information, and depth of book information from competing 
consolidators could result in improved order routing for customer 
orders if their broker-dealers currently utilize SIP data and switch to 
consuming the expanded consolidated market data.\904\ However, the 
Commission believes that the proposed amendments would lead to 
improvements in broker-dealer order routing decisions relative to a 
baseline in which the MDI Rules are implemented.
---------------------------------------------------------------------------

    \904\ See supra section VII.C.1.(d)(2) for further discussion.
---------------------------------------------------------------------------

(b) Improvements to Market Centers' Execution Practices
    The Commission believes that execution quality would improve as a 
result of increased competition between market centers on the basis of 
execution quality. As a result of the proposed amendments' effects 
increasing the transparency of reporting entities' execution quality, 
including market centers,\905\ broker-dealers would be better informed 
about the execution quality of market centers when making their routing 
decisions. The flow of orders to those market centers that provide 
better execution quality would improve the execution quality of those 
broker-dealers (and their customers) that route their orders to these 
higher-quality market centers, and also increase the extent to which 
market centers must improve their execution practices in order to 
better compete with other market centers to attract customer order 
flow.
---------------------------------------------------------------------------

    \905\ See supra section VII.D.1.(a)(2) for a discussion of how 
the proposed modifications to Rule 605 disclosure requirements would 
promote increased transparency about execution quality.
---------------------------------------------------------------------------

    The flow of orders to market centers that provide better execution 
quality would be further enhanced by improvements in broker-dealer 
routing practices,\906\ resulting from an increase in the extent to 
which broker-dealers \907\ compete on the basis of execution quality as 
a result of the proposed amendments increasing the transparency of 
larger broker-dealers' execution quality.\908\ Broker-dealers would be 
more likely to account for market centers' execution quality, further 
promoting the flow of orders to market centers offering better 
execution quality. The flow of orders to those market centers offering 
better execution quality could also result in further improvements in 
execution quality for their customers, as liquidity externalities and 
the consolidation of orders onto high-quality market centers would 
increase the liquidity of these venues.\909\
---------------------------------------------------------------------------

    \906\ See supra section VII.D.1.(b)(1)(a) for a discussion of 
the effects of the proposed amendments on broker-dealer routing 
practices.
    \907\ The Commission believes that these effects would 
principally accrue to larger broker-dealers, but may spill over to 
effect smaller broker-dealers as well. See supra note 901.
    \908\ See supra section VII.D.1.(a)(1)(a) for a discussion of 
how the proposed amendment requiring larger broker-dealers to 
publish Rule 605 reports would promote increased transparency about 
the execution quality of larger broker-dealers.
    \909\ However, liquidity externalities may have adverse effects 
on the competition between market centers if they result in the exit 
of some market centers. See infra section VII.D.1.(d)(4) for a 
discussion.
---------------------------------------------------------------------------

    Additionally, the proposed amendments modifying the scope of 
reporting entities to specify that broker-dealers post separate Rule 
605 reports for their ATSs and require that market centers operating 
SDPs and qualified auctions post separate reports for each market 
center would facilitate comparisons of execution quality across similar 
types of market centers, by allowing market participants to be better 
informed about the execution quality of each type of market 
center.\910\ This would increase the extent to which these market 
centers would compete on the basis of execution quality in order to 
attract orders.
---------------------------------------------------------------------------

    \910\ See supra section VII.D.1.(a)(1) for a discussion of how 
the proposed amendments modifying the scope of reporting entities 
would promote increased transparency about execution quality.
---------------------------------------------------------------------------

    The magnitude of the improvements in execution practices may be 
lower when the MDI Rules are implemented, because the availability of 
faster consolidated market data with more data on odd-lot information, 
auctions information, and depth of book information from competing 
consolidators could result in more informed customer order routing by 
broker-dealers that switch to consuming the expanded consolidated 
market data, which could separately increase the flow of orders to 
trading venues offering better execution quality.\911\ However, the 
Commission believes that the proposed amendments would lead to 
improvements in execution practices over and above the improvements 
that might result from the implementation of the MDI Rules.
---------------------------------------------------------------------------

    \911\ See supra section VII.C.1.(d)(2) for further discussion.

---------------------------------------------------------------------------

[[Page 3874]]

(c) Improvements to Information Used To Make Apples-to-Apples 
Comparisons of Execution Quality
    The Commission believes that competition between reporting entities 
on the basis of execution quality would also be enhanced by the 
proposed amendments modernizing the information included in Rule 605 
reports used to make apples-to-apples comparisons of execution quality. 
Some of the information required to be reported by Rule 605 does not 
measure execution quality directly but serves the purpose of providing 
context to execution quality metrics. This enables investors to make 
better apples-to-apples comparisons across reporting entities whose 
order flows consist of different mixes of securities, order sizes, and 
order types,\912\ and to ascertain how entities may handle orders 
during different market conditions.\913\ If market participants have 
access to more (and/or more relevant) information that improves their 
ability to compare execution quality across reporting entities, this 
would further promote competition between reporting entities on the 
basis of execution quality, resulting in improvements in execution 
quality for investors. Such information includes the proposed 
amendments expanding and modernizing order size and order type 
categories,\914\ which permit market participants to control for 
potential differences in the characteristics of reporting entities' 
order flow, as well as the proposed amendments modifying the 
calculation of realized spreads,\915\ which allows market participants 
to control for potential differences in the extent to which reporting 
entities handle orders during periods of adverse market conditions.
---------------------------------------------------------------------------

    \912\ See supra note 513 for an example of how differences in 
order flow characteristics may impact inferences about execution 
quality.
    \913\ See supra note 701 and accompanying text for a discussion 
of how handling order flow during adverse market conditions affects 
execution quality.
    \914\ See supra sections VII.D.1.(a)(2)(b) and 
VII.D.1.(a)(2)(c)(i)-(ii) for discussions of how the proposed 
amendments expanding the coverage of orders, as well as modifying 
the existing order type and size categories, respectively, would 
promote increased transparency about execution quality.
    \915\ See supra section VII.D.1.(a)(2)(c)(iv) for a discussion 
of how the proposed amendments modifying the reporting requirements 
for realized spreads, including expanding and modernizing the time 
horizon used to calculate the average realized spread, as well as 
including information about percentage average realized spreads, 
would promote increased transparency about execution quality.
---------------------------------------------------------------------------

    Furthermore, as market participants have access to more useful 
information about the execution quality of particular order types and 
sizes, the extent to which reporting entities would need to compete on 
the basis of execution quality to attract these types of orders would 
increase, and order flow would accumulate to the reporting entities 
offering the highest execution quality for these types of orders. This 
would in turn translate into improved execution quality for investors 
for these types of orders. For example, as a result of the proposed 
amendment expanding the order size categories to include information 
about odd-lots, market participants' improved access to information 
about a market center's offering of price improvement and timely 
execution of odd-lots would improve both the price and speed at which 
odd-lot orders are executed, which would be beneficial for both 
institutional and individual investors.\916\
---------------------------------------------------------------------------

    \916\ See supra section VII.C.2.(b)(1)(a) for a discussion of 
the use of odd-lots by both individual and institutional investors.
---------------------------------------------------------------------------

(d) Improvements to Accessibility
    The Commission believes that execution quality would also increase 
as a result of the proposed amendment requiring reporting entities to 
prepare human-readable summary reports,\917\ as market participants 
would be better able to use information from Rule 605 reports to 
compare execution quality across reporting entities and competition 
between reporting entities on the basis of execution quality would 
increase as a result.\918\ Specifically, individual investors, who may 
be less likely to have access to the resources to retrieve and process 
the raw data in Rule 605 reports, would be better able to access 
information from Rule 605 reports to compare execution quality across 
larger broker-dealers, which would increase the extent to which these 
broker-dealers would need to compete on the basis of execution quality 
to attract and retain these customers.
---------------------------------------------------------------------------

    \917\ See proposed Rule 605(a)(2). See also supra note 462 and 
accompanying text.
    \918\ See supra section VII.D.1.(a)(3) for a discussion of how 
the proposed amendment requiring reporting entities to prepare 
human-readable summary reports would result in increased 
transparency about execution quality.
---------------------------------------------------------------------------

(2) Improvements to Components of Execution Quality
    The Commission believes that the proposed amendments would have the 
effect of improving the quality of executions along specific dimensions 
of execution quality, including execution prices, size improvement, 
execution speeds, and execution probabilities (i.e., fill rates), as 
investors (and their broker-dealers) would be better able to identify 
and route orders to those reporting entities that offer better quality 
executions in terms of a particular dimension of execution 
quality,\919\ and as reporting entities would further compete with one 
another on the basis of these dimensions of execution quality.\920\ The 
Commission believes that the proposed amendments would lead to 
improvements in execution quality relative to a baseline in which the 
MDI Rules are implemented, i.e., over and above any improvements in 
execution quality that may result from the implementation of the MDI 
Rules.\921\
---------------------------------------------------------------------------

    \919\ See supra section VII.D.1.(a) for a discussion of the 
benefits to the proposed amendments for increased transparency.
    \920\ See supra section VII.D.1.(b)(1) for a discussion of the 
impact of the proposed amendments on competition between reporting 
entities on the basis of execution quality.
    \921\ See supra section VII.C.1.(d)(2) for further discussion.
---------------------------------------------------------------------------

(a) Execution Prices
    The Commission believes that the proposed amendments would improve 
execution quality in terms of execution prices by increasing the extent 
to which reporting entities seek out executions at prices better than 
the NBBO; i.e., increasing the extent to which market centers execute 
order with price improvement, and/or increasing the extent to which 
broker-dealers route to market centers offering price improvement.
    First, the proposed amendment to require information on the average 
percentage effective spread in addition to the average effective spread 
in dollar terms would facilitate more apples-to-apples comparisons of 
execution prices across reporting entities, permitting greater 
competition and resulting in lower effective spreads; i.e., better 
execution prices.\922\ Second, the proposed amendment to require 
information about effective spreads for NMLOs, in addition to market 
and marketable limit orders, would allow providers of limit orders (and 
their broker-dealers) to make comparisons across market centers based 
on the profitability of their limit order strategies, permitting 
greater competition and resulting in lower (i.e., more negative) 
effective spreads for NMLOs.\923\ Third, the proposed amendment to 
require price improvement statistics using the best available displayed 
price as the benchmark for market, marketable limit,

[[Page 3875]]

marketable IOC, and beyond-the-midpoint limit orders, would promote 
incentives for reporting entities to seek out or offer price 
improvement relative to the best displayed price, taking into account 
all available displayed liquidity (including odd-lots).\924\ Continuing 
the example from section VII.C.2.(c)(6), in which a market center 
internalizing an order could post a positive price improvement metric 
even though a better-priced odd-lot was available at another market 
center, this would not be the case for price improvement metrics 
measured relative to the best displayed price. Instead, the market 
center may be incentivized to increase its offering of price 
improvement from $0.05 above the NBBO to $0.15 above the NBBO (i.e., 
$0.05 above the best displayed price), in order to maintain the same 
level of price improvement in its Rule 605 report. Lastly, the proposed 
amendment to require reporting entities to report effective over quoted 
spreads would make more readily available a measure that is already 
often used and well understood by industry participants, and would 
result in improved execution prices as a result of the effects on 
competition.\925\
---------------------------------------------------------------------------

    \922\ See supra section VII.D.1.(a)(2)(b)(iv) for a discussion 
of the effect of the proposed amendment to include the average 
percentage effective spread on transparency.
    \923\ See id. for a discussion of the effect of the proposed 
amendment to include the average effective spread for NMLOs on 
transparency.
    \924\ See supra section VII.D.1.(a)(2)(b)(v) for a discussion of 
the effect of the proposed amendments related to include information 
about price improvement relative to the best displayed price on 
transparency.
    \925\ See supra section VII.D.1.(a)(2)(b)(iv) for a discussion 
of the benefits to transparency of the proposed amendments related 
to include information about E/Q into Rule 605 reporting 
requirements.
---------------------------------------------------------------------------

(b) Size Improvement
    The proposed amendments would improve execution quality in terms of 
size improvement by increasing the extent to which market centers 
execute orders beyond the liquidity available at the NBBO; i.e., 
execute order with size improvement, and by increasing the extent to 
which broker-dealers route to market centers offering size improvement. 
The proposed amendment would require reporting entities to report a 
benchmark metric calculated as the consolidated reference quote size, 
capped at the size of the order.\926\ In order to attract broker-dealer 
order flow,\927\ market centers would be incentivized to compete on the 
basis of size improvement, for example by executing orders against 
their own inventory at or better than the NBBO, or offering additional 
incentives to attract hidden liquidity priced at or better than the 
NBBO. Investors that particularly value the ability of reporting 
entities to offer size improvement, such as investors trading in larger 
order sizes, would be able to use this metric to discern which 
reporting entity might offer better size improvement to their orders, 
which would allow them to make better routing decisions and obtain 
increased size improvement as a result.\928\ Competition on the basis 
of size improvement among reporting entities would also increase in 
order to attract these customers and their orders.
---------------------------------------------------------------------------

    \926\ See supra note 720 for an example.
    \927\ See supra section VII.D.1.(b)(1)(a) for a discussion of 
how the proposed amendments would increase competition between 
broker-dealers on the basis of execution quality.
    \928\ For example, compare the example of Market Center B 
offering size improvement to a 200-share order in note 718, supra, 
to the example of Market Center B offering price improvement to a 
100-share order in note 719, supra. A trader that tends to submit 
200-share orders would want to know a market center's ability to 
offer the first scenario, while a trader that tends to submit 100-
share orders would want to know the market center's ability to offer 
the second scenario. However, in both examples the Rule 605 report 
would show an effective spread statistic of $0.05 for orders in the 
order size category of 100-499 shares, which means that these 
traders would not be able to use this statistic to discern a market 
center's execution quality according to the dimension of execution 
quality that they find most valuable.
---------------------------------------------------------------------------

(c) Execution Speeds
    The proposed amendments would also improve execution quality by 
increasing execution speeds for those investors that value fast 
executions.\929\ The proposed amendments increasing the granularity of 
the timestamp conventions required by Rule 605 from seconds to 
milliseconds, replacing the time-to-execution categories currently 
defined in Rule 605 with time-to-execution statistics, and measuring 
time-to-execution for NMLOs from the time that the order becomes 
executable, rather than from the time of order receipt, would lead to 
improved execution times for investors, as the increased transparency 
around reporting entities' execution times would increase their ability 
to identify and route orders to reporting entities offering faster 
execution speeds.\930\
---------------------------------------------------------------------------

    \929\ See supra section VII.C.2.(c)(4) for a discussion of 
current executions speeds. The Commission expects these benefits to 
mainly accrue to investors that value faster executions, as these 
investors (and their broker-dealers) would benefit from an improved 
ability to compare execution speeds across trading venues and route 
their orders accordingly. However, to the extent that changes in 
order flow would result in an increase in market centers' incentives 
to offer faster executions, e.g., by investing in faster trader 
technology, this could result in a market-wide increase in trading 
speeds for all investors.
    \930\ See supra section VII.D.1.(a)(2)(b)(iii) for a discussion 
of how these amendments to timestamp conventions would promote 
transparency on the basis of execution quality.
---------------------------------------------------------------------------

    Investors that may prioritize fast execution times would be able to 
better identify the reporting entities offering better execution 
quality in terms of time-to-execution. Different investors benefit from 
faster execution times for different reasons. Individual investors 
often benefit from faster executions to the extent that faster 
executions result in better prices. For example, market orders benefit 
from fast execution as any delay in execution could result in worse 
price if prices are increasing (for buy orders) or decreasing (for sell 
orders). This is particularly true for market orders submitted with 
stop prices, which tend to be triggered during rapidly declining 
markets, and which an analysis finds constitute 6.44% of market orders 
submitted by individual investors.\931\ For IOCs, a faster execution 
implies a faster routing time, which would reduce the chance of another 
order stepping in and removing liquidity before the order gets a chance 
to execute, thus increasing the order's probability of execution.
---------------------------------------------------------------------------

    \931\ See Table 4 in supra section VII.C.2.(b)(2).
---------------------------------------------------------------------------

    For institutional investors, the benefits of fast execution may be 
different.\932\ Institutional investors, who often need to trade large 
positions, may care more about reducing the price impact of their order 
rather than executing the order quickly.\933\ However, the academic 
literature suggests that institutional investors with short-lived 
private information may benefit from faster time-to-executions, as they 
are able to profit from trading against other, slower 
institutions.\934\ On the same note, faster time-to-executions benefit 
slower institutional investors by reducing their exposure to adverse 
selection as much as possible.\935\ Institutional investors may also 
care about the execution speed of their child orders.
---------------------------------------------------------------------------

    \932\ While institutional investors are likely to have access to 
alternative sources of more granular information about execution 
speeds, such as reports obtained through TCA, the information on 
execution quality that is individually collected by institutional 
investors is typically non-public and highly individualized, and 
therefore limited to the execution quality obtained from broker-
dealers with which the institutional investors currently does 
business. Since Rule 605 reports are public, institutional investors 
could use these reports to assess the execution quality of the 
broker-dealers and market centers with which they do not currently 
do business. See supra section VII.C.1.(c)(2) for further 
discussion.
    \933\ See supra section VII.C.3.(a)(1)(b) for a discussion of 
the handling of institutional orders by broker-dealers as not held 
orders.
    \934\ See, e.g., Ohad Kadan, Roni Michaely & Pamela C. Moulton, 
Trading in the Presence of Short-Lived Private Information: Evidence 
from Analyst Recommendation Changes, 53 J. Fin. Quantitative 
Analysis 1509 (2018).
    \935\ See, e.g., Jonathan Brogaard, Bjorn Hagstr[ouml]mer, Lars 
Nord[eacute]n & Ryan Riordan, Trading Fast and Slow: Colocation and 
Liquidity, 28 Rev. Fin. Stud. 3407 (2015).

---------------------------------------------------------------------------

[[Page 3876]]

(d) Fill Rates
    The Commission believes that the proposed amendments would improve 
execution quality in terms of increased fill rates.\936\ Specifically, 
the proposed amendment for reporting entities to report the number of 
shares that executed while an executable NMLO was in force would 
increase the ability of investors and their broker-dealers to route 
orders to those reporting entities with higher fill rates of executable 
NMLOs, as market participants would have access to information about 
the extent to which a NMLO did not execute or executed after a large 
number of shares executed elsewhere in the market, despite the fact 
that the NMLO was executable.\937\ In order to attract this order flow, 
reporting entities would need to improve their ability to achieve 
executions for executable NMLOs. Market centers could achieve higher 
fill rates for NMLOs, for example, by reducing access fees to encourage 
more marketable orders to execute against resting NMLOs, or by 
discouraging excessive submissions and cancellations of NMLOs, for 
example by instituting or raising excessive messaging fees.\938\ 
Broker-dealers could achieve higher fill rates for NMLOs by improving 
their order routing methods and by routing orders to market centers 
that achieve higher fill rates for NMLOs.
---------------------------------------------------------------------------

    \936\ See supra note 519 for a definition of the fill rate.
    \937\ See supra section VII.D.1.(a)(2)(b)(vi) for a discussion 
of how the proposed amendment requiring reporting entities to report 
the number of shares that executed while an executable NMLO was in 
force increase transparency.
    \938\ See, e.g., Price List--Trading Connectivity, NASDAQ, 
available at https://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2, which describes how one market 
center charges its members a penalty for exceed a certain ``Weighted 
Order-to-Trade Ratio.''
---------------------------------------------------------------------------

(c) Other Benefits
    To the extent that the proposed amendments to Rule 605 increase 
incentives for reporting entities to compete in areas other than 
improved execution quality, customers may benefit from improvements 
that are not directly related to execution quality, such as lower fees, 
higher rebates, new products or functionalities, or better customer 
service. Note that improvements in other quality areas as a result of 
the increase in competition among reporting entities may be either 
complementary to or a substitute for improvements in execution quality. 
Investors are more likely to see an overall benefit from the proposed 
amendments to the extent that these improvements are complementary. 
Furthermore, to the extent that the proposed amendments increase 
competition in related markets, market participants could benefit from 
lower costs and/or improved quality in these markets. For example, the 
quality of TCA reports may improve if their publishers need to offer 
better products in order to complete with the publicly available data 
under Rule 605.
(d) Potential Limitations to Benefits
    There are certain factors, however, that could limit the effects of 
the proposed amendments on transparency and competition, which would 
limit the effectiveness of the proposed amendments in improving 
execution quality.
(1) Effect on Smaller Broker-Dealers
    The expanded scope of Rule 605 only includes larger broker-dealers. 
Hence, investors, as they gain transparency into the execution at these 
larger broker-dealers, may route more transactions to these broker-
dealers at the expense of smaller broker-dealers who are not included 
in the scope of Rule 605. That said, smaller broker-dealers may gain a 
competitive advantage in the form of lower costs as a result of not 
having to prepare Rule 605 reports. Also, increased levels of 
competition between larger broker-dealers may spill over to affect 
smaller broker-dealers, as their customers may expect more 
transparency, and smaller broker-dealers would continue to be able to 
publish ad hoc execution quality reports that focus on execution 
quality metrics in which they perform well.\939\ Altogether, the 
Commission preliminarily believes that the cumulative effects on 
smaller broker-dealers, who handle only a small fraction of all 
orders,\940\ are likely to be minimal, and limiting the scope of Rule 
605 to large broker-dealers should suffice for the purposes of 
achieving the competitive effects discussed in prior sections.\941\
---------------------------------------------------------------------------

    \939\ These information asymmetries are described in more detail 
in supra section VII.C.1.(a).
    \940\ See infra section VII.E.1.(a) for a discussion of an 
analysis showing that broker-dealers with 100,000 customers or 
greater handled 66.6% of customer orders and 1.5% of customer 
accounts identified in the data sample. Note that, if these smaller 
broker-dealers would attract enough customers such that they 
represent a more significant fraction of orders, it is likely they 
would also subsequently fall above the customer account threshold 
and be required to begin publishing Rule 605 reports.
    \941\ See supra section VII.D.1.(b)(1) for a discussion of the 
effects of the proposed amendments on competition between reporting 
entities on the basis of execution quality.
---------------------------------------------------------------------------

    It is also possible that, as a result of the proposed amendments, 
smaller broker-dealers that are unable,\942\ or choose not, to offer 
the same levels of transparency as larger broker-dealers may lose 
customers to larger broker-dealers for which better execution quality 
information is available, which could cause some smaller broker-dealers 
to exit the market. The Commission is unable to quantify the likelihood 
that a brokerage firm would cease operating as a result of the proposed 
amendments. Even if some smaller broker-dealers were to exit, the 
Commission does not believe this would significantly impact competition 
in the market for brokerage services because the market is served by a 
large number of broker-dealers.\943\ The Commission recognizes that 
smaller broker-dealers may have unique business models that are not 
currently offered by competitors, but the Commission believes other 
broker-dealers, including new entrants, could create similar business 
models if demand was adequate.
---------------------------------------------------------------------------

    \942\ For example, if investors make use of third-party 
summaries of Rule 605 reports, these summaries may not incorporate 
execution quality information outside of ``official'' Rule 605 
reports. In that way, smaller broker-dealers would be unable to 
offer the same level of transparency even if they were to prepare an 
execution quality report containing all of the information and 
according to the exact specifications of Rule 605.
    \943\ See supra section VII.C.3.(a)(1) for a discussion of the 
current structure of the market for brokerage services.
---------------------------------------------------------------------------

(2) Switching Costs
    The effects of the proposed amendments on competition among 
reporting entities \944\ may be limited if investors incur high costs 
to switch between broker-dealers, and/or if broker-dealers incur costs 
to switch between market centers in response to information about 
execution quality. To the extent that competition between reporting 
entities on the basis of execution quality is limited, this would limit 
the extent to which execution quality would improve as a result of the 
proposed amendments.\945\
---------------------------------------------------------------------------

    \944\ See supra section VII.D.1.(b)(1) for a discussion of the 
effects of the proposed amendments on competition between reporting 
entities on the basis of execution quality.
    \945\ The effect of switching costs on competition may also 
depend on the variability of reporting entities' execution quality 
over time. For example, if the execution quality of any given 
reporting entity varies significantly over time, customers of those 
reporting entities may find it optimal to switch between reporting 
entities with some frequency, which would increase their overall 
switching costs. On the other hand, if the execution quality of 
reporting entities is relatively constant over time, the number of 
times that a customer would optimally want to switch between 
reporting entities would likely be more limited, and in this case 
switching costs may be a relatively small and/or short-term 
friction.

---------------------------------------------------------------------------

[[Page 3877]]

    First, if the costs for customers to switch broker-dealers are 
significant,\946\ this would limit the extent to which Rule 605 
promotes competition among broker-dealers on the basis of execution 
quality. However, switching costs for both individual and institutional 
investors may be limited. For example, institutional investors are 
likely to have multiple broker-dealers, which would facilitate the 
transfer of business to better-performing broker-dealers, and, for 
individual investors, transferring between retail brokers may be less 
costly, for example, because some retail brokers will compensate new 
customers for transfer fees that their outgoing broker-dealer may 
charge them.\947\
---------------------------------------------------------------------------

    \946\ See supra section VII.C.3.(a)(1) for a discussion of 
switching costs related to switching broker-dealers.
    \947\ See supra note 745 for an example.
---------------------------------------------------------------------------

    Second, the presence of switching costs that broker-dealers incur 
from changing the primary trading venues to which they route orders 
\948\ may limit the effects of the proposed amendments on competition 
among market centers. However, the Commission expects this to be less 
of an issue for the larger broker-dealers that would be required to 
produce Rule 605 reports,\949\ as these broker-dealers would likely 
face lower switching costs. For example, larger broker-dealers are 
likely already connected to multiple national securities exchanges. 
They are experienced with routing order flow across a larger variety of 
market centers and/or have sufficient bargaining power to renegotiate 
any agreements that they might have with individual market centers.
---------------------------------------------------------------------------

    \948\ See supra section VII.C.3.(b)(1) for discussions of 
switching costs broker-dealers may face when switching trading 
venues.
    \949\ The Commission believes that the competitive effects of 
the proposed amendments would principally accrue to larger broker-
dealers, who would be required to prepare Rule 605 reports, and thus 
these would be the broker-dealers most likely to be incentivized to 
switch market-centers as a result of additional information about 
market center execution quality. However, these effects may spill 
over to smaller broker-dealers as well per the discussion in supra 
section VII.D.1.(d)(1). For these smaller broker-dealers, switching 
costs may be more binding.
---------------------------------------------------------------------------

(3) Limited Usage and Search Costs
    The benefits of the proposed amendments for transparency, 
competition, and execution quality may be limited if market 
participants are not likely to make use of the additional information 
available under the proposed amendments, e.g., because this information 
is difficult to access or is not useful to market participants due to 
the availability of other sources of information about execution 
quality.
    For example, investors currently have access to information about 
the execution quality achieved by their broker-dealers for their not 
held orders,\950\ which in certain circumstances may be more relevant 
for institutional investors than aggregate information about the 
execution quality of broker-dealers' held orders \951\ and may lead to 
a low usage rate by institutional investors of larger broker-dealers' 
Rule 605 reports as proposed to be required. This would limit the 
benefits of the proposed amendments for competition in the market for 
institutional brokerage services. However, to the extent that 
institutional investors' alternative sources of execution quality 
information do not contain information about all of their relevant 
orders, and/or cannot be easily used to compare across broker-dealers 
that an investors does not do business with,\952\ the proposed 
amendments would likely impact competition for institutional brokerage 
services as well.
---------------------------------------------------------------------------

    \950\ See supra note 60 and accompanying text discussing broker-
dealers' requirements under Rule 606(b)(3) to provide individualized 
reports of execution quality upon request for not held orders.
    \951\ See supra section VII.C.3.(a)(1)(b) for a discussion of 
institutional investors' usage of not held orders.
    \952\ See discussion in supra section VII.C.1.(c)(2).
---------------------------------------------------------------------------

    Furthermore, the volume and complexity of data produced by Rule 605 
reports (i.e., both the number of rows and columns of Rule 605 reports) 
would increase as a result of the proposed amendments to modify the 
coverage of orders and expand the information required by Rule 605. 
Both of these factors could make the evaluation of the raw data in Rule 
605 reports costlier. If, in order to avoid this additional complexity, 
market participants would not incorporate the data elements or orders 
types that are proposed to be added to Rule 605 reports under the 
proposed amendments into their analyses of consumption of Rule 605 
data, this would limit the potential benefits of the proposed 
amendments. However, market participants that currently have the 
resources to process and analyze the raw data contained in Rule 605 
reports are likely to have the resources to process and analyze the 
additional data elements. To the extent that some investors may not 
have access to the resources to directly analyze the raw Rule 605 as a 
result of its increase in complexity,\953\ the Commission expects that 
independent analysts, consultants, broker-dealers, the financial press, 
and market centers would continue to respond to the needs of investors 
by analyzing the disclosures and producing more digestible information 
using the data.\954\
---------------------------------------------------------------------------

    \953\ See supra section VII.C.1.(c)(1) for a discussion of the 
difficulties that individual investors may face when accessing Rule 
605 reports.
    \954\ See supra note 545-546 for examples of how third parties 
currently use Rule 605 data to produce information meant for public 
consumption.
---------------------------------------------------------------------------

    The benefits of the proposed amendments for transparency, 
competition, and execution quality may also be limited by the presence 
of search costs. The proposed amendments are expected to increase the 
number of Rule 605 reporting entities from 236 to 359.\955\ For those 
market participants that would seek to collect a complete or mostly 
complete set of Rule 605 reports, these market participants would need 
to search through and download reports from a greater number of 
websites, which would increase their search costs.\956\ If, in order to 
avoid this increase in search costs, market participants would not 
incorporate execution quality information from the proposed additional 
reporting entities into their search or analysis of Rule 605 reports, 
this would limit the benefits of the proposed expansion of Rule 605 
reporting entities.
---------------------------------------------------------------------------

    \955\ See supra section VI.C for a description of these 
estimates.
    \956\ See supra section VII.C.2.(d) for a discussion of the 
search costs associated with collecting information from Rule 605 
reports.
---------------------------------------------------------------------------

(4) Liquidity Externalities
    The effects of the proposed amendments on competition between 
market centers \957\ may be limited by the development of liquidity 
externalities, or the consolidation of liquidity on a few dominant 
market centers.\958\ Under such circumstances, while the consolidation 
of liquidity on market centers offering superior execution quality may 
benefit market participants in the short run, it may also lead to 
barriers to entry in the market for trading services, as new entrants 
may have a harder time attracting sufficient liquidity away from 
established liquidity centers. This could also lead to consolidation or 
exit by smaller market centers. This could have the effect of reducing 
competition in the market for trading services. The Commission is 
unable to quantify the likelihood that

[[Page 3878]]

some smaller market centers would cease operating.
---------------------------------------------------------------------------

    \957\ See supra section VII.D.1.(b)(1) for a discussion of the 
effects of the proposed amendments on competition between reporting 
entities on the basis of execution quality.
    \958\ For theoretical discussions of liquidity externalities see 
Marco Pagano, Trading Volume and Asset Liquidity, 104 Q. J. Econ. 
255 (1989): Ananth Madhavan, Consolidation, Fragmentation, and the 
Disclosure of Trading Information, 8 Rev. Fin. Stud. 579 (1995).
---------------------------------------------------------------------------

(5) Dimensions of Execution Quality Not Captured by Rule 605 Reports
    The expected benefits from the proposed amendments to Rule 605 may 
be lessened to the extent that there are dimensions of execution 
quality not captured by Rule 605 reports which drive order handling 
decisions. For example, the ability of customers and/or traders to 
remain anonymous or limit information leakage may not be a dimension 
that is easily discernible from looking at Rule 605 data, though it is 
a feature of execution quality that may be valued by some 
investors.\959\ Similarly, the extent to which the reported statistics 
are perceived to fail to serve as an acceptable or timely proxy for a 
reporting entities' ability to secure favorable executions may dampen 
the benefits of proposed amendments for execution quality. This may 
happen if, for example, future market developments render the monthly 
reporting requirement to be too infrequent to be useful.
---------------------------------------------------------------------------

    \959\ See, e.g., Carole Comerton-Forde & Kar Mei Tang, 
Anonymity, Liquidity and Fragmentation, 12 J. Fin. Mkt. 337 (2009), 
who found evidence of evidence of a migration in order flow from the 
non-anonymous New Zealand Exchange (NZX) to the Australian Stock 
Exchange after the latter increased anonymity by removing broker 
identifiers from the central limit order book.
---------------------------------------------------------------------------

2. Costs
    As discussed in detail below, the Commission recognizes that the 
proposed amendments to Rule 605 would result in initial and ongoing 
compliance costs to reporting entities. The Commission quantifies the 
costs where possible and provides qualitative discussion when 
quantifying costs is not feasible. Most of the compliance costs related 
to the proposed amendments to Rule 605 involve a collection of 
information, and these costs are discussed above in relation to the 
expected burdens under the Paperwork Reduction Act, with those 
estimates being used in the economic analysis below.\960\
---------------------------------------------------------------------------

    \960\ See supra section VI.D for a discussion of how the 
proposed amendments would create burdens under the PRA.
---------------------------------------------------------------------------

(a) Compliance Costs
    The Commission believes that the majority of costs related to the 
proposed amendments would be in the form of compliance costs, including 
both initial and ongoing. Table 9 provides a summary of the estimated 
change in compliances costs \961\ resulting from the proposed 
amendments. The majority of both initial and ongoing compliance costs 
would be related to the proposed expansion of the scope of reporting 
entities. However, a significant portion of initial compliance costs 
would also result from the proposed amendments modifying the coverage 
of orders and information required by Rule 605, as current reporters 
would need to update their systems and additionally some new market 
centers trading in fractional shares would be required to report. 
Lastly, compliance costs resulting from the proposed amendment 
requiring reporting entities to prepare summary execution quality 
reports would mostly be ongoing.
---------------------------------------------------------------------------

    \961\ Note that the discussion in section VI.D considers the 
total expected ongoing compliance costs for all reporting entities, 
both new respondents and current respondents. To focus on the costs 
that would directly follow from the proposed amendments, this 
section focuses on the expected change in ongoing costs, which 
excludes the portions of ongoing costs that current respondents 
currently incur.

          Table 9--Estimated Compliance Costs, by Cost Category
------------------------------------------------------------------------
                                              Initial         Ongoing
                                            compliance      compliance
              Cost category                    costs           costs
                                             (million)       (million)
------------------------------------------------------------------------
Expanding the Scope of Reporting                    $3.8            $3.9
 Entities...............................
Modifications to Information Required...             3.4             1.9
Proposed Summary Execution Quality                   1.7             1.1
 Reports................................
                                         -------------------------------
    Total...............................             8.9            6.8
------------------------------------------------------------------------
Table 9: Estimated Compliance Costs, by Cost Category. This table
  presents estimates of the compliance costs related the to three broad
  categories of the proposed amendments to Rule 605 (expanding the scope
  of reporting entities, modifications to the coverage of orders and
  information required, and the proposed amendment requiring the
  preparation of summary reports). Numbers are based on the estimated
  number of respondents and PRA costs in sections VI.C and VI.D supra
  and have been rounded to the nearest tenth of million to avoid false
  precision. Further breakdowns of these estimates are presented in
  Tables 10, 11, and 12.

    Table 9 further breaks compliance costs down into three separate 
categories--costs related to the expansion of reporting entities, costs 
related to modifications to information required, and costs related to 
the preparation of summary execution quality reports.
    Estimates for the costs in each of these categories depend on a 
number of factors, including wages, inflation, and firm size, and the 
Commission acknowledges that the costs presented could be 
underestimated to the extent that wages and/or inflation are higher 
than those used in the estimation. Meanwhile, costs in each of these 
categories may also be overestimated if, instead of preparing reports 
in-house, reporting entities contracted with third-party vendors to 
prepare their reports.\962\ The costs in Table 9 are based on the 
assumption that reporting entities would prepare their Rule 605 reports 
in-house. Due to their ability to leverage their technical expertise 
and potential economies of scale, third-party vendors may be able to 
prepare Rule 605 reports for a lower cost than if each individual 
reporting entity prepares its own report, and could pass these lower 
costs on to their customers, resulting in lower compliance costs. 
However, the Commission is unable to know the percentage of entities 
that currently make use of third-party vendors to prepare their Rule 
605 reports, nor the percentage of entities that would make use of 
third-party vendors following the proposed amendments. Therefore, 
Commission is basing its compliance cost estimates on the potentially 
higher costs of in-house preparations of Rule

[[Page 3879]]

605 reports in order to be as conservative as possible.
---------------------------------------------------------------------------

    \962\ Specifically, the Commission estimates that, while 
preparing in-house reports would result on an annualized ongoing 
cost of $37,248 per respondent, contracting with a third party to 
prepare Rule 605 of their behalf would result in an annualized 
ongoing cost of $36,000 per respondent. See supra section VI.D. The 
Commission uses the higher of these costs in the present analysis to 
obtain a more conservative estimate of potential costs.
---------------------------------------------------------------------------

(1) Compliance Costs Related To Expanding the Scope of Rule 605 
Reporting Entities
    As a result of the proposed amendments expanding the scope of Rule 
605 reporting entities, market centers and broker-dealers that were 
previously not required to publish Rule 605 reports would incur initial 
costs to develop the policies and procedures to prepare Rule 605 
reports for the first time, and ongoing costs to continue to prepare 
them each month. Larger broker-dealers would incur initial and ongoing 
compliance costs as a result of the proposed amendment expanding the 
scope of Rule 605 reporting entities to include large broker-dealers. 
Similarly, the proposed amendments requiring reporting entities to 
prepare separate reports for their SDPs and qualified auctions would 
similarly result in market centers that were previously not required to 
prepare Rule 605 reports facing initial and ongoing compliance costs. 
The Commission estimates that 85 broker dealers, along with 10 SDPs and 
8 qualified auctions,\963\ would be required to start publishing Rule 
605 reports as a result of the proposed amendments expanding the scope 
of Rule 605 reporting entities. Table 10 breaks down the initial and 
ongoing compliance costs associated these three types of reporting 
entities.
---------------------------------------------------------------------------

    \963\ See supra note 483 and accompanying text for a discussion 
of these estimates. See also infra section VII.E.1.(a) for a 
discussion of estimating the number of larger broker-dealers (i.e., 
broker-dealers that introduce or carry customers above a threshold 
number of customer accounts), that would be required to prepare 
execution quality reports pursuant to Rule 605, defining the 
customer account threshold as 100,000 customer accounts.

        Table 10--Estimated Compliance Costs Related to Proposed Expansion of Rule 605 Reporting Entities
----------------------------------------------------------------------------------------------------------------
                                                                                      Initial         Ongoing
                                                                     Number of      compliance      compliance
                                                                    respondents        costs           costs
                                                                                     (million)       (million)
----------------------------------------------------------------------------------------------------------------
Broker-Dealers..................................................          \a\ 85        \b\ $3.1        \c\ $3.2
SDPs............................................................          \d\ 10         \b\ 0.4         \c\ 0.4
Qualified Auctions..............................................           \e\ 8         \b\ 0.3         \c\ 0.3
                                                                 -----------------------------------------------
    Total.......................................................             103             3.8            3.9
----------------------------------------------------------------------------------------------------------------
Table 10: Estimated Compliance Costs Related to Proposed Expansion of Rule 605 Reporting Entities. This table
  presents estimates of the compliance costs related to the proposed amendments to Rule 605 expanding the scope
  of reporting entities. Numbers are based on the estimated number of respondents and PRA costs in sections VI.C
  and VI.D supra and have been rounded to the nearest tenth of million to avoid false precision.
\a\ The number of new broker-dealer respondents is estimated using data from 2021 FOCUS Report Form X-17A-5
  Schedule I filings and CAT, according to the procedure described in detail in infra note 1008.
\b\ The estimate of initial compliance costs to new respondents is based on the monetized initial burden in
  supra note 491 for new respondents, assuming that these respondents would incur 100 initial burden hours at an
  average hourly cost of ($37,020/100 hours) = $370.20 per respondent per hour.
\c\ The estimate of ongoing compliance costs to new respondents is based on the monetized annual burden in supra
  note 492 for new respondents, assuming that these respondents would incur 8 ongoing burden hours per month (12
  per year) at an average hourly cost of ($37,488/(8 hours * 12 months)) = $391.00 per respondent per hour.
\d\ The Commission does not have knowledge of the number of SDPs in operation and there has chosen a
  conservative estimate of 10 SDPs.
\e\ The Commission is not able to know the number of qualified auctions that would begin operation if the Order
  Competition Rule Proposal were to be adopted, and has therefore chosen a conservative estimate of 8 qualified
  auctions.

    New reporters would face one-time, initial compliance costs to 
develop and implement the policies and procedures to prepare Rule 605 
reports for the first time. The Commission believes that the majority 
of these costs would relate to the development of systems to obtain, 
store and process the data required for Rule 605 reports.
    Larger broker-dealers that generally or exclusively route orders 
away would need to obtain information, such as the time of order 
execution and execution price, from trade confirmations provided by the 
execution venue. In addition, both broker-dealers and market centers 
would need to match their order information to historical price and 
depth information available via the exclusive SIPs or, following the 
implementation of the MDI Rules, competing consolidators,\964\ to 
determine the NBBO (and/or best displayed) quote and size at the time 
of order receipt (or executability) and at the time of order execution, 
and use this data to calculate the required statistics.\965\ These new 
reporters likely already retain most, if not all, of the underlying raw 
data necessary to generate these reports in electronic format or may 
obtain this information from publicly available data sources, and 
currently calculate similar measures to those that would be required 
under Rule 605 as proposed for their own internal purposes.\966\ 
However, as a result of the proposed amendments, new reporters may have 
to acquire or develop data specialists and/or programmers to the extent 
that the information required by Rule 605 as proposed is different or 
more complex than the information that the new reporters typically 
processes, and/or acquire legal specialists to ensure compliance with 
the Rule.
---------------------------------------------------------------------------

    \964\ See supra section VII.C.1.(d)(2).
    \965\ See supra note 196 and accompanying text.
    \966\ For example, broker-dealers may calculate similar measures 
as part of their Best Execution Committees' periodic review. See 
supra note 567 and accompanying text.

---------------------------------------------------------------------------

[[Page 3880]]

    These compliance costs related to expanding the scope of Rule 605 
reporting requirements may be under- or overestimated to the extent 
that larger broker-dealers, which are assumed to have the same 
compliance costs as SDPs and qualified auctions in Table 10, could 
experience higher or lower initial and/or ongoing costs than other 
types of reporting entities. For example, larger broker-dealers may 
incur higher initial costs to the extent that they do not currently 
obtain transaction information, such as the time of order execution and 
execution price, from trade confirmations provided by execution venues, 
and therefore would need to develop the procedures for doing so. 
Broker-dealers may also face higher ongoing costs as compared to market 
centers that mostly execute the shares that they receive, if collecting 
information for trades executed at away market centers is costlier than 
analyzing in-house trade information; e.g., because it results in 
delays in processing the trade information. On the other hand, larger 
broker-dealers may incur lower initial costs if they are more likely 
than market centers to already calculate similar measures to those 
proposed as part of their Best Execution Committees' periodic 
review.\967\ In addition, the Commission does not believe that there 
would be significant additional costs to collecting information for 
trades executed at away market centers, as given the monthly reporting 
frequency of Rule 605 reports, broker-dealers should have sufficient 
time to collect and process the information. Since it is not possible 
to determine whether larger broker-dealers would face higher or lower 
compliance costs than other types of market centers, the Commission is 
conservatively estimating that broker-dealers will incur the same 
compliance costs as other types of reporting entities.
---------------------------------------------------------------------------

    \967\ See supra note 567 and accompanying text.
---------------------------------------------------------------------------

    Furthermore, many of the larger broker-dealers that would be newly 
included in the scope of reporting requirements already have experience 
with filing Rule 605 reports; e.g., because they operate an ATS, engage 
in market making, or are otherwise affiliated with market centers that 
currently files Rule 605 reports.\968\ Likewise, SDPs and qualified 
auctions could also have lower initial costs to the extent that they 
are operated by market centers that are currently required to publish 
Rule 605 reports. In both cases, these reporting entities could 
leverage this experience to prepare the reports for these additional 
lines of businesses more cost effectively.
---------------------------------------------------------------------------

    \968\ For example, based on larger broker-dealers' answers in 
their Q4 2021 FOCUS Report Form X-17A-5 Schedules I and II, staff 
estimates that 29 out of the 85 broker-dealers identified as 
introducing or carrying at least 100,000 customers also engage in 
OTC or specialist market making activities. Specifically, 20 of 
these larger broker-dealers answered ``Yes'' to item 8075 of 
Schedule I, asking whether a respondent is registered as a 
specialist on a national securities exchange in equity securities, 
16 of them reported non-missing gains or losses from OTC market 
making in exchange listed equity securities in item 3943 of Schedule 
II, while 7 of them reported both OTC and specialist equity market 
maker activities.
---------------------------------------------------------------------------

(2) Compliance Costs Related to Modifications to the Coverage of Orders 
and Information Required by Rule 605 Reports
    As a result of the proposed amendments modernizing and expanding 
the coverage of orders and information required by Rule 605 reports, 
reporting entities would incur initial compliance costs and additional 
ongoing compliance costs.\969\ First, the estimated 236 current 
reporters \970\ would incur initial costs to update their systems to 
collect and store new information and to calculate modernized and 
additional metrics, as well as a potential increase in ongoing costs as 
a result of additional data that would need to be collected and stored. 
Second, the proposed amendment expanding the coverage of order sizes 
included in Rule 605 to include orders for less than one share would 
result in an additional estimated 20 market centers that trade 
exclusively in fractional shares would be required to begin filing Rule 
605 reports.\971\ Third, the 16 national securities exchanges and 1 
national securities association would be required to amend the NMS Plan 
to account for the new data fields required to be reported. Table 11 
breaks down the associated initial and ongoing compliance costs.
---------------------------------------------------------------------------

    \969\ This analysis considers the baseline against which to 
compare the costs that would accrue to larger broker-dealers, SDPs, 
and qualified auctions to be a world in which do not have to publish 
Rule 605 reports, and not a world in which these reporting entities 
are required to publish Rule 605 under current reporting 
requirements. As such, this section does not consider the cost of 
the proposed amendments modifying the coverage and information 
required by Rule 605 to those reporting entities that would begin 
publishing Rule 605 reports as a result of the proposed amendments 
expanding the scope of Rule 605 reporting entities.
    \970\ See supra note 483 and accompanying text for a discussion 
of these estimates.
    \971\ These market centers are identified using the CAT data 
described in supra note 644, as firm MPIDs that executed fractional 
shares during the sample time period that did not have a 
corresponding Rule 605 report. These firms are relatively large, 
with an average net capital of $1.66 billion, which is similar to 
the average net capital of all larger broker-dealers that meet the 
customer account threshold of at least 100,000 customer accounts 
($1.59 billion). In fact, the Commission estimates that 16 of the 
markets centers that exclusively execute fractional shares are also 
larger broker-dealers that meet the customer account threshold. 
Under proposed Rule 605(a)(7), to the extent that a market center 
that exclusively executes fractional shares is also a broker-dealer 
that meets or exceed the customer account threshold, then this 
reporting entity would be required to file separate Rule 605 reports 
pertaining to each function. See supra note 166.

 Table 11--Estimated Compliance Costs Related to Proposed Amendments Modifying the Information Required by Rule
                                                       605
----------------------------------------------------------------------------------------------------------------
                                                                                      Initial         Ongoing
                                                                     Number of      compliance      compliance
                                                                    respondents        costs           costs
                                                                                     (million)       (million)
----------------------------------------------------------------------------------------------------------------
Costs to Current Reporters......................................         \a\ 236        \b\ $2.6        \c\ $1.1
Costs to Market Centers Trading Fractional Shares...............          \d\ 20         \e\ 0.7         \f\ 0.7
Cost to NMS Plan Participants to Update Data Fields.............          \g\ 17        \h\ 0.06           \i\ 0
                                                                 -----------------------------------------------
    Total.......................................................             272             3.4             1.9
----------------------------------------------------------------------------------------------------------------
Table 11: Estimated Compliance Costs Related to Proposed Amendments Modifying the Information Required by Rule
  605. This table presents estimates of the compliance costs related to the proposed amendments to Rule 605
  modifying the coverage of orders and information required by Rule 605 reports. Numbers are based on the
  estimated number of respondents and PRA costs in sections VI.C and VI.D supra and have been rounded to the
  nearest tenth of million to avoid false precision.

[[Page 3881]]

 
\a\ The number of current respondents includes 16 national securities exchanges, 1 securities association, 32
  ATSs (based on the number of effective Form ATS-N filings), and an estimated 93 OTC market makers and 94
  exchange market makers (based on firms' responses on their 2021 FOCUS Report Form X-17A-5 Schedules I and II).
\b\ The estimate of initial compliance costs to current respondents is based on the monetized initial burden in
  supra note 488 for current respondents, assuming that these respondents would incur 30 initial burden hours as
  a result of the amendments at an average hourly cost of ($18,510/50 hours) = $370.20 per respondent per hour.
\c\ The estimate of ongoing compliance costs to current respondents is based on the monetized annual burden in
  supra note 489 for current respondents, assuming that these respondents would incur 1 additional ongoing
  burden hours per month (12 per year) as a result of the amendments at an average hourly cost of ($37,488/(8
  hours * 12 months)) = $391.00 per respondent per hour.
\d\ The Commission does not have knowledge of the number of market centers currently trading in fractional
  shares that would newly be required to prepare Rule 605 reports, and has therefore chosen a conservative
  estimate of 20 firms.
\e\ The estimate of initial compliance costs to new respondents (in this case, market centers that would newly
  be required to prepare Rule 605 reports as a result of trading fractional shares) is based on the monetized
  initial burden in supra note 491 for new respondents, assuming that these respondents would incur 100 initial
  burden hours at an average hourly cost of ($37,020/100 hours) = $370.20 per respondent per hour.
\f\ The estimate of ongoing compliance costs to market centers that would newly be required to prepare Rule 605
  reports as a result of trading fractional shares is based on the monetized annual burden in supra note 492 for
  new respondents, assuming that these respondents would incur 8 ongoing burden hours per month (12 per year) at
  an average hourly cost of ($37,488/(8 hours * 12 months)) = $391.00 per respondent per hour.
\g\ The number of NMS plan participants includes 16 national securities exchanges and 1 securities association.
\h\ The estimate that the monetized initial burden for preparing and filing an amendment to the NMS Plan would
  include approximately $40,222 in aggregate internal costs per participants as well as an aggregate external
  cost of $16,864 resulting from outsourced legal work. See supra section VI.D.
\i\ The Commission estimates that the costs related to updating data fields would be a one-time cost, and thus
  would not incur any additional ongoing compliance costs.

    As a result of the proposed amendments, current Rule 605 reporters 
would incur initial compliance costs to update their systems to collect 
and store new information.\972\ For example, current Rule 605 reporters 
would need to expand their data collection systems to include 
additional order types, such as stop orders, short sale orders, and 
orders submitted outside of regular trading hours, and would need to 
update their systems to reclassify certain orders, such as IOCs, 
riskless principal orders, and beyond-the-midpoint NMLOs, into new or 
different order type categories. Similarly, current reporters would 
need to expand their data collection systems to incorporate additional 
order sizes, including odd-lots, fractional orders, and larger-sized 
orders.
---------------------------------------------------------------------------

    \972\ The Commission assumes that the majority of reporting 
entities' initial burden hours under the PRA would be spent updating 
current systems as a result of the many changes to Rule 605, and 
thus estimate that 30 of the 50 initial burden hours estimated for 
current respondents and described in supra note 488 would be 
allocated to compliance with the proposed amendments modifying the 
information contained in Rule 605.
---------------------------------------------------------------------------

    Current Rule 605 reporters would also incur initial compliance 
costs to update their data processing software to generate modernized 
and additional metrics. For example, current Rule 605 reporters would 
need to update their methodologies for calculating realized spread, 
first, to include two measures, and, second, to calculate the realized 
spread using 15 second and 1 minute horizons, instead of 5 minutes, and 
would need to develop programs (i.e., code) to calculate newly required 
metrics, such as E/Q. Some of the metrics would involve matching trade 
information to data elements that are not currently required by Rule 
605 but that can be obtained from public data sources, such as the best 
displayed price for calculating the proposed new price improvement 
metrics,\973\ and the number of shares displayed at the NBBO for 
calculating the benchmark measure related to size improvement.\974\ To 
the extent that they do not already do so, current Rule 605 reporters 
would also need to update their systems to record timestamps in terms 
of milliseconds rather than seconds as a result of the proposed 
amendment increasing the granularity of time-to-execution metrics.
---------------------------------------------------------------------------

    \973\ See supra section IV.B.5 for a discussion of the data 
required to calculate this measure.
    \974\ See supra section IV.B.4.(e) for a discussion of the data 
required to calculate this measure.
---------------------------------------------------------------------------

    The Commission believes that, after current Rule 605 reporters 
update their systems to reflect the amendments, changes to their 
ongoing costs would be limited, as the process for generating and 
publishing Rule 605 reports would largely be unchanged.\975\ This is 
because most reporting entities currently retain most, if not all, of 
the underlying raw data necessary to generate the additional data 
elements, or are easily able to obtain this information from publicly 
available data sources. Furthermore, once reporting entities have 
developed the necessary programs to calculate the required metrics, 
there is limited additional effort that needs to be made beyond what 
current reporters are already doing, such as monitoring and debugging 
these statistical programs. However, the Commission recognizes that 
there may be some additional ongoing costs to the extent that some 
metrics introduced under the proposed amendments may require more data 
storage or more complex calculations, such that the cost of preparing 
monthly Rule 605 reports may increase. Therefore, the Commission has 
allocated addition ongoing costs to account for this possibility.\976\
---------------------------------------------------------------------------

    \975\ One exception is the proposed amendment requiring 
reporting entities to prepare summary reports summarizing key 
information from their Rule 605 reports. The Commission assumes that 
current reporters would face additional ongoing costs as a result of 
this amendment, and discuss these costs in infra section 
VII.D.2.(a)(3).
    \976\ Specifically, one additional ongoing monthly burden hour 
per respondent has been added to account for this possibility. See 
footnote to Table 11.
---------------------------------------------------------------------------

    As a result of the proposed amendment expanding the scope of Rule 
605 to include information about orders for less than one share, the 
Commission estimates that some broker-dealers that exclusively execute 
fractional shares, and therefore do not currently file Rule 605 reports 
in their capacity as a market center due to fractional shares falling 
below the smallest order size category in current Rule 605, would be 
required to begin publishing Rule 605 reports. These broker-dealers 
would incur similar initial and ongoing costs as those discussed above 
for larger broker-dealers, SDPs, and qualified auctions that would be 
included as a result of the expanded scope of reporting entities. These 
compliance costs may be over- or underestimated if broker-dealers that 
exclusively execute fractional shares have different characteristics 
(e.g., fewer customers) than the larger broker-dealers that would be 
included as a result of the expanded scope of reporting entities.
    Lastly, the Commission estimates that the 16 national securities 
exchanges and 1 national securities association would incur a one-time 
initial cost to amend the NMS Plan to account for the new data fields 
required to be reported. The Commission estimates that this would 
mostly consist of legal time to develop

[[Page 3882]]

and draft the amendments to the NMS Plan.
(3) Compliance Costs Related to the Proposed Summary Execution Reports
    The estimated 236 current Rule 605 reporters \977\ would face 
additional initial and ongoing compliance cost as a result of the 
proposed amendment requiring reporting entities to prepare summary 
reports summarizing key information from their Rule 605 reports.\978\ 
Table 12 breaks down the initial and ongoing compliance costs 
associated with this amendment.
---------------------------------------------------------------------------

    \977\ This section does not consider the cost of the proposed 
amendments to those reporting entities that would begin publishing 
Rule 605 reports as a result of the proposed amendments expanding 
the scope of Rule 605 reporting entities. See explanation in supra 
note 969.
    \978\ The Commission believes that a significant portion of 
reporting entities' initial burden hours under the PRA would be 
allocated to updating current systems to prepare summary reports, 
which would entail both a new format and a new level of information 
aggregation as compared to current Rule 605, and thus estimate that 
20 of the 50 initial burden hours estimated for current respondents 
and described in supra note 488 would be allocated to compliance 
with the proposed amendments modifying the information contained in 
Rule 605.

 Table 12--Estimated Compliance Costs Related to Proposed Amendment Requiring Summary Execution Quality Reports
----------------------------------------------------------------------------------------------------------------
                                                                                      Initial         Ongoing
                                                                     Number of      compliance      compliance
                                                                    respondents        costs           costs
                                                                                     (million)       (million)
----------------------------------------------------------------------------------------------------------------
Costs to Prepare Summary Execution Quality Reports..............         \a\ 236        \b\ $1.7        \c\ $1.1
----------------------------------------------------------------------------------------------------------------
Table 12: Estimated Compliance Costs Related to Proposed Amendment Requiring Summary Execution Quality Reports.
  This table presents estimates of the compliance costs related to the proposed amendments to Rule 605 requiring
  Rule 605 reporting entities to prepare summary execution quality reports. Numbers are based on the estimated
  number of respondents and PRA costs in sections VI.C and VI.D supra and have been rounded to the nearest tenth
  of million to avoid false precision.
\a\ The number of current respondents is estimated as including 16 national securities exchanges, 1 securities
  association, 32 ATSs (based on the number of effective Form ATS-N filings), 93 OTC market makers, and 94
  exchange market makers (based on firms' responses on their 2021 FOCUS Report Form X-17A-5 Schedules I and II).
\b\ The estimate of initial compliance costs to current respondents is based on the monetized initial burden in
  supra note 488 for current respondents, assuming that these respondents would incur 20 initial burden hours as
  a result of the amendments at an average hourly cost of ($18,510/50 hours) = $370.20 per respondent per hour.
\c\ The estimate of ongoing compliance costs to current respondents is based on the monetized annual burden in
  supra note 489 for current respondents, assuming that these respondents would incur 1 additional ongoing
  burden hours per month (12 per year) as a result of the amendments at an average hourly cost of ($37,488/(8
  hours * 12 months)) = $391.00 per respondent per hour.

    The Commission estimates that these costs would be only a fraction 
of the overall costs to comply with Rule 605 reporting requirements, as 
they would contain only a small subset of the information published in 
the fuller Rule 605 reports. However, this may underestimate costs to 
the extent that these summary reports, which are intended to be human-
readable and therefore have a different format (PDF file), are costlier 
to prepare and/or store than machine-readable data.\979\
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    \979\ For example, a single letter ``a'' results in a PDF file 
of 7,706 bytes vs. a TXT file of 1 byte. See, e.g., File Size, U.S. 
Pat. & Trademark Office, available at https://www.uspto.gov/ebc/portal/infofilesize.htm. However, the lower information content of 
the summary file PDFs likely results in lower file sizes despite the 
larger per-pixel storage requirements.
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(4) Implications of Compliance Costs for Competition
    While the Commission believes that the primary competitive effect 
of the proposed amendments would be to increase competition between 
reporting entities on the basis of execution quality,\980\ it is 
possible that the proposed amendments would have a negative impact on 
competition if the associated compliance costs described above prevent 
the entry of new reporting entities or cause some entities to leave the 
market.
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    \980\ See supra section VII.D.1.(b)(1) for a discussion of the 
effects of the proposed amendments on competition between reporting 
entities on the basis of execution quality.
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    The Commission is unable to quantify the likelihood that a either a 
trading venue or a brokerage firm would cease operating as a result of 
the compliance costs associated with the proposed amendments. While the 
Commission does not believe that these compliance costs are large 
enough such that this would be likely,\981\ the Commission recognizes 
this possibility depends in part on whether the compliance costs 
associated with Rule 605 are likely to be fixed or variable. If Rule 
605 compliance costs represent a fixed cost, these costs could 
represent a significant portion of a smaller reporting entity's 
revenue, such that the reporting entity could become unprofitable if 
subjected to these costs.\982\ This could impact competition between 
reporting entities, for example, by causing some reporting entities to 
leave the market, or preventing the entry of new ones. It could also 
result in broker-dealers avoiding taking on more than 100,000 
customers, to avoid crossing the customer account threshold such that 
they would need to being complying with Rule 605 reporting 
requirements.
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    \981\ For example, data on broker-dealers' median monthly 
revenues from FOCUS Report Form X-17A-5 Schedule II show that the 
estimated monthly compliance cost would represent 0.09% of the 
monthly revenues of broker-dealers with 100,000 customers or less, 
and 0.003% of the monthly revenues of broker-dealers with 100,000 
customers or more.
    \982\ The Commission does not believe that this compliance costs 
are large enough such that this would be likely. See id.
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    On the other hand, if Rule 605 compliance costs are variable, then 
the scalability of compliance costs would mean that smaller reporting 
entities would incur lower compliance costs related to execution 
quality reports, which would mitigate some of these concerns. Rule 605 
compliance costs could be variable, e.g., because smaller reporting 
entities handle lower order volumes and therefore would require less 
data storage and less complexity when calculating the metrics required 
by Rule 605 as proposed.
    Furthermore, even if compliance costs of preparing Rule 605 reports 
are fixed from the perspective of reporting entities (this would be the 
case, e.g., if variable costs such as data storage are dominated by 
fixed costs such as costs for compliance and data personnel), they may 
be lower if reporting entities make use of third-party vendors, who can 
leverage economies of scale to spread fixed costs across the 
potentially many reporting entities that they

[[Page 3883]]

service, to prepare Rule 605 reports on their behalf. Therefore, to the 
extent that reporting entities make use of third-party vendors to 
prepare their Rule 605 reports, and these vendors charge reporting 
entities variable report preparation fees (e.g., based on the amount of 
data), this could lead to data vendors charging lower prices to prepare 
the Rule 605 reports of smaller reporting entities. This would also 
reduce the burdens of compliance costs for smaller reporting entities.
    However, even if some smaller reporting entities were to exit, the 
Commission does not believe this would significantly impact competition 
in either the market for brokerage services or the market for trading 
services, because both markets are served by a large number of 
competitors.\983\ The Commission recognizes that smaller reporting 
entities may have unique business models that are not currently offered 
by competitors, but the Commission believes a competitor could create 
similar business models if demand were adequate.
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    \983\ See supra section VII.C.3.(a)(1) for a discussion of the 
structure of the market for brokerage services, and supra section 
VII.C.3.(a)(2) for a discussion of the structure of the market for 
trading services.
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(b) Other Potential Costs
    The Commission has preliminarily identified costs in addition to 
compliance costs that some market participants may incur as a result 
from the proposed amendments. Many of these costs are difficult to 
quantify, especially as the practices of market participants are 
expected to evolve and may change due to the information on execution 
quality that is required to be reported under the proposed amendments 
to Rules 605. Therefore, much of the following discussion is 
qualitative in nature.
(1) Costs to Reporting Entities of Improvements to Execution Quality
    In addition to compliance costs, the proposed amendments could 
result in costs to some reporting entities based on how market 
participants adjust their behavior in response to increased 
transparency and competition on the basis of execution quality.\984\
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    \984\ See supra Section VII.D.1.(b)(1) for a discussion on how 
the proposed amendments would increase competition on the basis of 
execution quality. The costs to reporting entities associated with 
increased transparency and competition on the basis of execution 
quality would likely represent a transfer from these reporting 
entities to other market participants.
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    First, increased transparency and competition on the basis of 
execution quality, and subsequent scrutiny by customers and other 
market participants, might make broker-dealers less likely to route 
orders based on payment relationships and/or fees and rebates. While 
this would likely benefit customers in the form of better execution 
quality, if broker-dealers were to reduce the order flow sent to 
wholesalers who pay for it, the broker-dealers would receive less 
payment for such order flow and might pass the lost payments on to 
their customers, for example, by raising brokerage commissions or other 
fees. Similarly, if broker-dealers were to route orders to trading 
centers with lower rebates and higher fees, they might pass the 
reduction in rebate revenue and increase in fee costs on to their 
customers, for example, by raising brokerage commissions or other fees. 
Broker-dealers may pass lost payments or revenues along to customers in 
other ways as well, for example by reducing the quality of some bundled 
services or paying a lower interest rate on deposit accounts.
    Second, increased competition on the basis of execution quality may 
result in costs to reporting entities to the extent that they need to 
update or improve their routing or execution systems in order to remain 
competitive. However, should these improvements result in improved 
execution quality for investors, any costs to a reporting entity of 
improvements to their routing or execution systems would be offset by 
benefits to other market participants, i.e., investors.
    It is possible that the capital expenditure associated with such an 
upgrade may be such that some reporting entities would no longer remain 
profitable. The Commission is unable to estimate the number of 
reporting entities that may leave the market as a result of no longer 
being able to compete with other reporting entities on the basis of 
execution quality. However, the Commission does not believe this would 
significantly impact competition in either the market for brokerage 
services or the market for trading services, because both markets are 
served by a large number of competitors and that, if a reporting entity 
were to exit for this reason, these markets would be served by more 
efficient firms that are better able to offer execution quality to 
customers in line with its industry peers.
(2) Costs for Smaller Broker-Dealers
    There may be additional costs to the proposed amendments if smaller 
broker-dealers, who would not be subject to Rule 605 reporting 
requirements under the proposed amendments but may face competitive 
pressure to provide customers with more information and execution 
quality, would also face initial and ongoing costs to provide customers 
with execution quality reports.\985\ The costs for smaller broker-
dealers to prepare execution quality reports may not be the same as the 
costs for larger broker-dealers. Smaller-broker dealers may lack the 
technical expertise and compliance experience of larger broker-dealers, 
which would tend to lead to higher costs; however, smaller broker-
dealers may also have lower costs if their lower order volume and 
customer account numbers lead to less complexity when calculating the 
metrics required in the reports.
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    \985\ See infra section VII.D.1.(d)(1) for a discussion of the 
impact of the proposed amendments on smaller broker-dealers.
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(3) Potential for Less Transparency
    The proposed amendments expanding the set of Rule 605 reporting 
entities to include larger broker-dealers could impose a cost on 
broker-dealer customers if those broker-dealers that currently 
voluntarily provide their customers with execution quality reports stop 
providing these reports, which potentially contain more or different 
information than what the proposed amendments require.\986\ Some 
broker-dealer customers, especially institutional investors, currently 
request reports about the handling of their orders from their broker-
dealers.\987\ These reports may be less or more detailed and provide 
different and potentially less or potentially more information than 
those required by Rule 605 as proposed to be amended. To the extent 
that these reports are more detailed or provide more information than 
Rule 605 as proposed to be amended, and to the extent that broker-
dealers would be less incentivized to provide these reports to their 
customers as a result of the proposed amendments,\988\ broker-dealer 
customers may have access to less information as a result of the 
proposed amendments. The Commission preliminarily believes that this 
scenario is not very likely because customers could still request 
additional information or customized reports from

[[Page 3884]]

their broker-dealers and broker-dealers may be incentivized to satisfy 
such requests, to the extent they currently do, to retain their 
customers.\989\
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    \986\ These reports could include, for example, public reports 
prepared according to the FIF Template (see supra note 450), or 
private ad hoc reports the broker-dealers prepare for their 
customers (see discussion in section VII.C.1.(c)(2) supra).
    \987\ See supra section VII.C.1.(c)(2) for a discussion of the 
practice of institutional investors requesting execution quality 
reports from their broker-dealers.
    \988\ Note that this does not apply to broker-dealer's 
requirements to provide customers with execution quality information 
about their not held orders.
    \989\ See, e.g., 2018 Rule 606 Amendments Release, 83 FR 58338 
(Nov. 19, 2018) at 58403, which discusses a similar potential cost 
and further notes that the willingness of broker-dealers to provide 
such customized reports to customers and the level of detail in such 
a report might depend on the business relationship between the 
broker-dealer and the customer, such as whether the customer does a 
large amount of business with the broker-dealer.
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(4) Potential for Lower Execution Quality
    The Commission acknowledges that, to the extent that the proposed 
amendments to Rule 605 fail to capture relevant dimensions of execution 
quality or cause market participants to focus on some dimensions of 
execution quality to the detriment of others, the proposed amendments 
may reduce execution quality along certain dimensions that may be 
relevant to some investors. The nature of execution quality as a multi-
faceted concept has been a focus of academic papers, which have pointed 
out that execution quality is composed of multiple aspects or 
dimensions, including price and speed, among others.\990\ As stated by 
the Commission in the Adopting Release, different investors may have 
different concerns and priorities related to execution of their 
orders.\991\ If the proposed amendments tend to favor certain 
dimensions of execution quality while excluding or neglecting others, 
there is a possibility that certain investor groups may be advantaged 
by the proposed amendments to the disadvantage of other investor 
groups.
---------------------------------------------------------------------------

    \990\ See, e.g., Robert Battalio, Brian Hatch & Robert Jennings, 
All Else Equal?: A Multidimensional Analysis of Retail, Market Order 
Execution Quality, 6 J. Fin. Mkt. 143 (2003); Ekkehart Boehmer, 
Dimensions of execution quality: Recent evidence for US equity 
markets, 78 J. Fin. Econ. 553 (2005); Emiliano S. Pagnotta & Thomas 
Philippon, Competing on Speed, 86 Econometrica 1067 (2018).
    \991\ See Adopting Release, 65 FR 75414 (Dec. 1, 2000) at 75432.
---------------------------------------------------------------------------

    For example, average effective spreads calculated for NMLOs capture 
the portion of the spread that is earned by liquidity providers and 
paid by liquidity demanders.\992\ If reporting entities compete for 
NMLOs by offering a wider effective spread, NMLO execution prices would 
improve at the expense of the execution prices of the marketable 
orders. There is a similar trade-off between, e.g., time-to-execution 
and execution prices for NMLOs, as a broker-dealer seeking to improve 
the time-to-execution of NMLOs may favor routing those orders to an 
inverted venue where, as marketable orders earn a rebate, it may be 
more likely to attract a counterparty; this could incentivize trading 
venues to compete on rebates rather than on execution quality. Another 
example would be, if size improvement becomes a major driver of order 
flow, national securities exchanges may try to incentivize hidden 
liquidity and broker-dealers may route orders to venues with higher 
expected hidden orders, as size improvement measures mechanically 
benefit from a greater degree of hidden volume.\993\ It is possible 
that incentivizing hidden liquidity at the cost of displayed orders may 
negatively impact market quality by obfuscating trading interest 
information and discouraging trade by making order books look thinner 
than they actually are.
---------------------------------------------------------------------------

    \992\ See supra note 709 and accompanying text for a discussion 
of the interpretation of average effective spreads for NMLO.
    \993\ For example, if two exchanges have 200 shares available at 
the NBO price but one exchange is hiding a portion of this interest, 
a market order to purchase 200 shares would record size improvement 
on the venue with hidden liquidity but wouldn't on the other venue.
---------------------------------------------------------------------------

(5) Costs To Update Best Execution Methodologies
    As a result of the proposed amendments, financial service providers 
that are subject to best execution obligations \994\ would likely 
reevaluate their best execution methodologies to take into account the 
availability of new statistics and other information that may be 
relevant to their decision making. This may impose a cost only to the 
extent that broker-dealers and/or investment advisers choose to build 
the required statistics into their best execution methodologies. The 
proposed amendments do not, however, address and therefore do not 
change the existing legal standards that govern financial service 
providers' best execution obligations.\995\
---------------------------------------------------------------------------

    \994\ See supra notes 565-566 and accompanying text.
    \995\ See supra note 69.
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3. Economic Effects on Efficiency, Competition, and Capital Formation
(a) Efficiency
    The Commission preliminarily believes the proposed amendments to 
Rule 605 would improve the efficiency of analyzing 605 reports, which 
would result in improved price efficiency. Price efficiency would 
improve as a result of improvements in order execution quality that 
would result from increased transparency and thus competition. As 
investors would benefit from improved execution quality as a result of 
the proposed amendments, these investors would also likely benefit from 
lower transaction costs. Transaction costs reflect the level of 
efficiency in the trading process, with higher transaction costs 
reflecting less efficiency and more friction, which limits the ability 
for prices to fully reflect a stock's underlying value.\996\ Academic 
literature defines friction in financial markets to measure ``the 
difficulty with which an asset is traded,'' \997\ and as ``the price 
paid for immediacy.'' \998\ Friction makes it more costly to trade and 
makes investing less efficient, and it limits the ability of 
arbitrageurs or informed customers to push prices to their underlying 
values. Thus, friction makes prices less efficient. The proposed 
amendments to Rule 605 would improve order execution quality and reduce 
transaction costs. This, in turn, would reduce financial frictions and 
improve price efficiency.
---------------------------------------------------------------------------

    \996\ See Hans R. Stoll, Friction, 55 J. Fin. 1479 (2000).
    \997\ See id.
    \998\ See Harold Demsetz, The Cost of Transacting, 82 Q. J. 
Econ. 33 (1968).
---------------------------------------------------------------------------

(b) Competition
    As previously discussed in the benefits section of this economic 
analysis, the Commission believes that the proposed amendments to Rule 
605 would facilitate competition on the basis of execution quality in 
the markets for brokerage services and trading services.\999\ The 
proposed amendments may also have additional effects on competition, 
such as increasing the extent to which Rule 605 reporting entities 
compete within other quality areas (such as rebates and transaction 
fees), and increasing competition in related markets (such as the 
market for TCA).
---------------------------------------------------------------------------

    \999\ See supra section VII.D.1.(b)(1) for a detailed discussion 
of the effects of the proposed amendments on competition in these 
markets on the basis of execution quality.
---------------------------------------------------------------------------

(1) Competition in Other Areas
    An increase in the extent to which Rule 605 reporting entities 
compete on the basis of execution quality as a result of the proposed 
amendments may also spill over to increase incentives to compete along 
other lines, i.e., reduce fees or increase rebates (including PFOF), or 
offer new products or functionalities to attract customers.
    First, national securities exchanges may be incentivized to 
increase rebates or lower fees as a result of the proposed amendments. 
Exchanges compete on the basis of fees and rebates to incentivize 
broker-dealers to route more order flow to them.\1000\ If an exchange 
offers the

[[Page 3885]]

same execution quality as another reporting entity, an exchange may be 
incentivized to lower its transaction fees or raise its rebates in 
order to increase its competitive position in attracting more customers 
or order flow.\1001\ To the extent that this occurs and to the extent 
that the resulting lower fees or higher rebates would be passed on to 
investors, this could be beneficial for investors.
---------------------------------------------------------------------------

    \1000\ See supra section VII.C.3.(b)(2) for a discussion of 
competition between national securities exchanges on the basis of 
fees and rebates.
    \1001\ Another possibility is that a reporting entity that 
offers inferior execution quality may try to compete on the basis of 
lower fees or higher rebates instead of increasing its execution 
quality. To the extent that this occurs, this may limit the extent 
to which competition would lead to improved execution quality for 
the customers of these reporting entities. However, these customers 
would still benefit from the lower fees or higher rebates.
---------------------------------------------------------------------------

    Reporting entities may also be incentivized to innovate to offer 
new products in order to compete. For example, some broker-dealers may 
be incentivized to differentiate themselves by offer new 
functionalities that appeal to customers, such as the ability to trade 
on margin, in additional asset classes, such as options, or trade 
fractional shares.\1002\
---------------------------------------------------------------------------

    \1002\ See, e.g., supra note 642, describing how trading volume 
increased substantially for brokers after they introduced the use of 
fractional shares.
---------------------------------------------------------------------------

(2) Competition in Related Markets
    Second, the proposed amendments to Rule 605 could also have an 
impact on markets other than brokerage and trading services, such as 
the market for TCA. For example, suppose that a customer chooses to no 
longer purchase TCA once Rule 605 reports as proposed to be amended 
become available, because the customer decides that the information 
contained in the reports is sufficient. If fewer customers purchase 
TCA, this would have a negative impact on the market for third-party 
providers of TCA as well as third-party data vendors, because of a 
reduction in the demand for their services. Further, the quality of TCA 
provided by third parties may decrease because third-party providers of 
TCA might have fewer resources for the development and maintenance of 
their product offerings and because with fewer customers, third-party 
providers may have less data to use to build their models. At the same 
time, the quality of TCA reports may also improve if their publishers 
need to offer better products in order to compete with the publicly 
available data, and/or use the expanded information available under the 
proposed amendments to Rule 605 to offer new or better products.
(c) Capital Formation
    The Commission preliminary believes the proposed amendments to Rule 
605 may promote capital formation by improving price efficiency. As 
discussed above, the proposed amendments would improve order execution 
quality and reduce transaction costs, which would improve price 
efficiency. Improved price efficiency would cause firms' prices to more 
accurately reflect their underlying values, which may improve capital 
allocation and promote capital formation.
    Financial frictions may have an adverse impact on capital 
formation. In particular, higher transaction costs may hinder 
customers' trading activity that would support efficient adjustment of 
prices and, as a result, may limit prices' ability to reflect 
fundamental values. Less efficient prices may result in some issuers 
experiencing a cost of capital that is higher than if their prices 
fully reflected underlying values, and in other issuers experiencing a 
cost of capital that is lower than if their prices accurately reflected 
their underlying value, as a result of the market's incomplete 
information about the value of the issuer. This, in turn, may limit 
efficient allocation of capital and capital formation.
    By improving order execution quality and reducing transaction 
costs, the proposed amendments would reduce financial frictions and 
promote investor's ability to trade. This would have the effect of 
promoting capital formation through improved price efficiency.

E. Reasonable Alternatives

1. Reasonable Alternative Modifications to Reporting Entities
(a) Different Customer Account Thresholds for Differentiating Larger 
Broker-Dealers
    The Commission also considered alternatives to the proposed 
amendment to require larger broker-dealers \1003\ to prepare execution 
quality reports pursuant to Rule 605 and exclude broker-dealers that 
introduce or carry less than a threshold number of customer accounts, 
defining the customer account threshold as 100,000 customer 
accounts.\1004\ Lowering this threshold would increase the total costs 
of the proposed amendments, as more broker-dealers would be subject to 
the costs of preparing Rule 605 reports; however, lowering the 
threshold may also be beneficial if more broker-dealer customers are 
able to benefit from the proposed modifications to reporting 
entities.\1005\ On the other hand, raising the customer account 
threshold would lower the total costs of the proposal, but may result 
in fewer broker-dealer customers benefiting from the proposed 
modifications to reporting entities.
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    \1003\ See supra note 1 defining the term ``larger broker-
dealers.''
    \1004\ See supra note 166 and accompanying text discussing the 
proposed customer account threshold.
    \1005\ See supra section VII.D.1.(d)(1) for a discussion of the 
extent to which excluding smaller-brokers dealers (i.e., those 
broker-dealers with customer accounts numbers below the customer 
account threshold) limits the benefits of the enhanced reporting 
requirements on competition for customer order flow.
---------------------------------------------------------------------------

    In order to examine the number of broker-dealers that would be 
subject to the collection of information obligations of Rule 605 as a 
result of the proposed modifications to reporting entities for 
different levels of the customer account threshold, it is necessary to 
estimate the number of customers for both carrying and introducing 
broker-dealers.\1006\ In order to estimate the number of carrying 
broker-dealers' customers, the Commission used data from broker-
dealers' 2021 FOCUS Report Form X-17A-5 Schedule I, which asks 
respondents whether they carry their own public customer accounts, 
along with the number of carrying broker-dealers' public customer 
accounts.\1007\ In order to estimate the number of introducing broker-
dealers' customers, the Commission used data from CAT during the 
calendar year 2021 on the number of unique customer accounts whose 
trades are associated with broker-dealers that do not identify as 
carrying their own public customer accounts in FOCUS Report Form X-17A-
5 Schedule I.\1008\ The resulting customer numbers

[[Page 3886]]

are then used to estimate the number of both carrying and introducing 
broker-dealers that would be subject to the reporting requirements of 
Rule 605 as proposed, using various different definitions of the 
customer account threshold. The estimated costs of the proposed 
amendments from the various definitions of the customer account 
thresholds are then calculated using the estimated initial and ongoing 
costs for new Rule 605 filers.\1009\
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    \1006\ See supra note 736 and accompanying text for a definition 
of carrying and introducing broker-dealers.
    \1007\ Specifically, item 8080 asks for information on 
``respondent's total number of public customer accounts,'' but only 
broker-dealers that are carrying firms are requiring to answer this 
question, so information on introducing broker-dealers' customers is 
not included.
    \1008\ Customer accounts are identified in CAT as accounts 
belonging to either the ``Institutional Customer'' account type, 
defined as accounts that meet the definition in FINRA Rule 4512(c), 
or the ``Individual Customer'' account holder type, defined as 
accounts that do not meet the definition of FINRA Rule 4512(c) and 
are also not a proprietary account. See supra note 609 for more 
information about account types in CAT. Broker-dealers are 
identified according to their FDID as defined in section 1.1 of the 
CAT NMS Plan. Introducing broker-dealers are identified as those 
broker-dealers that report trades by customer accounts in the CAT 
dataset and do not identify as carrying their own public customer 
accounts in FOCUS Report Form X-17A-5 Schedule I. However, a 
customer account is only observed in this dataset if it actually 
traded during the sample period from January to December 2021. 
Therefore, to the extent that there are customer accounts that did 
not trade during this period, these accounts would be missing from 
our sample. In order to adjust for these missing accounts, an 
adjustment factor was constructed based on the assumption that, for 
carrying broker-dealers identified in both FOCUS and CAT, the number 
of customer accounts associated with the broker-dealer in CAT 
represents some percentage of that broker-dealer's total customer 
base available from FOCUS (i.e., those customer accounts that 
actually traded during 2021). Dividing the number of accounts from 
CAT by the number of customer accounts from FOCUS reveals that, on 
average, around 29% of these broker-dealers' customer accounts 
traded during 2021. Observed customer numbers from CAT are then 
scaled up using the adjustment factor of 1/0.29 to estimate of the 
total number of customers for each broker-dealer (both carrying and 
introducing). In order to ensure that our estimate of customer 
account numbers is as conservative as possible, if a broker-dealer 
is observed in both datasets, the number of customers for that 
broker-dealer is taken as the higher of their customer account 
number reported in FOCUS and the adjusted number of customers 
estimated from CAT. Note that this method may underestimate the 
total number of customers to the extent that carrying broker-dealers 
identified in FOCUS introduce customers that they do not carry (see 
supra note 736 discussing hybrid carrying/introducing broker-
dealers), and/or that introducing broker-dealers would have a higher 
or lower adjustment factor than carrying broker-dealers. This method 
may also underestimate or overestimate any particular broker-
dealer's total number of customers to the extent that a larger or 
smaller portion of the broker-dealer's customer base traded during 
the sample period than the number implied by the adjustment factor. 
Lastly, this method may underestimate the number of customer 
accounts to the extent that some broker-dealers introduce customer 
accounts on an omnibus basis, which pool together the accounts of 
potentially multiple underlying customers but would only be recorded 
as a single account in CAT.
    \1009\ See supra section VI.D for a description of these costs. 
See supra notes 488 and 489 for initial and ongoing costs for 
existing respondents; and supra notes 491 and 492 for initial and 
ongoing costs for new respondents. This analysis assumes the same 
costs for both larger and smaller broker-dealers.
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    Lowering the customer account threshold may be beneficial if more 
broker-dealer customer accountholders are able to benefit from the 
enhanced reporting requirements. In order to estimate the benefits of 
different customer account thresholds, the Commission calculated the 
cumulative number of customer accounts (expressed as a percentage of 
all identified carrying and introducing broker-dealer customer 
accounts) associated with broker-dealers that would be subject to the 
reporting requirements of Rule 605 as proposed according to various 
definitions of the customer account threshold. Similarly, using 
estimates of the number of transactions associated with the broker-
dealers' customer accounts, the Commission calculated the cumulative 
number of customer orders (expressed as a percentage of all customer 
orders belonging to carrying and introducing broker-dealer customer 
accounts) associated with broker-dealers that would be included under 
the various thresholds.\1010\
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    \1010\ Specifically, the Commission used the total number of 
transactions associated with the broker-dealer customer accounts 
identified in CAT during calendar year 2021, along with the sum of 
broker-dealers' responses to items 8107 and 8108 from their 2021 
FOCUS Report Form X-17A-5 Schedule I (``Number of respondent's 
public customer transactions: equity securities transactions 
effected on a national securities exchange'' and ``equity securities 
transactions effected other than on a national securities 
exchange''). See Focus Report Form X-17A-5 Schedule I, SEC, 
available at https://www.sec.gov/files/formx-17a-5_schedi.pdf. Note 
that some of these orders are likely to be excluded from Rule 605 
reporting requirements to the extent that they belong to an order 
type or size group that is not subject to Rule 605. In order to 
ensure that our estimate of customer transactions is as conservative 
as possible, if a broker-dealer is observed in both datasets, the 
number of customer transactions for that broker-dealer is taken as 
the higher of the number of transactions as reported in FOCUS and 
the number of transactions observed in CAT.
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    Table 13 presents the estimated number of broker-dealers (both 
carrying and introducing) that would be subject to Rule 605 reporting 
requirements according to different customer account thresholds, the 
resulting estimated costs of the proposed amendments, and the resulting 
estimated benefits in terms of the cumulative percentage of included 
customer accounts and orders. The table shows that increasing the 
customer account threshold from 100,000 to 500,000 would reduce the 
costs of the proposed amendments by around 47%, but would also result 
in lower coverage of customer transactions and accounts. In particular, 
only 6.2% of the customer transactions observed in 2021 would be 
included. Meanwhile, reducing the customer account threshold from 
100,000 to 10,000 would almost triple both initial and ongoing costs. 
The amount of included transactions would increase by an additional 
14.8 percentage points, which would be beneficial. However, the 
percentage of included customer accounts increases only marginally, by 
1.2 percentage points, implying that the additional customer coverage 
resulting from the lower threshold is associated with only a small 
number of accounts that trade in large volumes. Such accounts are 
likely to belong to institutional traders, who are likely to have 
access to alternative information about the execution quality achieved 
by their broker-dealers and/or are likely to make use of not held 
orders that are excluded from Rule 605 reporting requirements, and 
would therefore be less likely to depend on Rule 605 reports for 
information about their broker-dealers' execution quality.\1011\ 
Therefore, lowering the customer account threshold to include these 
customers may not be particularly beneficial, especially when compared 
to the substantial increase in cost.
---------------------------------------------------------------------------

    \1011\ See supra section VII.C.1.(c)(2) for a discussion of 
institutional investors' access to alternative sources of execution 
quality other than Rule 605 reports.
---------------------------------------------------------------------------

Table 13--Cost-Benefit Analysis of Different Customer Account 
Thresholds Defining ``Larger Broker-Dealers''

[[Page 3887]]

[GRAPHIC] [TIFF OMITTED] TP20JA23.016

    An indirect cost of requiring these smaller broker-dealers to 
publish Rule 605 reports is an increased risk of information leakage. 
To the extent that a broker-dealer serves multiple institutional 
investors and/or these institutional investors exclusively use not held 
orders, it would be difficult to identify the orders of a particular 
customer in the proposed reports. However, a smaller broker-dealer may 
have only a few institutional investor customers that represents the 
majority of its business and this may be known to other market 
participants. In this case, it may be possible to learn from Rule 605 
reports some information about the customer's order flow that is 
handled by the specific broker-dealer. This information would only 
pertain to historical order flow and would only include a possibly 
limited subset of the customer's orders that are held orders, but could 
nevertheless provide information about the general characteristics of 
the customer's order flow, which may be useful to other market 
participants. Such a potential outcome could put smaller broker-dealers 
(that is, those with a small set of customers or handling a relatively 
small number of institutional orders) at a competitive disadvantage 
relative to larger broker-dealers, as institutional investors might 
avoid using smaller broker-dealers to avoid possible disclosure that 
could be traced back to the customer.
(b) Require All Broker-Dealers To Prepare Rule 605 Reports
    Another alternative to the proposed amendment to require larger 
broker-dealers to prepare execution quality reports pursuant to Rule 
605 is to require all broker-dealers to prepare such reports, excluding 
broker-dealers with de minimis order flow.\1012\
---------------------------------------------------------------------------

    \1012\ This alternative was suggested by EMSAC; see supra notes 
104-106; 171 and accompanying text.
---------------------------------------------------------------------------

    Expanding reporting requirements to all broker-dealers, subject to 
a de minimis threshold, would greatly increase the scope of the 
proposed amendments, as there were 3,498 registered broker-dealers as 
of Q2 2022.\1013\ However, only around a third (specifically, 1,267) of 
these broker-dealers introduced or carried at least one individual and/
or institutional investor in the market for NMS stocks within the 
sample time period.\1014\ The Commission is mindful of the additional 
costs that broad expansion of the rule to all broker-dealers would 
entail, relative to the likely limited benefits of expanding reporting 
requirements to a substantial number of broker-dealers that do not 
directly handle, and thus have less discretion over the execution 
quality of, individual and institutional investors' orders. Therefore, 
the Commission believes that the increase in cost that would accompany 
a requirement for all broker-dealers to prepare Rule 605 reports, 
subject to a de minimis threshold, would not be justified by the 
corresponding benefit, and that limiting reporting obligations to 
broker-dealers that handle customer orders would focus the associated 
implementation costs on those broker-dealers for which the availability 
of more specific execution quality statistics would provide a greater 
benefit.
---------------------------------------------------------------------------

    \1013\ See supra note 735 and corresponding discussion.
    \1014\ See analysis in supra Table 13 for estimated number of 
broker-dealers that introduce or carry at least one customer 
account.
---------------------------------------------------------------------------

(c) Defining the Threshold for Differentiating Larger Broker-Dealers 
Using Number of Customer Transactions Rather Than Number of Customer 
Accounts
    The Commission also considered defining the threshold for 
differentiating larger broker-dealers using number of customer 
transactions rather than number of customer accounts. An approach 
requiring that broker-dealers handling above a threshold level of 
customer transactions publish Rule 605 reports would likely capture an 
overall larger number of customer orders. However, it would also be 
subject to a

[[Page 3888]]

number of issues that would limit the benefits of this approach.
    First, this approach would likely exclude from reporting 
requirements broker-dealers that have a large number of relatively 
inactive customer accounts, and include broker-dealers that have a 
small number of accounts associated with large amounts of trading 
volume. While the former are likely to be accounts belonging to 
individual investors, the latter are very likely to be institutional 
accounts. Institutional investors are likely to have access to 
alternative information about the execution quality achieved by their 
broker-dealers and/or are likely to make use of not held orders that 
are excluded from Rule 605 reporting requirements, and would therefore 
be less likely to depend on Rule 605 reports for information about 
their broker-dealers' execution quality.\1015\ Meanwhile, individual 
investors have few alternatives other than Rule 605 for information 
about the execution quality achieved by their broker-dealers.\1016\ 
Therefore, while expanding overall coverage, defining the threshold 
using the number of customer transactions would be less likely to 
target the types of orders that may be most useful for consumers of 
Rule 605 reports.
---------------------------------------------------------------------------

    \1015\ See section VII.C.1.(c)(2) for a discussion of 
institutional investors' access to alternative sources of execution 
quality other than Rule 605 reports.
    \1016\ See section VII.C.1.(c)(1) for a discussion of individual 
investors' usage of Rule 605 reports.
---------------------------------------------------------------------------

    Secondly, defining the threshold using the number of customer 
transactions may result in a less stable classification of broker-
dealers into those that are and are not subject to Rule 605 
requirements, as there is likely to be more month-to-month variation in 
transaction numbers resulting from changes in market conditions, as 
compared to number of customer accounts.\1017\ This could potentially 
be disruptive to broker-dealers to have to coordinate compliance with 
the Rule during some periods but not others and interfere with 
customers' or market participants' ability to look at a broker-dealer's 
execution quality over time by analyzing historical data. Furthermore, 
the dependence of transaction volumes on market conditions may result 
in broker-dealers being newly defined as ``larger broker-dealers'' 
subject to reporting requirements, even though their size relative to 
other broker-dealers did not change. For example, a period of sustained 
market volatility resulting in overall increases in market activity 
levels may trigger the need for many or even most broker-dealers to 
file Rule 605 reports, even if the broker-dealer's relative portion of 
order flow (as a percentage of total broker-dealer customer order flow) 
did not change.\1018\ This would increase the total compliance costs 
associated with the proposed amendments.
---------------------------------------------------------------------------

    \1017\ Note that this possibility is somewhat limited by the 
proposal that a broker or dealer that equals or exceeds the customer 
account threshold would be required to provide reports for at least 
three calendar months. See supra note 183 and corresponding 
discussion.
    \1018\ Note that this possibility would be somewhat limited by 
the proposal to only require broker-dealers to publish Rule 605 
reports after a three-month initial grace period. See supra note 186 
and corresponding discussion.
---------------------------------------------------------------------------

    Lastly, the number of customer accounts is likely less costly for 
broker-dealers to calculate and track compared to the number of 
transactions associated with customer accounts. Given that only 41.1% 
of customer-carrying broker-dealers report the actual number of their 
customer transactions (rather than an estimated number) on their FOCUS 
Report Form X-17A-5 Schedule I,\1019\ the extent to which broker-
dealers currently are able or choose to track the number of 
transactions associated with their customer accounts is unclear.
---------------------------------------------------------------------------

    \1019\ See supra note 168 for a description of FOCUS Report Form 
X-17A-5 Schedule I.
---------------------------------------------------------------------------

2. Reasonable Alternative Modifications to Scope of Covered Orders
(a) Explicitly Include ISO Orders With Limit Prices Inferior to the 
NBBO
    Currently, marketable Intermarket Sweep Orders (``ISOs'') with a 
limit price inferior to the NBBO, i.e., an ISO with a limit price less 
than the national best bid for sell orders or higher than the national 
best offer for buy orders, may be viewed as being subject to special 
handling, which would exclude them from Rule 605 reports.\1020\ One 
alternative could be to explicitly include these orders within the 
scope of covered orders, either aggregated with other orders types or 
as a separate order type category.
---------------------------------------------------------------------------

    \1020\ See supra notes 36-37, discussing the exclusion of orders 
for which the customer requests special handling from the definition 
of ``covered orders''. See also 2013 FAQs, answer to Question 1.
---------------------------------------------------------------------------

    ISOs make up a large percentage of on-exchange trade volume; one 
academic working paper found that, between January 2019 and April 2021, 
ISOs accounted for 48% of on-exchange trade volume.\1021\ In order to 
estimate the volume of ISOs that are excluded from Rule 605 reporting 
requirements as a result of the exclusion of ISOs with inferior limit 
prices, an analysis was performed using data on ISO marketable limit 
orders from the Tick Size Pilot B.II Market and Marketable Limit Order 
dataset.\1022\ Table 14 shows that ISO orders with limit prices 
inferior to the NBBO make up 4.9% of ISO buy orders (6.3% of buy share 
volume), and 4.7% of ISO sell orders (9.0% of ISO sell volume). 
Therefore, it could be the case that these orders make up a small but 
non-negligible percent of order flow.\1023\
---------------------------------------------------------------------------

    \1021\ See Ariel Lohr, Sweep Orders and the Costs of Market 
Fragmentation (Sept. 18, 2021), available at https://ssrn.com/abstract=3926296 (retrieved from SSRN Elsevier database).
    \1022\ See supra note 723 for dataset description. For the 
analysis of ISO orders, the Commission limited this analysis to a 
randomly selected sample of 100 stocks and for the time-period of 
March 2019.
    \1023\ As the Tick Size Pilot covered only small-cap stocks 
(i.e., NMS common stocks that have a market capitalization of $3 
billion or less, a closing price of at least $2.00, and a 
consolidated average daily volume of one million shares or less), 
ISO volumes and properties may be different for mid- or large-cap 
stocks. Furthermore, as the Tick Size Pilot data is based on self-
reported data by trading centers, there is the possibility that the 
data may be subject to certain errors or omissions.

Table 14--Marketable Intermarket Sweep Orders by Price Relative to NBBO,
                               March 2019
------------------------------------------------------------------------
                                                             ISO sell
                                          ISO buy orders      orders
                                             (percent)       (percent)
------------------------------------------------------------------------
Percent of Orders:
    Price Equal to the NBBO.............            95.1            95.2
    Price Worse Than NBBO...............             4.9             4.7
    Price Better Than NBBO..............            0.05            0.06
Percent of Share Volume:
    Price Equal to the NBBO.............            93.5            90.1
    Price Worse Than NBBO...............             6.3             9.0

[[Page 3889]]

 
    Price Better Than NBBO..............             0.2             0.9
------------------------------------------------------------------------
Table 14: Marketable Intermarket Sweep Orders by Price Relative to NBBO,
  March 2019. This table shows the percentage of ISO marketable limit
  orders with limit prices inferior to the NBBO, equal to the NBBO, and
  better than the NBBO, using a randomly selected sample of 100 stocks
  from the Tick Size Pilot B.II Market and Marketable Limit Order
  dataset and for the time period of March 2019. See supra note 723 for
  dataset description. The numbers reported here, in particular those
  related to the NBBO, may change once the amendments in the MDI
  Adopting Release are implemented. See supra note 613 and section
  VII.C.1.(d)(2).

    However, there are questions as to whether ISOs with inferior limit 
prices would be comparable to other marketable limit orders. When the 
limit price of an ISO is inferior to the NBBO at time of order receipt, 
the customer is effectively instructing the trading center that it can 
execute the order at a price inferior to the NBBO. If the order 
executes, any adverse effects that this inferior limit price has on the 
order's execution quality metrics (e.g., a negative price improvement, 
or a higher effective spread) would be a result of the customer's 
instructions, rather than the market center or broker-dealer's 
discretion. As a result, these orders are likely to skew execution 
quality metrics downwards if included with other order types, which 
would harm market participants' ability to use these metrics to 
accurately compare reporting entities.
    One alternative could be to explicitly include ISOs with inferior 
limit prices as a separate order type category in Rule 605 reports. 
However, the instruction that a market center should execute an ISO 
order at a price inferior to the NBBO, even when other market centers 
are displaying liquidity at better prices, limits broker-dealers' 
discretion over the execution price of these orders. Thus, market 
participants may only benefit from this information to the extent that 
market centers or broker-dealers still have some discretion over some 
dimension of the order's execution quality such that this information 
would be useful in comparing metrics across reporting entities. For 
example, the willingness of traders to accept prices worse than the 
NBBO could help illuminate the premium paid by traders to quickly trade 
in a fragmented trading environment, which could differ across market 
centers.
(b) Exclude Orders That Are Cancelled Quickly After Submission
    Limit orders that are canceled within a very short amount of time 
after submission are likely driven by trading strategies (for example, 
high frequency trading \1024\ and ``pinging'') that are not intended to 
provide liquidity, and therefore may have limited information about the 
execution quality of a particular market center. Excluding quickly 
cancelled orders from the definition of covered orders may allow fill 
rates (i.e., number of shares executed at or away from the market 
center, divided by number of covered shares) to better capture the 
execution probability of resting orders that are given a minimum 
opportunity to be executed, leading to a more meaningful ranking of 
Rule 605 reporting entities. At the same time, excluding cancelled 
orders also may entail losing important information if these 
cancellations capture information about orders that did not or could 
not receive a fill, rather than trading strategies.
---------------------------------------------------------------------------

    \1024\ The Concept Release on Equity Market Structure states 
that ``the submission of numerous orders that are cancelled shortly 
after submission'' is a primary characteristic of high-frequency 
traders. See 75 FR 3594 (Jan. 21, 2010) at 3606.
---------------------------------------------------------------------------

    In order to examine how the presence of quickly cancelled orders 
may impact fill rates and subsequently impact the ranking of market 
centers, the Commission first examined data on cancellation and 
execution times of executable NMLOs from MIDAS during the month of 
March 2022.\1025\ Figure 16 plots the conditional distribution of 
cancellation and execution times,\1026\ and shows that cancellation 
times tend to be shorter than execution times: while the largest 
percentage (29.8%) of cancelled executable NMLOs are cancelled between 
1 and 100 milliseconds after submission, the largest percentage (44.8%) 
of executable NMLOs that received execution are not executed until 
between 1 and 30 seconds after submission. In fact, while 75% of 
cancelled orders are cancelled in less than 1 second, only 41.1% of 
executions happen within the same time frame. This imbalance implies 
that many orders may be cancelled before they are given a reasonable 
opportunity to execute.
---------------------------------------------------------------------------

    \1025\ See supra note 634 for data description. Note that this 
analysis doesn't include IOC NMLOs, which are not captured in MIDAS 
metrics. As discussed in supra section VII.C.2.(c)(7), these orders 
may also contribute to low fill rates in Rule 605 reports.
    \1026\ Note that the conditional distribution examines the 
percentage of cancelled (executed) orders that are cancelled 
(executed) within the defined time thresholds, and not the 
percentage of all orders that are cancelled or executed within the 
defined thresholds. Therefore, the cancellation (execution) 
percentages plotted in the Figure should sum up to 100%.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

Figure 16: Distribution of Execution and Cancellation Times for 
Executable NMLOs, March 2022

[[Page 3890]]

[GRAPHIC] [TIFF OMITTED] TP20JA23.017

    Therefore, it may be the case that excluding orders cancelled below 
some minimum threshold may lead to more informative fill rates. 
However, one question might be how to determine this threshold. For 
example, if the intent is to exclude cancellations that are part of 
high-frequency trading strategies such as pinging, it may be useful to 
keep in mind that estimates of human reaction time range from between 
one second and several hundred milliseconds, setting an upper bound for 
what might be considered high-frequency trading.\1027\ Meanwhile, one 
recent academic paper found that high frequency trading strategies 
operate in approximately 5 to 10 microseconds.\1028\ This would imply 
that a useful range for determining an appropriate threshold might be 
between approximately a few microseconds and one second. Figure 17 
plots the fill rates of executable NMLOs that result from excluding 
orders that are cancelled below a variety of minimum time thresholds, 
showing that fill rates increase and approach 100% as more and more 
cancelled orders are excluded from the calculation of the fill rate. 
Importantly, fill rates do not change much when orders cancelled in 
less than 100 microseconds, only increasing by 0.2%. Fill rates 
increase substantially when orders cancelled in less than 1 second are 
excluded, but still remain on the lower side at 11.5%. This implies 
that the impact of excluding quickly cancelled orders on fill rates may 
be limited.\1029\
---------------------------------------------------------------------------

    \1027\ See, e.g., Neil Johnson, Guannan Zhao, Eric Hunsader, 
Hong Qi, Nicholas Johnson, Jing Meng & Brian Tivnan, Abrupt Rise of 
New Machine Ecology Beyond Human Response Time, 3 Sci. Reps. 1 
(2013); Albert Menkveld & Marius A. Zoican, Need for Speed? Exchange 
Latency and Liquidity, Rev. Fin. Stud. 1188 (2017).
    \1028\ See Matteo Aquilina, Eric Budis & Peter O'Neill, 
Quantifying the High-Frequency Trading ``Arms Race, 137 Q. J. Econ. 
493 (2022).
    \1029\ Note that this sample contains a mixture of stocks in 
terms of share price and market capitalization, and these numbers 
are likely to look different for individual stocks according to 
their market capitalization and liquidity characteristics.
---------------------------------------------------------------------------

Figure 17: Effect of Excluding Quickly Cancelled Orders on Fill Rates 
for Executable NMLOs, March 2022

[[Page 3891]]

[GRAPHIC] [TIFF OMITTED] TP20JA23.018

BILLING CODE 8011-01-C
    The benefit of excluding quickly cancelled orders is also likely to 
be limited if excluding these orders systemically increases fill rates 
across all reporting entities and does not necessarily lead to a change 
in ranking between reporting entities. To explore this possibility, the 
Commission limited the sample to the five largest market centers in 
terms of execution volume, to examine how the rankings between these 
market centers changes in terms of their fill rates for executable 
NMLOs resulting from changes to the threshold below which to exclude 
cancelled orders. Then it examined changes to their fill rate rankings 
for executable NMLOs as the threshold below which to exclude cancelled 
orders increased. The Commission found that market centers' rankings 
did not change until cancellations below one second were excluded, when 
the market centers ranked first and third switched places. As for 
reasons described above one second represents a maximum bound on a 
reasonable threshold for excluding cancellations, this again implies 
that the benefits of excluding quickly cancelled orders on fill rates 
may be limited.
(c) Include NMLOs Submitted Outside of Regular Trading Hours as a 
Separate Order Category
    The Commission is proposing to include NMLOs submitted outside of 
regular trading hours if they become executable during regular trading 
hours into the scope of covered orders. If NMLO orders submitted 
outside of regular trading hours have characteristics that are 
fundamentally different from other types of orders and have sufficient 
volume such that their inclusion along with other orders may skew 
execution quality statistics, it may be useful to include these orders 
are a separate order type category in Rule 605 reports. Pre-open orders 
likely have characteristics that differ from orders submitted during 
regular hours.\1030\ However, these pre-open orders make up only a very 
small percentage of order volume, representing only around 4.8% of the 
volume of orders submitted during a single ten-minute period of the 
trading day. Therefore, it is unlikely that the inclusion of these 
orders along with other order types would significantly skew execution 
quality statistics, and including them as a separate order type 
category would likely only increase the complexity and size of Rule 605 
report files.
---------------------------------------------------------------------------

    \1030\ See supra section VII.D.1.(a)(2)(a) for an analysis 
showing that orders submitted pre-open tend to be larger and further 
away from the midpoint as compared to orders submitted during 
regular opening hours.
---------------------------------------------------------------------------

3. Reasonable Alternative Modifications to Required Information
(a) Reasonable Alternative Order Size Categories
    (1) Defining Order Sizes Based on Dollar Volume Categories Rather 
Than Number of Round Lots
    Instead of redefining order size categories according to number of 
round lots, one alternative would be to redefine categories based on 
the dollar value of the order. This approach has several advantages. 
First, similarly to defining categories based on numbers of round lots 
as in the current proposed amendments, notional size buckets based on 
orders' dollar values may make it easier to compare execution quality 
metrics across market centers that may trade in differently priced 
stocks. Pre-controlling for the stock price would thus eliminate the 
need for users of Rule 605 to go through the extra step of collecting 
and controlling for stock price information before being able to 
meaningful compare market centers using Rule 605 data. Secondly, unlike 
categories based on numbers of round lots, which according to the MDI 
Rules are based on the previous month's trading price,\1031\ categories 
based on dollar volumes incorporate information about changing stock 
prices in real time, thereby better grouping together similarly sized 
orders, e.g., stocks that experience a large price increase or drop 
within a single month.
---------------------------------------------------------------------------

    \1031\ See supra note 265 and accompanying text.
---------------------------------------------------------------------------

    On the other hand, while remaining in the spirit of distinguishing 
between ``small'' and ``large'' orders, defining order size buckets 
according to dollar values would no longer produce a meaningful 
distinction between round lot and odd-lot orders according to the

[[Page 3892]]

new definitions under the MDI Rules, so it would not be possible to 
distinguish orders that may not be at quotes protected under Rule 611. 
Therefore, it is not clear that defining order size categories in terms 
of dollar values is superior to defining them by number of round lots 
as is currently proposed.
(b) Reasonable Alternative Time-to-Execution Statistics
(1) Increase the Granularity of Time-to-Execution Buckets
    One alternative to eliminating time-to-execution buckets would be 
to redefine the time-to-executions to have a granularity that better 
suits the speed of modern markets. Time-to-executions for both 
marketable and non-marketable order types calculated using the Tick 
Size Pilot B.II dataset was analyzed,\1032\ and Figure 12 shows 
execution speeds of market and marketable limit orders, along with the 
three categories of non-marketable limit orders currently required in 
Rule 605 (inside-the-quote, at-the-quote, and near-the-quote).
---------------------------------------------------------------------------

    \1032\ See supra note 723 for dataset description.
---------------------------------------------------------------------------

    The figure shows that, for market and marketable limit orders, 
time-to-execution speeds are mostly bunched up at the fastest end of 
their time buckets, and the longer time-to-execution buckets are left 
virtually empty. However, the figure shows a very different picture for 
NMLOs, in particular for at-the-quote and near-the-quote limit orders. 
In contrast to market and marketable limit orders, a vast majority of 
these orders are executed in over one second.
    While the proposed amendment to include only NMLOs that eventually 
touch the NBBO could cause average execution speeds to differ between 
Rule 605 and that of the Tick Size Pilot, e.g., by excluding some NMLOs 
with very long execution times, virtually all of the orders in the at-
the-quote category would by definition be included within the proposed 
new scope of executable NMLOs. These orders also have a very different 
distribution of time-to-executions compared to that of market and 
marketable limit orders. Therefore, the granularity of time-to-
execution that would be granular enough to usefully capture the 
execution speeds of market and marketable limit orders would likely be 
too granular to capture the execution speeds of non-marketable limit 
orders. One solution might be to define two different sets of time-to-
execution buckets: one for market/marketable orders, and one for non-
marketable limit orders. However, this would likely increase the 
complexity of reporting requirements.
(c) Reasonable Alternative Spread Measures
(1) Use Different Clock Time Horizons To Calculate Realized Spread
    The Commission is proposing to require the realized spread to be 
calculated at both 15 seconds and one minute time horizons. The 
Commission also considered alternative time horizons. An ideal 
measurement horizon would be one that aligns with the amount of time an 
average liquidity provider holds onto the inventory positions 
established from providing liquidity.\1033\ Selecting an appropriate 
time horizon to calculate the realized spread is important, as realized 
spreads vary significantly as the time horizon is changed, as well as 
according to stock characteristics, such as size.\1034\
---------------------------------------------------------------------------

    \1033\ See supra section IV.B.4.
    \1034\ See supra Figure 1.
---------------------------------------------------------------------------

    An analysis of variations in realized spreads calculated over time 
horizons ranging from 1 second to 5 minutes, as well as how they differ 
based on stock size, generally showed that, by the 1-minute horizon, 
realized spreads captured the majority of the information contained in 
realized spreads for all stocks, and a substantial majority for the two 
groups of larger stocks.\1035\ However, while increasing the time 
horizon from 1 minute to 5 minutes has only a minimal impact on 
realized spreads for larger stocks, for the two smaller-stock groups, a 
sizeable proportion of the overall decline (37%) does not occur until 
the 5-minute horizon. Therefore, it may be that retaining a 5-minute 
horizon, in addition to the proposed 1-minute and 15-second horizon, 
would capture additional information about realized spreads, particular 
for the smallest stocks. However, requiring an additional specification 
of realized spreads would entail adding another data item, which would 
also increase the complexity of Rule 605 reports and thereby add to the 
costs that market participants face when collecting, interpreting, and 
evaluating Rule 605 reports.\1036\ Given that more than 50% of the 
variation in realized spreads is already captured by the 1-minute 
horizon, the Commission does not believe that this additional cost 
would be justified by the benefit of requiring an additional 
specification for realized spreads.
---------------------------------------------------------------------------

    \1035\ See supra Table 1.
    \1036\ See supra section VII.C.2.(d) discussing search costs 
related to Rule 605 reports.
---------------------------------------------------------------------------

(2) Use Trade Time Horizons To Calculate Realized Spread
    The Commission also considered whether the time horizon used to 
calculate realized spreads should be measured in terms of ``trade 
time,'' rather than ``clock time.'' An ideal measurement horizon for 
realized spreads would be one that aligns with the amount of time an 
average liquidity provider holds onto the inventory positions 
established from providing liquidity. As discussed above, one would 
expect that this horizon varies according to characteristics that 
impact liquidity providers' ability to turn over their positions, 
including stock characteristics such as size as described above; 
however, this time horizon also varies over time, as overall market 
conditions change. The use of a fixed time horizon could therefore make 
it so that the ability of realized spread measures to capture 
information about adverse selection varies over time.
    Instead of setting a fixed ``clock time'' horizon, volume or 
``trade time'' measures changes between the ``the initial trade to the 
ith trade thereafter,'' \1037\ and therefore allows for a time horizon 
that is flexible to different levels across stocks, and also over 
different time periods. In other words, while prices may update under 
liquid conditions in a few seconds or less, during very illiquid 
conditions several minutes may go by without a trade. Measuring time in 
terms of number of trades allow for the horizon to match these 
different speed ``regimes'' and may result in realized spread 
calculations that are more consistently relevant.\1038\
---------------------------------------------------------------------------

    \1037\ See Conrad and Wahal at 241.
    \1038\ For this reason, some academic studies use of trade time 
instead of clock time when calculating metrics; see, e.g., David 
Easley, Marcos M. Lopez De Prado & Maureen O'Hara, Flow Toxicity and 
Liquidity in a High-Frequency World, 25 Rev. Fin. Stud. 1457 (2012).
---------------------------------------------------------------------------

    However, the Commission is mindful of the additional computational 
resources that would be required if trade time were required to 
calculate realized spreads, as it would require reporting entities to 
match their execution information both to information on the NBBO, as 
would be necessary under the proposed clock time horizons, but 
additionally historical trade information from the exclusive 
SIPs.\1039\ More computationally intensive metrics would likely 
increase reporting entities' compliance costs. Therefore, the 
Commission believes that the proposed amendment to include multiple 
fixed time horizons (15 seconds and 1 minute) would allow for 
sufficient

[[Page 3893]]

flexibility in capturing realized spread information for stocks and/or 
time periods with different liquidity characteristics without 
increasing the computational resources required to calculate this 
measure.
---------------------------------------------------------------------------

    \1039\ See supra note 195.
---------------------------------------------------------------------------

(3) Use Weighted Midpoint To Calculate Effective and Realized Spread
    Rule 600(b)(9) currently defines effective spreads as, for buy 
orders, 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.\1040\ 
The Commission is further proposing to add a definition of the average 
percentage effective spread, which would be equal to the share-weighted 
average of effective spreads, divided by the midpoint.\1041\ However, 
an academic study \1042\ found that measuring the effective spread 
relative to the midpoint overestimates effective spreads by an average 
of 13%-18%, and that the bias can vary across stocks, trading venues, 
and investor groups. The paper instead suggests measuring effective 
spreads relative to a weighted midpoint, which factors in the depth 
available at the best bid and ask price, in order to reduce this 
bias.\1043\
---------------------------------------------------------------------------

    \1040\ See 17 CFR 242.600(b)(8).
    \1041\ See proposed Rule 600(b)(11).
    \1042\ See Bj[ouml]rn Hagstr[ouml]me, Bias in the Effective Bid-
Ask Spread, 142 J. Fin. Econ. 314 (2021).
    \1043\ See supra note 419 for a precise definition of the 
weighted midpoint.
---------------------------------------------------------------------------

    The presence of bias in effective spreads in Rule 605 reports would 
impact market participants' ability to use this metric to make 
comparisons across reporting entities, particularly if the bias leads 
to a systematic over- or under-estimation of spreads for a particular 
entity or group of entities. However, there are benefits and costs to 
the use of the midpoint compared to the weighted midpoint for 
calculating effective spreads. On the one hand, the midpoint requires 
only data on the best available bid and ask price. Calculating the 
weighted midpoint on the other hand would require that reporting 
entities additionally collect data on the depth available at the 
NBBO.\1044\ Furthermore, the midpoint may be easier to compute and 
interpret, as it is more familiar to market participants than the 
weighted midpoint.
---------------------------------------------------------------------------

    \1044\ Note that this may not be a significant cost, as 
reporting entities are required to collect information on NBBO depth 
for computing the size improvement benchmark measure under the 
proposed amendments. See supra section IV.B.4.(e).
---------------------------------------------------------------------------

(d) Reasonable Alternative Size Improvement Measures
(1) Allow Market Centers To Voluntarily Report ``Real Price 
Improvement'' Measures
    The Commission considered alternative measures of size improvement, 
including a measure of ``real price improvement'' (``RPI''), which the 
petitioner suggested would take into account the depth available at 
market quotes.\1045\ RPI is calculated as the signed difference between 
the transaction price and a reference price calculated as the value-
weighted average price that the trader would have gotten from walking a 
consolidated limit order book consisting of displayed liquidity from 
all national securities exchanges, taking into account both odd-lots 
and depth available at prices outside of the NBBO. In other words, it 
calculates how much money a trader saved by the market center executing 
their trade at a particular price, rather than having their order walk 
the consolidated limit order book.
---------------------------------------------------------------------------

    \1045\ See supra note 411 and accompanying text.
---------------------------------------------------------------------------

    As the calculation of RPI takes into account the complete set of 
information related to the consolidated depth of book, RPI may be a 
more informative measure of size improvement than a measure that can be 
calculated using the benchmark metric \1046\ proposed to be required by 
Rule 605, such as the size enhancement rate,\1047\ which only includes 
information about depth at the best displayed prices. However, as the 
complete set of consolidated depth of book information is not available 
from public data sources, the RPI would require reporting entities to 
subscribe to all national securities exchanges' proprietary depth-of-
book data feeds, which would entail a significant cost for those 
reporting entities that do not already subscribe to these feeds.\1048\ 
This could make it so the benefits to market participants from having 
access to a potentially more accurate measure of size improvement are 
not justified by these additional costs to reporting entities of 
needing to subscribe to national securities exchanges' proprietary data 
feeds.
---------------------------------------------------------------------------

    \1046\ See supra section IV.B.4.(e) for more information about 
this benchmark.
    \1047\ See supra note 884 for information about how the size 
enhancement rate is constructed.
    \1048\ In a white paper, one market center estimated its costs 
related to subscribing to depth of book data feeds for 11 national 
securities exchanges to be between $51,480 and $226,320 per exchange 
per year. See The Cost of Exchange Services: Disclosing the Cost of 
Offering Market Data and Connectivity as a National Securities 
Exchange, IEX (Jan. 2019), available at https://iextrading.com/docs/TThe%20Cost%20Tof%20Exchange%20Services.Tpdf.
---------------------------------------------------------------------------

    In order to compare the extent to which RPI and the size 
enhancement rate contain similar information about size improvement, 
staff used data from the Tick Size Pilot B.II Market and Marketable 
Limit Order dataset \1049\ to calculate the average correlation \1050\ 
between these two measures. Similar to the analysis in Table 8 
examining whether price improvement and size improvement measures 
contain different information, staff also calculated the average 
correlation between RPI, price improvement and effective spreads, to 
confirm that this measure of size improvement contains different 
information than the metrics that are already included in Rule 605 
reporting requirements. As in Table 8, the analysis is performed 
separately for national securities exchanges and off-exchange market 
centers.
---------------------------------------------------------------------------

    \1049\ See supra note 882 for dataset description. This analysis 
uses data from prior to the implementation of the MDI Rules and the 
specific numbers may be different following the implementation of 
the MDI Rules. However, it is unclear whether or how these effects 
would impact the correlations between these measures documents in 
this analysis. See supra note 882 and section VII.C.1.(d)(2).
    \1050\ See supra note 883 for a description of how average 
correlations are calculated.
---------------------------------------------------------------------------

    Results are presented in Table 15 and show that RPI and price 
improvement are relatively strongly correlated for both national 
securities exchanges and off-exchange market centers, implying that 
these measures contain some (but not all) of the same information about 
execution quality. Similarly, there is moderate correlation between RPI 
and effective spreads, implying that these measures are somewhat 
overlapping in terms of their information about execution quality for 
both types of market centers. This confirms the results from Table 8 
that measures of size improvement contain information that is currently 
missing from Rule 605 reports. In terms of the extent to which RPI and 
the size enhancement rate contain the same information about size 
improvement, the Commission found that there is a moderate level of 
correlation between RPI and the size enhancement rate (18.4% for 
exchanges and 22.7% for off-exchange market centers).

[[Page 3894]]



    Table 15--Average Correlation Between Measures of Price and Size
                               Improvement
------------------------------------------------------------------------
                                             National
                                            securities     Off-exchange
              Correlations                   exchanges    market centers
                                             (percent)       (percent)
------------------------------------------------------------------------
RPI and Price Improvement...............            42.1            37.2
RPI and Effective Spreads...............            17.1            25.8
RPI and Size Enhancement Rate...........            18.4            22.7
------------------------------------------------------------------------
Table 15: Average Correlation between Measures of Price and Size
  Improvement. This table presents correlations between three measures
  of price improvement and size improvement: price improvement,
  calculated as the signed difference between the execution price and
  the NBBO, the effective spread, calculated as twice the signed
  difference between the execution price and the NBBO midpoint, and the
  size enhancement rate, calculated as the size improvement share count
  divided by the benchmark share count (see supra note 884 for a
  detailed description of this measure). See supra note 882 for dataset
  description and supra note 883 for methodology. This analysis uses
  data from prior to the implementation of the MDI Rules and specific
  numbers may be different following the implementation of the MDI
  Rules. See supra note 882 and section VII.C.1.(d)(2).

    Given that correlation levels between these two measures are only 
moderate, the implication is that RPI does contain information that is 
not contained by the proposed benchmark metric. However, even though 
RPI may be a more informative measure of size improvement, it is not 
clear that the cost of requiring reporting entities to have access to 
full set of consolidated depth information would justify the benefit to 
market participants of having access to this additional information 
about size improvement. If not, the proposed amendment to include the 
benchmark consolidated reference quote size, capped at the size of the 
order, in Rule 605 reporting requirements would still be a reasonable 
proxy for size improvement.
    One alternative might be to add a field to Rule 605 reports for 
real PI, but allow reporting entities to voluntarily report this 
measure if they subscribe to the full set of proprietary data feeds and 
thus have access to the complete set of consolidated depth information. 
Note that the requirements would need to specify that only firms that 
subscribe to the full set of proprietary data feeds could report this 
measure, as an incomplete set of information about availability 
liquidity at market prices would systematically overstate any size 
improvement measure.
4. Reasonable Alternative Modifications to Accessibility
(a) Require a System for the Centralized Posting of Rule 605 Reports
    Instead of or in addition to having market centers and larger 
broker-dealers post Rule 605 reports to their websites, the Commission 
could require Rule 605 reports be submitted to a centralized electronic 
system, which would then make these reports available to market 
participants. Compared to the proposed amendments, requiring the 
creation of a centralized electronic system for Rule 605 reports would 
promote even greater transparency by better enabling market 
participants to access and evaluate the reports of multiple (or even 
the complete set of) reporting entities for the purposes of comparison. 
Market participants may currently face search costs when collecting 
existing Rule 605 reports in order to compare execution quality across 
reporting entities, in particular when collecting Rule 605 reports for 
multiple entities and across longer time periods.\1051\ A centralized 
electronic system for Rule 605 reports would make it easier for market 
participants to collect and aggregate data in order to compare 
reporting entities as the reports would be available at a single 
central location. Compared to the proposed amendments, which maintain 
the existing requirement to disseminate Rule 605 reports on a website, 
the creation of a centralized electronic system would lower these 
search costs. Such search costs would likely increase under the 
proposed amendments, which would increase the number of reporting 
entities from 236 to 359, including 85 broker-dealers that introduce or 
carry 100,000 or more customer accounts.\1052\ The creation of a 
centralized electronic system would reduce these search costs by making 
it easier for market participants to locate Rule 605 reports, as well 
as to collect subsets or even the complete set of Rule 605 reports for 
the purpose of comparisons.
---------------------------------------------------------------------------

    \1051\ See supra section VII.C.2.(d) for a discussion of the 
current search costs associated with collecting a complete or mostly 
complete set of Rule 605 reports to, for example, select the 
reporting entity offering the best execution quality in a given 
stock. See also supra section VII.D.1.(d)(3) for a discussion of how 
these search costs may increase as a result of an increase in the 
number of Rule 605 reporting entities under the proposed amendments.
    \1052\ See supra note 486 and accompanying text for a discussion 
of the estimated number of reporting entities under the proposed 
amendments. See also supra section VII.D.1.(d)(3) for a discussion 
of how the increase in reporting entities under the proposed 
amendments may increase search costs for some market participants.
---------------------------------------------------------------------------

    The creation of a centralized electronic system would also promote 
greater transparency as compared to the proposed amendments by reducing 
these search costs and increasing the accessibility of Rule 605 reports 
by ensuring that all reports are able to be obtained from a single 
location. As a result of this increase in transparency, investors would 
be better able to use Rule 605 reports to compare execution quality 
across larger broker-dealers, which would increase the extent to which 
broker-dealers would need to compete on the basis of execution quality. 
Likewise, compared to the proposed amendments, broker-dealers would be 
better able to use Rule 605 reports to compare execution quality across 
market centers, increasing the extent to which market centers compete 
on the basis of execution quality in order to attract order flow. 
Requiring a centralized electronic system would also enable 
programmatic checks that the Rule 605 reports are appropriately 
standardized, formatted, and complete before posting, potentially 
reducing processing costs for users. The Commission recognizes that the 
entity responsible for administering the Rule 605 centralized 
electronic system would incur compliance costs as a result of the 
creation and maintenance of such a system (including any programmatic 
formatting, completeness, and/or consistency checks on the reports 
before posting), which could be passed on to reporting entities in the 
form of filing fees and/or to consumers of Rule 605 reports in the form 
of access fees. However, to ensure that Rule 605 reports continue to be 
freely available, the current requirement for reporting entities to 
post a free version of the report on their websites (incorporating any 
corrections made pursuant to any aforementioned programmatic 
formatting, completeness, and/or consistency checks on the reports) 
could be retained along with the additional

[[Page 3895]]

requirement for reports to be made available through a centralized 
electronic system.\1053\
---------------------------------------------------------------------------

    \1053\ To the extent that potential consumers of Rule 605 
reports would not access the reports as a result of a centralized 
electronic system's access fees, this would represent a limitation 
to the benefits from increased accessibility. If the number of 
current consumers of Rule 605 would actually decrease as a result of 
these potential access fees, this would represent a cost in the form 
of reduced accessibility of Rule 605 reports. However, maintaining 
the current requirement for reporting entities to post a free 
version of the report on their websites would obviate this cost.
---------------------------------------------------------------------------

    Furthermore, to the extent that the centralized electronic system 
would include programmatic formatting, completeness, and/or consistency 
checks on Rule 605 reports before accepting them, reporting entities 
would also incur costs to resolve any issues detected by such checks. 
Reporting entities would be most efficiently situated to remedy any 
identified issues in their own reports before they are posted.
    The Commission has specifically considered two options for how to 
implement the centralized electronic system: using the existing Rule 
605 NMS Plan and the Commission's Electronic Data Gathering, Analysis, 
and Retrieval (``EDGAR'') system. Table 16 summarizes the costs and 
benefits of each of these alternatives, which are also discussed in 
more detail in the sections below. The Commission acknowledges there 
may be other options for a centralized system and requests comment on 
these other options.

   Table 16--Summary of Costs and Benefits of Alternative Centralized
                           Electronic Systems
------------------------------------------------------------------------
  Mechanism for centralized
     posting of reports               EDGAR               NMS plan
------------------------------------------------------------------------
                Benefits Relative to Proposed Amendments
------------------------------------------------------------------------
Accessibility...............  Reports would be in   Reports would be in
                               one place, reducing   one place, reducing
                               search costs and      search costs and
                               increasing the        increasing the
                               benefits of Rule      benefits of Rule
                               605 reporting.        605 reporting. The
                               EDGAR could include   NMS Plan could
                               programmatic checks   include
                               to ensure the         programmatic checks
                               reports are           to ensure the
                               appropriately         reports are
                               standardized,         appropriately
                               formatted, and        standardized,
                               complete before       formatted, and
                               posting,              complete before
                               potentially           posting,
                               reducing processing   potentially
                               costs for users.      reducing processing
                               EDGAR functionality   costs for users.
                               would allow           However, the
                               consumers to search   specific
                               for specific          functionality and
                               reports or all        ease of access is
                               reports for a given   uncertain. Any
                               month. However,       access fees could
                               consumers wishing     limit benefits.
                               to combine reports
                               for analysis would
                               need to pull each
                               report separately.
                               EDGAR does not
                               charge access fees.
------------------------------------------------------------------------
                  Costs Relative to Proposed Amendments
------------------------------------------------------------------------
Costs to Build..............  n/a.................  Plan participants
                                                     would incur costs
                                                     to build a system
                                                     to collect and
                                                     validate or to
                                                     contract with
                                                     someone who already
                                                     has a system that
                                                     could work.
Costs to Maintain...........  n/a.................  Plan participants
                                                     would incur the
                                                     cost of maintaining
                                                     a reporting system.
Reporting Costs.............  Reporting entities    Reporting entities
                               that do not already   could pay a
                               submit documents to   reporting fee to
                               the Commission via    cover the costs of
                               EDGAR would incur a   the Plan
                               one-time burden to    participants.
                               obtain EDGAR access   Reporting entities
                               codes. Reporting      would incur costs
                               entities would        if their reports
                               incur costs if        contain formatting,
                               their reports         completeness, or
                               contain formatting,   consistency issues
                               completeness, or      that would require
                               consistency issues    resolution before
                               that would require    acceptance.
                               resolution before
                               acceptance. EDGAR
                               does not charge
                               filing fees.
Coordination Costs..........  n/a.................  Plan participants
                                                     would incur costs
                                                     to coordinate on
                                                     amending the NMS
                                                     Plan.
------------------------------------------------------------------------
Table 16: Summary of Costs and Benefits of Alternative Centralized
  Electronic Systems. This table presents a qualitative summary of the
  benefits and costs that the Commission estimates would result from
  various alternatives requiring the centralized posting of Rule 605
  reports, relative to the proposed amendments. These benefits and costs
  are discussed in more detail in infra sections VII.E.4.(a)(1)-(2).

(1) Require Rule 605 Reports To Be Provided Through the NMS Plan
    One alternative would be to require that procedures established 
pursuant to the NMS Plan provide for the creation and maintenance of a 
centralized electronic system to serve as a repository for Rule 605 
reports. In this alternative, the proposed rule text could specify that 
the NMS plan procedures shall provide for the creation and maintenance 
of a centralized electronic system for such reports and make such 
reports available for viewing and downloading in a manner that is free 
and readily accessible to the public. However, the rule text could 
retain existing language such that, in the event there is no plan or 
system currently establishing such procedures, reports shall be 
prepared in a consistent, usable, and machine-readable electronic 
format and be made available for downloading from an internet website 
that is free and readily accessible to the public.\1054\ In other 
words, in the absence of procedures providing for the creation and 
maintenance of a centralized electronic system, Rule 605 reports are 
required to be made available for download from an internet website 
that is free and readily accessible to the public (or as specified by 
the then-current NMS plan). This backstop requirement will help to 
assure the continued availability of execution quality information 
while a centralized electronic system is developed.
---------------------------------------------------------------------------

    \1054\ See 17 CFR 242.605(a)(2).
---------------------------------------------------------------------------

    As discussed above, the creation of a centralized electronic system 
would generally result in additional economic benefits as compared to 
the proposed amendments by further promoting transparency and 
competition, and by reducing market participants' search costs by 
ensuring that all Rule 605 reports could be obtained from a single

[[Page 3896]]

location. However, as the NMS Plan would be tasked with designing and 
implementing the centralized electronic system, the Commission would ex 
ante be uncertain as to the specific functionality and ease of access 
that such a centralized electronic system would provide. Any 
differences between this alternative and any other alternative in terms 
of the accessibility and timeliness of centralized Rule 605 information 
would depend on how the NMS Plan would develop the functionality for 
distributing or making the Rule 605 reports public.
    The Commission estimates that the NMS Plan participants, consisting 
of 16 national securities exchanges and 1 national securities 
association, would incur initial and ongoing compliance costs 
associated with this alternative. First, the NMS Plan participants 
would incur initial compliance costs associated with preparing and 
filing amendments to the NMS Plan to account for the creation of a 
centralized electronic system to make reports available for viewing and 
downloading, along with the implementation and enforcement of that 
system. The Commission estimates that there would be a one-time (or 
initial) burden of 65 hours per NMS Plan participant to account for the 
creation of a centralized electronic system.\1055\ Furthermore, the 
Commission estimates that the NMS Plan participants would incur an 
ongoing, annual burden of 15 hours per NMS Plan participant \1056\ 
associated with the maintenance of the centralized electronic system. 
NMS Plan participants would likely also incur coordination costs to 
reach an agreement on the design and implementation of a centralized 
electronic system. However, the Commission is unable to quantify these 
potential coordination costs as it would depend on the extent to which 
there would be disagreements among the NMS plan participants.
---------------------------------------------------------------------------

    \1055\ The Commission believes the monetized initial burden for 
this requirement to be $294,950. The Commission derived this 
estimate based on per hour figure from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1,800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead: [(Programmer Analyst at $267 for 40 
hours) + (Business Analyst at $255 for 5 hour) + (Attorney at $462 
for 15 hours) + (Assistant General Counsel at $518 for 5 hours)] = 
$17,350 per respondent for a total initial monetized burden of 
$365,075 ($21,475 x 17 respondents).
    \1056\ The Commission believes the monetized annual burden for 
this requirement to be $80,444. The Commission derived this estimate 
based on per hour figure from SIFMA's Management & Professional 
Earnings in the Securities Industry 2013, modified by Commission 
staff to account for an 1,800-hour work-year and inflation, and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead: [(Attorney at $462 for 10 hours) + (Assistant 
General Counsel at $518 for 5 hours)] = $4,732 per respondent for a 
total initial monetized burden of $122,570 ($7,210 x 17 
respondents).
---------------------------------------------------------------------------

    The Commission estimates that the above initial and ongoing burdens 
would result in an estimated total initial compliance cost of 
approximately $294,950 and a total annual compliance cost of $80,444 
for all NMS Plan participants. These costs would likely be passed on to 
reporting entities in the form of reporting fees, or to consumers of 
Rule 605 reports in the form of access fees. Thus, these costs could 
result in an increase in the initial and ongoing compliance costs 
incurred by reporting entities, and/or an increase in costs or a 
limitation to benefits for Rule 605 consumers. As discussed above, to 
the extent that the centralized electronic system would include pre-
acceptance checks that Rule 605 reports are appropriately standardized, 
formatted, and complete, reporting entities would also incur costs to 
resolve any issues flagged by such checks, though the specific process 
for resolving such issues would determine the precise costs involved.
(2) Require Rule 605 Reports To Be Provided to the Commission Through 
EDGAR
    As another alternative, the Commission could propose to have 
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. Such 
an alternative would increase certain reporting entities' compliance 
costs relative to the proposed amendments, as any reporting entities 
that do not already submit documents to the Commission via EDGAR would 
incur a one-time burden of submitting a notarized Form ID application 
to obtain EDGAR access codes, a burden that would not apply under the 
proposed amendments.\1057\ However, an EDGAR requirement would not 
involve any costs to NMS Plan participants of creating and maintaining 
an electronic system for Rule 605 reports, and, as EDGAR would not 
charge any reporting or access fees, would not involve the cost to 
reporting entities of paying reporting fees or the cost to consumers of 
Rule 605 reports of paying access fees.
---------------------------------------------------------------------------

    \1057\ See 17 CFR 232.10; section 3 of the EDGAR Filer Manual 
(Volume I) version 40 (June 2022). Any market centers, brokers, and 
dealers that already submit documents on EDGAR would not incur this 
burden. For example, some broker-dealers choose to file the annual 
audit reports required by Form X-17A-5 Part III on EDGAR rather than 
via paper, and would thus already have the required access and 
procedures in place to submit Rule 605 Reports to EDGAR. See section 
8.2.19 of the EDGAR Filer Manual (Volume II) version 62 (June 2022).
---------------------------------------------------------------------------

    EDGAR functionality would allow consumers of Rule 605 to search for 
specific reports or all reports for a given month. However, consumers 
wishing to combine reports for analysis would need to pull each report 
separately. EDGAR functionality would also allow for programmatic 
checks to ensure Rule 605 reports are appropriately standardized, 
formatted, and complete before posting; Commission staff could design 
and periodically assess such checks to ensure they are effective. To 
the extent that these checks detect any issues in Rule 605 reports 
before posting, reporting entities may incur costs in resolving these 
issues and re-submitting their reports.
    Under this alternative, entities would submit Rule 605 information 
to the Commission, but would not file Rule 605 information with the 
Commission. Under the Exchange Act, documents filed with the Commission 
are subject to heightened liability for misstatements contained therein 
than documents otherwise provided to the Commission (e.g., documents 
furnished to the Commission).\1058\ Because this alternative is 
intended to alter the manner by which Rule 605 reports are made 
available, and not the liability attached to Rule 605 reports, the 
alternative does not contemplate filing Rule 605 information with the 
Commission.
---------------------------------------------------------------------------

    \1058\ See section 32 of the Exchange Act.
---------------------------------------------------------------------------

(b) Require Rule 605 Reports To Be Filed Using an Expanded Version of 
the Rule 606 XML Schema
    Rule 605 currently requires that reports be provided in a machine-
readable electronic format,\1059\ and the governing NMS Plan specifies 
that Rule 605 reports must be provided in pipe-delimited ASCII, which 
is a machine-readable electronic format.\1060\ This would not be 
changed under the proposed amendments. As an alternative, the 
Commission could revise Rule 605 to specify that Rule 605 reports must 
be provided using an

[[Page 3897]]

expanded version of the existing XML schema for Rule 606 reports.\1061\ 
This alternative would allow the data on Rule 605 reports to be used 
interchangeably with the data in Rule 606 reports, thus facilitating 
the usage of Rule 605 data together with Rule 606 data, in line with 
the Commission's original intent for the rules.\1062\ In addition, the 
use of XML rather than pipe-delimited ASCII would facilitate the use of 
more complex data error checks (such as checks on elements in nested 
structures).
---------------------------------------------------------------------------

    \1059\ See CFR 242.605(a)(2) requiring that ``. . . market 
centers shall prepare their reports in a consistent, usable, and 
machine-readable electronic format . . .''
    \1060\ See Plan at 2 (``Section V . . . provides that market 
center files must be in standard, pipe-delimited ASCII format''). 
See also supra note 49 and accompanying text.
    \1061\ See 17 CFR 242.606(a)(2) and (b)(3), requiring reports to 
be made available ``using the most recent versions of the XML schema 
and the associated PDF renderer as published on the Commission's 
website.'' See also Order Routing and Handling Data Technical 
Specification, SEC (Feb. 25, 2022), available at https://www.sec.gov/files/order_handling_data_technical_specification-2022-02-25.pdf.
    \1062\ See supra note 141.
---------------------------------------------------------------------------

    On the other hand, this alternative would require reporting 
entities to establish technical systems to format the reports using the 
expanded XML schema and render them using the PDF renderer, thus 
imposing additional compliance costs relative to the baseline and the 
proposed amendments. Furthermore, because Rule 605 reports consist 
solely of a series of discrete numeric values, and do not contain 
elements in nested structures, the Commission does not believe the more 
sophisticated validations enabled by the use of XML would provide 
significant benefits for Rule 605 reports. In addition, because the 
nature of the Rule 606 data (which includes narrative discussions) 
differs from the nature of the Rule 605 data (which is limited to a 
discrete set of numerical statistics), and because the population of 
entities that report Rule 606 data (broker-dealers) does not coincide 
with the population of entities that report Rule 605 data (market 
centers, and, under the proposed amendments, certain broker-dealers), 
the Commission does not believe the benefits to be realized from 
interchangeable usage of Rule 605 and Rule 606 data would justify the 
compliance costs that would arise under this alternative.
5. Other Reasonable Alternatives
(a) Releasing Aggregated CAT Data
    As an alternative to the proposed amendments, the Commission could 
use CAT data to have either the Commission or the CAT Plan Processor 
\1063\ provide execution quality information to the public at monthly 
intervals--or more frequently. This alternative would effectively 
eliminate the need for Rule 605 reports.
---------------------------------------------------------------------------

    \1063\ As set forth in the CAT NMS Plan, the Plan Processor is 
required to develop and, with the prior approval of the Operating 
Committee, implement policies, procedures, and control structures 
related to the CAT System that are consistent with 17 CFR 
242.613(e)(4), and Appendix C and Appendix D of the CAT NMS Plan. 
See Joint Industry Plan; Order Approving the National Market System 
Plan Governing the Consolidated Audit Trail, SEC, n.136 (Nov. 15, 
2016), available at https://www.sec.gov/rules/sro/nms/2016/34-79318.pdf.
---------------------------------------------------------------------------

    This approach would have lower compliance costs for reporting 
entities than the current proposal, as it would not require reporting 
entities to prepare Rule 605 reports. Another benefit of this 
alternative with regard to the current proposal is that the data in 
this alternative could be more comprehensive in terms of the breadth of 
broker-dealers whose execution quality information could be aggregated 
and published, because the Commission could publish aggregated data on 
execution quality from all broker-dealers instead of just those that 
meet the customer account threshold. As a result, the data would be 
more comprehensive, resulting in even greater benefits from 
transparency.\1064\
---------------------------------------------------------------------------

    \1064\ See supra section VII.D.1.(a)(1)(a) for a discussion of 
the benefits of increased transparency from expanding reporting 
requirements to include larger broker-dealers.
---------------------------------------------------------------------------

    However, it would be a major undertaking for the Plan Processor to 
build out and adapt systems to collect, process, and publish this 
information, which would increase costs associated with the Plan 
Processor. Costs associated with the Plan Processor would also increase 
as a result of increased requirements for processing power for the 
aggregation of CAT data if such computations could not be performed 
with existing resources (without reducing other functionality). Any 
costs incurred by the Plan Processor would be passed along to Plan 
Participants and Industry Members, which could result in larger costs 
to some reporting entities.\1065\ Another drawback to this alternative 
is that releasing CAT data to the public could increase security risks. 
CAT contains highly sensitive information and creating a process that 
would release portions of the data, even if aggregated, could present 
risks.
---------------------------------------------------------------------------

    \1065\ Some reporting entities, on the other hand, may incur 
lower costs if they pay a smaller proportion of CAT costs.
---------------------------------------------------------------------------

F. Request for Comment

    The Commission requests comment on all aspects of this initial 
economic analysis, including whether the analysis has: (1) identified 
all benefits and costs, including all effects on efficiency, 
competition, and capital formation; (2) given due consideration to each 
benefit and cost, including each effect on efficiency, competition, and 
capital formation; and (3) identified and considered reasonable 
alternatives to the proposed new rules and rule amendments. The 
Commission requests and encourages any interested person to submit 
comments regarding the proposed rules, our analysis of the potential 
effects of the proposed rules and proposed amendments, and other 
matters that may have an effect on the proposed rules. The Commission 
requests that commenters identify sources of data and information as 
well as provide data and information to assist us in analyzing the 
economic consequences of the proposed rules and proposed amendments. 
The Commission also is interested in comments on the qualitative 
benefits and costs identified here and any benefits and costs that may 
have been overlooked. In addition to the general request for comments 
on the economic analysis associated with the proposed rules and 
proposed amendments, the Commission requests specific comment on 
certain aspects of the proposed amendments to Rule 605:
    56. Do commenters believe that rulemaking is necessary to provide 
investors with a more modernized source of standardized execution 
quality information than what is currently contained in Rule 605 
reports? What are commenters' views on why alternative market-based 
sources of standardized execution quality information, such as the FIF 
Template, have not been more widely adopted?
    57. Has the Commission accurately assessed the current usage of 
Rule 605 reports? Do commenters agree that broker-dealers currently use 
Rule 605 reports in assessing best execution? Do commenters believe 
that Rule 605 reports currently have low usage among individual 
investors? If so, why? Do commenters believe that Rule 605 reports 
currently have low usage among institutional investors? If so, why? 
What are commenters' understandings of the current availability and 
cost of data products and/or summary reports sourced from Rule 605 
data? Does the availability and costs of such products vary depending 
on the type of investor that the product is targeting (i.e., individual 
or institutional)?
    58. Do market participants currently lack information about the 
execution quality of broker-dealers? If so, does this limit the extent 
to which broker-dealers must compete on the basis of execution quality? 
Why or why not? Do commenters believe that the ability to use 
information on broker-dealer routing in Rule 606 reports and

[[Page 3898]]

information on market center execution quality in Rule 605 reports in 
order to discern the execution quality of broker-dealers currently 
limited? Why or why not?
    59. Are commenters aware of any inconsistencies in how reporting 
entities separate or combine information across several market centers 
or business lines that they operate for the purposes of Rule 605 
reporting? To the best of commenters' knowledge, is it common practice 
for market centers that operate SDPs to combine information about 
orders submitted to their SDPs with information about other orders 
handled by the market center for the purposes of Rule 605 reporting? 
Are commenters aware of any other situations in which reporting 
entities typically co-mingle execution quality statistics across 
several market centers or business lines that they operate?
    60. Do commenters agree that orders submitted to qualified auctions 
would likely differ from other types of orders? If so, in what ways 
might these differences impact execution quality metrics?
    61. Do commenters agree that the number of order types has 
increased since the early 2000s? If so, do commenters believe that a 
proliferation of order types has contributed to any changes in the 
extent to which Rule 605 reports contain information about relevant 
order sizes and order types? Are there any additional order types that 
are currently excluded from Rule 605 reporting requirements that the 
Commission should include?
    62. Do commenters believe that a significant portion of ISO order 
volume may be made up of ISO orders trading at prices inferior to the 
NBBO? Are commenters aware of whether a significant portion of ISO 
orders are excluded from Rule 605 reporting requirements? Do commenters 
believe that it would be useful for market participants to have access 
to information about the execution quality of ISO orders submitted with 
limit prices inferior to the NBBO? Why or why not?
    63. Do commenters believe that there are any other market or 
regulatory changes that have significantly contributed to changes in 
the extent to which Rule 605 reports contain information about relevant 
order sizes and order types?
    64. Do commenters agree that, by excluding odd-lots, fractional 
shares, and block orders (i.e., orders that are larger than 10,000 
shares), Rule 605 reports are missing information about an important 
segments of order flow? Why or why not? Do commenters agree that 
individual investors would benefit from the inclusion of information 
about odd-lots and fractional share orders? Why or why not? Do 
commenters agree that the use of block trades has decreased since the 
initial adoption of Rule 605 but still represents an important segment 
of order flow in terms of total share volume? Why or why not? Are 
commenters aware of whether the majority of block orders tend to be not 
held to the market?
    65. Do commenters agree that information about the execution 
quality of stop orders would be useful for investors? Why or why not? 
Do commenters agree that market centers and broker-dealers may differ 
in how they handle stop orders? Why or why not? Do commenters believe 
that the use of stop orders (e.g., as a percent of total order flow) 
has increased or decreased in recent years? How might stop orders be 
different from other types of orders in terms of their execution 
quality metrics? Do commenters agree that grouping executable stop 
orders together with other types of NMLOs would skew or add noise to 
execution quality metrics? Why or why not? Do commenters believe that 
there could be any negative consequences associated with increasing the 
transparency of stop-loss order volume, such as the increasing the risk 
of certain trading strategies, i.e., ``gunning for stops''? Why or why 
not?
    66. Do commenters agree that information about the execution 
quality of non-exempt short sale orders would be useful for investors? 
Why or why not? How might non-exempt short sale orders be different 
from other types of orders in terms of their execution quality metrics? 
Do commenters believe that grouping non-exempt short sale orders 
together with other types of orders would skew or add noise to 
execution quality metrics? Why or why not?
    67. Do commenters agree that orders submitted outside of regular 
market hours represent a small portion of overall order flow, but 
contain a higher concentration of individual investor orders compared 
to order flow during regular market hours? Why or why not? Are 
commenters aware of any other ways in which orders submitted outside of 
regular market hours differ from other types of orders and, if so, 
whether these differences would impact execution quality metrics in 
ways that may skew or add noise to these metrics?
    68. Do commenters believe that, following the new definition of 
``round lot'' under the MDI Rules, the order size categories currently 
defined in Rule 605 reports would lead to the exclusion of a relevant 
portion of order flow? Do commenters find the order size categories 
currently defined in Rule 605 reports useful? Why or why not?
    69. Do commenters believe that the current categorization of NMLOs 
does not lead to meaningful information about execution quality? Why or 
why not? Do commenters find these categories useful? If so, why? Do 
commenters believe that the Commission should use a 10 cent threshold 
to determine whether a NMLO should be included within the scope of Rule 
605?
    70. Do commenters believe that information about the execution 
quality of beyond-the-midpoint limit orders is currently missing from 
Rule 605 reports and would be useful for investors? Do commenters 
believe that some market centers, such as wholesalers, may handle 
beyond-the-midpoint limit orders more like marketable limit orders than 
NMLOs? Are commenters aware of any other differences in the handling of 
beyond-the-midpoint limit orders, as compared to other types of NMLOs? 
If so, do commenters believe that these differences would impact 
execution quality metrics in ways that may skew or add noise to these 
metrics?
    71. Do commenters believe that the current time-to-execution 
information required by Rule 605 is inappropriate given the current 
speed of trading in equity markets? Do commenters believe that the 
current time-to-execution categories defined in Rule 605 are not 
granular enough? What do commenters believe would be an appropriate 
granularity, and does it depend on the type of order (marketable, NMLO, 
etc.)?
    72. Do commenters believe that the current requirements in Rule 605 
related to measures of effective, realized and quotes spreads may lead 
to inaccurate or incomplete information? Do commenters agree that the 
use of a five-minute time horizon to calculate the realized spread is 
inappropriate? If so, why? Do commenters believe that the use of a 
five-minute time horizon leads to biased realized spreads, noisy 
realized spreads, both, or potentially other issues? Do commenters find 
effective and realized spreads expressed in dollar terms to be useful? 
If so, why? Do commenters believe that there are any problems with 
using effective and realized spreads expressed in dollar terms? If so, 
what?
    73. Do commenters believe that size improvement information is 
currently missing from Rule 605 reports? If not, what specific 
information in Rule 605 reports (e.g., effective spreads, price 
improvement) do commenters make use

[[Page 3899]]

of in order to proxy for size improvement?
    74. Do commenters believe that information about IOC orders is 
currently missing from Rule 605 reports and would be useful for 
investors? Do commenters believe that IOCs likely have different 
execution quality characteristics than other types of orders? If so, in 
what ways might these differences impact execution quality metrics? Do 
commenters believe that these differences would impact execution 
quality metrics in ways that may skew or add noise to these metrics?
    75. Do commenters believe that the reporting of riskless principal 
transactions as shares executed at the market center is inappropriate? 
Why or why not? Would commenters find it useful to have access to more 
information about the extent to which wholesalers internalize orders? 
If so, in what ways would this information be beneficial?
    76. Do commenters believe that the search costs to access, 
aggregate, and compare execution quality metrics across Rule 605 
reporting entities are currently high? Do commenters believe that the 
search costs are high enough to limit the utility of Rule 605 reports? 
Are commenters currently able to use Rule 605 reports to compare 
execution quality measures across market centers? If not, why not? Do 
commenters believe that the use of third parties to collect Rule 605 
data alleviates some of these costs?
    77. Do commenters believe the Commission has adequately described 
the baseline for the market for brokerage services? Are there elements 
of this market that are relevant to the proposed amendments that are 
not discussed in the release? If so, please describe.
    78. Do commenters believe the Commission has adequately described 
the baseline for the market for trading services? Are there elements of 
this market that are relevant to the proposed amendments that are not 
discussed in the release? If so, please describe.
    79. What do commenters believe would be the effect of expanding the 
scope of Rule 605 reporting entities to include larger broker-dealers 
on transparency and competition in the market for brokerage services? 
Do commenters believe that the costs to switching broker dealers are 
significant? Do commenters believe that there are other significant 
limits to the effects on competition of expanding the scope of Rule 605 
reporting entities and, if so, what are these limits? Do commenters 
believe that any broker-dealer(s) would need to exit the market as a 
result of the proposal? If so, what effect if any would this have on 
competition? What do commenters believe are the effects on competition 
of limiting the scope of broker-dealers subject to Rule 605 to only 
include larger broker-dealers?
    80. What are commenters' views regarding the effects of the 
proposal on transparency and competition in the market for trading 
services? Do commenters believe that there are significant limits to 
these effects? Do commenters believe that the effects on competition 
would be different (e.g., stronger or weaker) for competition for 
individual investor order flow vs. institutional order flow? Do 
commenters believe that any market center(s) would need to exit the 
market as a result of the proposal? If so, what effect if any would 
this have on competition?
    81. Do commenters believe that Rule 605 reports as proposed to be 
amended would contain sufficient information such that the reports 
could be used to make apples-to-apples comparisons across reporting 
entities? If not, is there any additional or alternative information 
that could be required to ensure a more apples-to-apples comparison? 
Please be specific.
    82. Do commenters believe the proposed summary report reflecting 
aggregated execution quality information would contain sufficient 
information such that the summary reports could be used to make apples-
to-apples comparisons across reporting entities? If not, is there any 
additional or alternative information that could be required to ensure 
a more apples-to-apples comparison? Please be specific. Do commenters 
believe that the availability of Rule 605 summary reports would have an 
impact on competition between reporting entities? Why or why not? Do 
commenters believe that the availability of Rule 605 summary reports 
would increase the likelihood that investors would use execution 
quality information to compare across reporting entities? Why or why 
not?
    83. Do commenters believe that the availability of alternative 
sources of execution quality information would limit the effects of the 
proposal on competition across reporting entities? Do commenters 
believe that the availability of alternative sources of execution 
quality information decreases the likelihood that investors would use 
reports to compare execution quality across reporting entities? If so, 
which sources?
    84. Do commenters agree with the Commission's assessment that the 
proposal would impact the market for TCA? Why or why not? Are 
commenters aware of any other market whose competitive structure would 
be effected by the proposal?
    85. What are commenters' views of the benefits of the proposal? Do 
commenters believe that the proposal would increase transparency 
regarding the execution quality of reporting entities? Do commenters 
believe that the proposal would increase competition between reporting 
entities on the basis of execution quality? Do commenters believe that 
the proposal would improve execution quality for investors? Would the 
benefits of the proposal depend on the type of investor (i.e., 
individual or institutional)? Why or why not? Do commenters believe 
that there would be any limitations to the benefits and, if so, what? 
Do commenters believe that the lack of a centralized electronic system 
for Rule 605 reports represents a limitation to the benefits of the 
proposed amendments? Why or why not?
    86. Do commenters agree that the benefits of the proposed 
amendments would be limited if investors incur high costs to switch 
between broker-dealers, and/or if broker-dealers incur costs to switch 
between market centers in response to information about execution 
quality? Do commenters believe that these switching costs are currently 
high? Why or why not?
    87. Are commenters aware of circumstances in which customers may 
not be able to select the broker-dealers of their choice, for example 
as a result of the customers' order flow characteristics, and whether 
this has or would have an impact on the switching costs for these 
customers? Do commenters believe that the proposal, if adopted, would 
affect such circumstances and, if so, how?
    88. What are commenters' views of the costs of the proposal? What 
do commenters believe would be the main costs of the proposal? What do 
commenters believe would be the other costs of the proposal, if any? Do 
commenters believe that costs may vary across reporting entities? If 
so, which characteristics of the reporting entities would be the main 
drivers of cost differences between reporting entities? Do commenters 
believe that the complexity of Rule 605 reports would increase as a 
result of the proposed amendments and, if so, would this result in 
additional costs to market participants? Why or why not? Do commenters 
believe that search costs would increase as a result of the proposed 
amendments? Why or why not?
    89. What are commenters' views regarding the effects the proposed

[[Page 3900]]

amendments might have on efficiency and capital formation?
    90. Do commenters believe the proposed amendments may have 
unintended consequences that are not captured by the Commission's 
assessment of the effects the proposed amendments may have on 
efficiency, competition and capital formation? Why or why not?
    91. Should the Commission adopt an alternative approach to any of 
the proposed amendments? Why or why not? Which alternatives? What are 
the benefits and costs of such an approach?
    92. Do commenters believe that the Commission should adopt 
alternatives to the proposal to include only larger broker-dealers with 
100,000 or more customer accounts into the scope of Rule 605? Should 
the Commission adopt alternative thresholds for determining which 
broker-dealers to include or exclude? What would be the benefits and 
costs of these alternative thresholds?
    93. Do commenters believe that the Commission should adopt 
alternative amendments to the scope of orders covered by Rule 605? 
Should the Commission include ISO orders with limit prices inferior to 
the NBBO into the scope of Rule 605, either as a separate order type 
category or together with other orders, and what would be the costs and 
benefits of this approach? Should the Commission exclude orders that 
are quickly cancelled from Rule 605 reporting requirements? If so, what 
would be an appropriate threshold cancellation time below which to 
exclude orders? What would be the costs and benefits of excluding 
quickly cancelled orders? Should the Commission separate NMLOs 
submitted outside of regular trading hours as a separate order type 
category? What would be the costs and benefits of separating NMLOs 
submitted outside of regular trading hours as a separate order type 
category?
    94. Do commenters believe the Commission should add additional 
price improvement statistics to Rule 605 reports for segmented orders 
in qualified auctions measuring price improvement compared to the 
initial price at which a segmented order was submitted to a qualified 
auction? If so, what would be the benefits and costs of adding these 
additional metrics? How would these additional metrics affect 
competition between qualified auctions at different market centers?
    95. Do commenters believe that pipe-delimited ASCII is the best 
format for Rule 605 reports? Should the Commission instead expand the 
existing XML Schema that it has created for Rule 606 reports? Should 
the Commission create a new XML Schema for Rule 605 reports in a manner 
similar to the XML Schema for Rule 606 reports? Would XML be an 
improvement over the use of pipe-delimited ASCII and, if so, why? Is 
there another format--other than pipe-delimited ASCII and XML--that the 
Commission should require for Rule 605 reports? If so, which format 
should the Commission use, and why?
    96. Should the Commission require that Rule 605 reports be posted 
in a centralized electronic system? Would a centralized electronic 
system for Rule 605 reports make it easier for investors, analysts, and 
others to access and gather information from Rule 605 reports? Would it 
be beneficial for such a system to include programmatic checks to 
ensure Rule 605 reports are appropriately standardized, formatted, and 
complete before acceptance? Do commenters believe there would be any 
additional benefits from establishing or requiring to be established a 
centralized electronic system for Rule 605 reports? If so, what? Do 
commenters have a view on how a centralized electronic system could be 
implemented? What do commenters estimate would be the costs associated 
with such a centralized electronic system (including any costs 
associate with programmatic checks for completeness, consistency, and 
proper formatting), and who do commenters believe would incur these 
costs?
    97. If the Commission were to adopt a centralized electronic system 
for Rule 605 reports, do commenters believe EDGAR or a system created 
and maintained by the NMS Plan is the optimal alternative? Are there 
other alternatives that the Commission should consider? If so, what 
would be the costs and benefits associated with posting Rule 605 
reports through that system? Should separate centralized electronic 
systems be established for different categories of reporting entities?
    98. Do commenters agree with the Commission's analysis of the 
accessibility, data quality, costs to build, costs to maintain, 
reporting costs, and coordination costs associated with using EDGAR or 
a system created and maintained by the NMS Plan for a centralized 
electronic system for Rule 605 reports?
    99. Are market participants likely to access and download Rule 605 
reports from a centralized electronic system, rather than from a 
reporting entity's website? For which customers will a centralized 
electronic system be most beneficial, and why? How will these benefits 
differ if the centralized electronic system uses EDGAR, a system 
created maintained by the NMS Plan, or any other system proposed by 
commenters?

VIII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, (``SBREFA''),\1066\ the Commission requests comment on the 
potential effect of the proposed amendments to Rule 605 on the United 
States economy on an annual basis. The Commission also requests comment 
on any potential increases in costs or prices for consumers or 
individual industries, and any potential effect on competition, 
investment, or innovation. Commenters are requested to provide 
empirical data and other factual support for their views to the extent 
possible.
---------------------------------------------------------------------------

    \1066\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C., and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

IX. Initial Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (``RFA'') \1067\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. Section 603(a) \1068\ of the Administrative 
Procedure Act,\1069\ as amended by the RFA, generally requires the 
Commission to undertake a regulatory flexibility analysis of all 
proposed rules, or proposed rule amendments, to determine the impact of 
such rulemaking on ``small entities.'' \1070\ Section 605(b) of the RFA 
states that this requirement shall not apply to any proposed rule or 
proposed rule amendment which, if adopted, would not have a significant 
economic impact on a substantial number of small entities.\1071\
---------------------------------------------------------------------------

    \1067\ 5 U.S.C. 601 et seq.
    \1068\ 5 U.S.C. 603(a).
    \1069\ 5 U.S.C. 551 et seq.
    \1070\ Although section 601(b) of the RFA defines the term 
``small entity,'' the statute permits agencies to formulate their 
own definitions. The Commission adopted definitions for the term 
``small entity'' for purposes of Commission rulemaking in accordance 
with the RFA. Those definitions, as relevant to this proposed 
rulemaking, are set forth in 17 CFR 240.0-10.
    \1071\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    The proposed rule would apply to market centers--which includes any 
exchange market maker, OTC market maker, ATS, national securities 
exchange registered with the Commission under section 6 of the Exchange 
Act, or national securities association registered with the Commission 
under section 15A of the Exchange Act--and certain brokers or dealers 
that are not a market center.\1072\
---------------------------------------------------------------------------

    \1072\ A broker or dealer that is not a market center would not 
be subject to the requirements unless it reaches or exceeds the 
customer account threshold.

---------------------------------------------------------------------------

[[Page 3901]]

    None of the exchanges registered under section 6 that would be 
subject to the proposed amendments are ``small entities'' for purposes 
of the RFA.\1073\ There is only one national securities association, 
and it is not a small entity as defined by 13 CFR 121.201.1220.\1074\
---------------------------------------------------------------------------

    \1073\ See 17 CFR 240.0-10(e). 17 CFR 240.0-10(e) states that 
the term ``small business,'' when referring to an exchange, means 
any exchange that has been exempted from the reporting requirements 
of Rule 601 of Regulation NMS, 17 CFR 242.601, and is not affiliated 
with any person (other than a natural person) that is not a small 
business or small organization as defined in Rule 0-10. The 
exchanges subject to this proposed rulemaking do not satisfy this 
standard. See also Securities Exchange Act Release Nos. 82873 (Mar. 
14, 2018), 83 FR 13008, 13074 (Mar. 26, 2018) (File No. S7-05-18) 
(Transaction Fee Pilot for NMS Stocks Proposed Rule); 55341 (May 8, 
2001), 72 FR 9412, 9419 (May 16, 2007) (File No. S7-06-07) (Proposed 
Rule Changes of Self-Regulatory Organizations Proposing Release).
    \1074\ See, e.g., Securities Exchange Act Release No. 90610 
(Dec. 9, 2020), 86 FR 18808 (Apr. 9, 2021), n.2549 and accompanying 
text.
---------------------------------------------------------------------------

    A broker-dealer is considered a small entity for purposes of 
Regulatory Flexibility Act if: (1) it had total capital of less than 
$500,000 on the date in the prior fiscal year as of which its audited 
financial statements were prepared, or, if not required to prepare such 
statements, it had total capital of less than $500,000 on the last 
business day of the preceding fiscal year; and (2) it is not affiliated 
with any person (other than a natural person) that is not a small 
entity. Applying this standard, the Commission estimates that, of the 
firms that would be impacted by the Rule, only two exchange market 
makers, no OTC market makers, and no ATS are small entities.\1075\ 
Because the Commission estimates that not more than two small entities 
would be required to comply with the proposed rule changes, the 
Commission certifies that the proposed amendments to Rule 605 would 
not, if adopted, have a significant economic impact on a substantial 
number of small entities.
---------------------------------------------------------------------------

    \1075\ These estimates are based on the FYE 2021 FOCUS Reports 
received by the Commission from exchange market makers, OTC market 
makers, and ATSs that would be subject to the changes proposed to 17 
CFR 242.600 and 17 CFR 242.605.
---------------------------------------------------------------------------

    For the above reasons, the Commission certifies that the proposed 
amendments to Rules 600 and 605, if adopted, would not have a 
significant economic impact on a substantial number of small entities 
for purposes of the RFA.
    The Commission invites commenters to address whether the proposed 
rules would have a significant economic impact on a substantial number 
of small entities, and, if so, what would be the nature of any impact 
on small entities. The Commission requests that commenters provide 
empirical data to support the extent of such impact.

Statutory Authority and Text of Proposed Rule

    Pursuant to the Exchange Act and particularly sections 3(b), 5, 6, 
11A, 15, 17, 19, 23(a), 24, and 36 thereof, 15 U.S.C. 78c, 78e, 78f, 
78k-1, 78o, 78q, 78s, 78w(a), 78x, and 78mm, the Commission proposes to 
amend 17 CFR 242.600 and 17 CFR 242.605 in the manner set forth below.

List of Subjects in 17 CFR Part 242

    Brokers, Confidential business information, Fraud, Reporting and 
recordkeeping requirements, Securities.

    For the reasons stated in the preamble, the Commission is proposing 
to amend title 17, chapter II of the Code of Federal Regulations:

PART 242--REGULATIONS M, SHO, ATS, AC, NMS, AND SBSR AND CUSTOMER 
MARGIN REQUIREMENTS FOR SECURITY FUTURES

0
1. The authority for part 242 continues to read as follows:

    Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and 
80a-37.

0
2. Amend Sec.  242.600 by:
0
a. Removing paragraph (b)(40).
0
b. Redesignating paragraphs (b)(9) through (b)(110) as follows:

------------------------------------------------------------------------
               Old paragraph                        New paragraph
------------------------------------------------------------------------
(b)(9)....................................  (b)(10)
(b)(10)...................................  (b)(13)
(b)(11)...................................  (b)(15)
(b)(12)...................................  (b)(17)
(b)(13)...................................  (b)(18)
(b)(14)...................................  (b)(19)
(b)(15)...................................  (b)(20)
(b)(16)...................................  (b)(21)
(b)(17)...................................  (b)(22)
(b)(18)...................................  (b)(23)
(b)(19)...................................  (b)(24)
(b)(20)...................................  (b)(25)
(b)(21)...................................  (b)(26)
(b)(22)...................................  (b)(27)
(b)(23)...................................  (b)(28)
(b)(24)...................................  (b)(29)
(b)(25)...................................  (b)(30)
(b)(26)...................................  (b)(31)
(b)(27)...................................  (b)(32)
(b)(28)...................................  (b)(33)
(b)(29)...................................  (b)(34)
(b)(30)...................................  (b)(35)
(b)(31)...................................  (b)(36)
(b)(32)...................................  (b)(37)
(b)(33)...................................  (b)(38)
(b)(34)...................................  (b)(39)
(b)(35)...................................  (b)(40)
(b)(36)...................................  (b)(41)
(b)(37)...................................  (b)(43)
(b)(38)...................................  (b)(45)
(b)(39)...................................  (b)(46)
(b)(40)...................................  deleted
(b)(41)...................................  (b)(48)
(b)(42)...................................  (b)(49)
(b)(43)...................................  (b)(50)
(b)(44)...................................  (b)(51)
(b)(45)...................................  (b)(52)
(b)(46)...................................  (b)(53)
(b)(47)...................................  (b)(54)
(b)(48)...................................  (b)(55)
(b)(49)...................................  (b)(56)
(b)(50)...................................  (b)(57)
(b)(51)...................................  (b)(58)
(b)(52)...................................  (b)(59)
(b)(53)...................................  (b)(60)
(b)(54)...................................  (b)(61)
(b)(55)...................................  (b)(62)
(b)(56)...................................  (b)(63)
(b)(57)...................................  (b)(64)
(b)(58)...................................  (b)(65)
(b)(59)...................................  (b)(66)
(b)(60)...................................  (b)(67)
(b)(61)...................................  (b)(68)
(b)(62)...................................  (b)(69)
(b)(63)...................................  (b)(70)
(b)(64)...................................  (b)(71)
(b)(65)...................................  (b)(72)
(b)(66)...................................  (b)(73)
(b)(67)...................................  (b)(74)
(b)(68)...................................  (b)(75)
(b)(69)...................................  (b)(76)
(b)(70)...................................  (b)(77)
(b)(71)...................................  (b)(78)
(b)(72)...................................  (b)(79)
(b)(73)...................................  (b)(80)
(b)(74)...................................  (b)(81)
(b)(75)...................................  (b)(82)
(b)(76)...................................  (b)(83)
(b)(77)...................................  (b)(84)
(b)(78)...................................  (b)(85)
(b)(79)...................................  (b)(86)
(b)(80)...................................  (b)(87)
(b)(81)...................................  (b)(88)
(b)(82)...................................  (b)(89)
(b)(83)...................................  (b)(90)
(b)(84)...................................  (b)(91)
(b)(85)...................................  (b)(92)
(b)(86)...................................  (b)(93)
(b)(87)...................................  (b)(94)
(b)(88)...................................  (b)(95)
(b)(89)...................................  (b)(96)
(b)(90)...................................  (b)(97)
(b)(91)...................................  (b)(98)
(b)(92)...................................  (b)(99)
(b)(93)...................................  (b)(100)
(b)(94)...................................  (b)(101)
(b)(95)...................................  (b)(102)
(b)(96)...................................  (b)(103)
(b)(97)...................................  (b)(104)
(b)(98)...................................  (b)(105)
(b)(99)...................................  (b)(106)
(b)(100)..................................  (b)(107)
(b)(101)..................................  (b)(108)
(b)(102)..................................  (b)(109)
(b)(103)..................................  (b)(110)
(b)(104)..................................  (b)(111)
(b)(105)..................................  (b)(112)
(b)(106)..................................  (b)(113)
(b)(107)..................................  (b)(114)
(b)(108)..................................  (b)(115)
(b)(109)..................................  (b)(116)
(b)(110)..................................  (b)(117)
------------------------------------------------------------------------


[[Page 3902]]

0
c. Adding new paragraphs (b)(9), (b)(11), (b)(12), (b)(14), (b)(16), 
(b)(42), (b)(44), and (b)(47).
0
d. Revising newly redesignated paragraphs (b)(10), (b)(13), (b)(19), 
(b)(20), (b)(30), (b)(57), (b)(108), and (b)(109).
    The revisions and additions read as follows:


Sec.  242.600   NMS security designation and definitions.

* * * * *
    (b) * * *
    (9) Average effective over quoted spread means the share-weighted 
average for order executions of effective spread divided by 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, beyond-the-midpoint limit orders, and orders submitted 
with stop prices, the difference between the national best offer and 
the national best bid at the time such orders first become executable. 
The effective spread shall be 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. For order 
executions of non-marketable limit orders, beyond-the-midpoint limit 
orders, and orders submitted with stop prices, average percentage 
effective spread shall be calculated from the time such orders first 
become executable rather than the time of order receipt.
    (10) Average effective spread means 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. For 
order executions of non-marketable limit orders, beyond-the-midpoint 
limit orders, and orders submitted with stop prices, average effective 
spread shall be calculated from the time such orders first become 
executable rather than the time of order receipt.
    (11) Average percentage effective spread means the share-weighted 
average for order executions of effective spread divided by 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. The effective spread shall be 
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. For order executions of non-marketable limit orders, 
beyond-the-midpoint limit orders, and orders submitted with stop 
prices, average percentage effective spread shall be calculated from 
the time such orders first become executable rather than the time of 
order receipt.
    (12) Average percentage realized spread means the share-weighted 
average for order executions of realized spread divided by 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. The realized spread shall be 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 a specified interval after the time of order execution and, for sell 
orders, as double the amount of difference between the midpoint and the 
national best bid and national best offer at a specified interval after 
the time of order execution and the execution price; provided, however, 
that the midpoint of the final national best bid and national best 
offer disseminated for regular trading hours shall be used to calculate 
a realized spread if it is disseminated less than that specified 
interval after the time of order execution.
    (13) Average realized spread means the share-weighted average of 
realized 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 a 
specified interval after the time of order execution and, for sell 
orders, as double the amount of difference between the midpoint and the 
national best bid and national best offer at a specified interval after 
the time of order execution and the execution price; provided, however, 
that the midpoint of the final national best bid and national best 
offer disseminated for regular trading hours shall be used to calculate 
a realized spread if it is disseminated less than that specified 
interval after the time of order execution.
    (14) Best available displayed price means, with respect to an order 
to buy, the lower of: the national best offer at the time of order 
receipt or 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: the national best bid at 
the time of order receipt or 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. 
With respect to a beyond-the-midpoint limit order, the best available 
displayed price shall be determined at the time such order becomes 
executable rather than the time of order receipt.
* * * * *
    (16) Beyond-the-midpoint limit order means, with respect to an 
order received at a time when a national best bid and national best 
offer is being disseminated, 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 and 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 national best 
bid and national best offer is not being disseminated, 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 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.
* * * * *
    (19) Categorized by order size means dividing orders into separate 
categories for the following sizes:
    (i) Less than a 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;

[[Page 3903]]

    (vi) 50 round lots to less than 100 round lots; and
    (vii) 100 round lots or greater.
    (20) Categorized by order type means dividing orders into separate 
categories for market orders, marketable limit orders (excluding 
immediate-or-cancel orders), marketable immediate-or-cancel orders, 
beyond-the-midpoint limit orders, executable non-marketable limit 
orders (excluding orders submitted with stop prices and beyond-the-
midpoint limit orders), and executable orders submitted with stop 
prices.
* * * * *
    (30) Covered order means any market order or any limit order 
(including immediate-or-cancel orders) received by a market center, 
broker, or dealer during regular trading hours at a time when a 
national best bid and national best offer is being disseminated and 
after the primary listing market has disseminated its first firm, 
uncrossed quotations in the security, and, if executed, is executed 
during regular trading hours; or any non-marketable limit order 
(including an order submitted with a stop price) received by a market 
center, broker, or dealer outside of regular trading hours or at a time 
when a national best bid and national best offer is not being 
disseminated and, if executed, is executed during regular trading 
hours. Covered order shall exclude any order for which the customer 
requests special handling for execution, including, but not limited to, 
orders to be executed at a market opening price or a market closing 
price, orders to be executed only at their full size, orders to be 
executed on a particular type of tick or bid, orders submitted on a 
``not held'' basis, orders for other than regular settlement, and 
orders to be executed at prices unrelated to the market price of the 
security at the time of execution.
* * * * *
    (42) Executable means, for any non-marketable buy order (excluding 
orders submitted with stop prices), 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. 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 orders submitted with a stop price, that the stop price is 
equal to or less than the national best offer during regular trading 
hours. The time an order becomes executable shall be measured in 
increments of a millisecond or finer.
* * * * *
    (44) Executed outside the best available displayed price means, for 
buy orders, execution at a price higher than the best available 
displayed price; and, for sell orders, execution at a price lower than 
the best available displayed price.
* * * * *
    (47) Executed with price improvement relative to the best available 
displayed price means, for buy orders, execution at a price lower the 
best available displayed price and, for sell orders, execution at a 
price higher than the best available displayed price.
* * * * *
    (57) Marketable limit order means, with respect to an order 
received at a time when a national best bid and national best offer is 
being disseminated, any buy order with a limit price equal to or 
greater than the national best offer at the time of order receipt, or 
any sell order with a limit price equal to or less than the national 
best bid at the time of order receipt, and, with respect to an order 
received at a time when a national best bid and national best offer is 
not being disseminated, any buy order with a limit price equal to or 
greater than the national best offer at the time that the national best 
offer is first disseminated during regular trading hours after the time 
of order receipt, or any sell order with a limit price equal to or less 
than the national best bid time at the time that the national best bid 
is first disseminated during regular trading hours after the time of 
order receipt.
* * * * *
    (108) Time of order execution means the time (at a minimum to the 
millisecond) that an order was executed at any venue.
    (109) Time of order receipt means the time (at a minimum to the 
millisecond) that an order was received by a market center for 
execution, or in the case of a broker or dealer that is not acting as a 
market center, the time (at a minimum to the millisecond) that an order 
was received by the broker or dealer for execution.
* * * * *


Sec.  242.605  [Amended]

0
2. Amend Sec.  242.605 by revising the introductory text and paragraph 
(a) to read as follows:


Sec.  242.605   Disclosure of order execution information.

    This section requires market centers, brokers, and dealers to make 
available standardized, monthly reports of statistical information 
concerning their order executions. This information is presented in 
accordance with uniform standards that are based on broad assumptions 
about order execution and routing practices. The information will 
provide a starting point to promote visibility and competition on the 
part of market centers and broker-dealers, particularly on the factors 
of execution price and speed. The disclosures required by this section 
do not encompass all of the factors that may be important to investors 
in evaluating the order routing services of a broker-dealer. In 
addition, any particular market center, broker, or dealer's statistics 
will encompass varying types of orders routed by different broker-
dealers on behalf of customers with a wide range of objectives. 
Accordingly, the statistical information required by this section alone 
does not create a reliable basis to address whether any particular 
broker-dealer failed to obtain the most favorable terms reasonably 
available under the circumstances for customer orders.
    (a) Monthly electronic reports by market centers, brokers, and 
dealers. (1) Every market center, broker, or dealer shall make 
available for each calendar month, in accordance with the procedures 
established pursuant to paragraph (a)(3) of this section, a report on 
the covered orders in NMS stocks that it received for execution from 
any person or that it received for execution in a prior calendar month 
but which remained open. Any market center that operates a qualified 
auction shall produce a separate report pertaining only to covered 
orders that the market center receives for execution in a qualified 
auction. 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. 
Alternative trading systems (as defined in Regulation ATS, Sec.  
242.300(a)) shall prepare reports separately from their broker-dealer 
operators to the extent such entities are required to prepare reports. 
Each report shall be in electronic form; shall be categorized by 
security, order type, and order size; and shall include the following 
columns of information:
    (i) For market orders, marketable limit orders, marketable 
immediate-or-cancel orders, beyond-the-midpoint limit orders, 
executable non-marketable limit orders, and executable orders with stop 
prices:
    (A) The number of covered orders;

[[Page 3904]]

    (B) The cumulative number of shares of covered orders;
    (C) The cumulative number of shares of covered orders cancelled 
prior to execution;
    (D) The cumulative number of shares of covered orders executed at 
the receiving market center, broker, or dealer (excluding shares that 
the market center, broker, or dealer executes on a riskless principal 
basis);
    (E) The cumulative number of shares of covered orders executed at 
any other venue;
    (F) For executions of covered orders, 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, or the full 
displayed size of the protected offer at the time of execution, in the 
case of a market or limit order to buy. For each order, the share count 
shall be capped at the order size;
    (G) For executions of covered orders, the average realized spread 
as calculated fifteen seconds after the time of execution;
    (H) For executions of covered orders, the average percentage 
realized spread as calculated fifteen seconds after the time of 
execution;
    (I) For executions of covered orders, the average realized spread 
as calculated one minute after the time of execution;
    (J) For executions of covered orders, the average percentage 
realized spread as calculated one minute after the time of execution;
    (K) For executions of covered orders, the average effective spread;
    (L) For executions of covered orders, the average percentage 
effective spread; and
    (M) For executions of covered orders, the average effective over 
quoted spread, expressed as a percentage; and
    (ii) For market orders, marketable limit orders, marketable 
immediate-or-cancel orders, and beyond-the-midpoint limit orders:
    (A) The cumulative number of shares of covered orders executed with 
price improvement;
    (B) For shares executed with price improvement, the share-weighted 
average amount per share that prices were improved;
    (C) For shares executed with price improvement, the share-weighted 
average period from the time of order receipt to the time of order 
execution, expressed in increments of a millisecond or finer, or, in 
the case of beyond-the-midpoint limit orders, from the time such orders 
first become executable to the time of order execution, expressed in 
increments of a millisecond or finer;
    (D) For shares executed with price improvement, the share-weighted 
median period from the time of order receipt to the time of order 
execution, expressed in increments of a millisecond or finer, or, in 
the case of beyond-the-midpoint limit orders, from the time such orders 
first become executable to the time of order execution, expressed in 
increments of a millisecond or finer;
    (E) For shares executed with price improvement, the share-weighted 
99th percentile period from the time of order receipt to the time of 
order execution, expressed in increments of a millisecond or finer, or, 
in the case of beyond-the-midpoint limit orders, from the time such 
orders first become executable to the time of order execution, 
expressed in increments of a millisecond or finer;
    (F) The cumulative number of shares of covered orders executed at 
the quote;
    (G) For shares executed at the quote, the share-weighted average 
period from the time of order receipt to the time of order execution, 
expressed in increments of a millisecond or finer, or, in the case of 
beyond-the-midpoint limit orders, from the time such orders first 
become executable to the time of order execution, expressed in 
increments of a millisecond or finer;
    (H) For shares executed at the quote, the share-weighted median 
period from the time of order receipt to the time of order execution, 
expressed in increments of a millisecond or finer, or, in the case of 
beyond-the-midpoint limit orders, from the time such orders first 
become executable to the time of order execution, expressed in 
increments of a millisecond or finer;
    (I) For shares executed at the quote, the share-weighted 99th 
percentile period from the time of order receipt to the time of order 
execution, expressed in increments of a millisecond or finer, or, in 
the case of beyond-the-midpoint limit orders, from the time such orders 
first become executable to the time of order execution, expressed in 
increments of a millisecond or finer;
    (J) The cumulative number of shares of covered orders executed 
outside the quote;
    (K) For shares executed outside the quote, the share-weighted 
average amount per share that prices were outside the quote;
    (L) For shares executed outside the quote, the share-weighted 
average period from the time of order receipt, expressed in increments 
of a millisecond or finer, or, in the case of beyond-the-midpoint limit 
orders, from the time such orders first become executable to the time 
of order execution, expressed in increments of a millisecond or finer;
    (M) For shares executed outside the quote, the share-weighted 
median period from the time of order receipt to the time of order 
execution, expressed in increments of a millisecond or finer, or, in 
the case of beyond-the-midpoint limit orders, from the time such orders 
first become executable to the time of order execution, expressed in 
increments of a millisecond or finer;
    (N) For shares executed outside the quote, the share-weighted 99th 
percentile period from the time of order receipt to the time of order 
execution, expressed in increments of a millisecond or finer, or, in 
the case of beyond-the-midpoint limit orders, from the time such orders 
first become executable to the time of order execution, expressed in 
increments of a millisecond or finer;
    (O) The cumulative number of shares of covered orders executed with 
price improvement relative to the best available displayed price;
    (P) 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;
    (Q) The cumulative number of shares of covered orders executed at 
the best available displayed price;
    (R) The cumulative number of shares of covered orders executed 
outside the best available displayed price;
    (S) 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; and
    (iii) For beyond-the-midpoint limit orders, executable non-
marketable limit orders, and executable orders with stop prices:
    (A) The number of orders that received either a complete or partial 
fill;
    (B) 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. For each order, the share count 
shall be capped at the order size;
    (C) For shares executed, the share-weighted average period from the 
time the order becomes executable to the time of order execution 
expressed in increments of a millisecond or finer, or, in the case of 
beyond-the-midpoint limit orders, from the time such orders first 
become executable to the time of order execution, expressed in 
increments of a millisecond or finer;

[[Page 3905]]

    (D) For shares executed, the share-weighted median period from the 
time the order becomes executable to the time of order execution, 
expressed in increments of a millisecond or finer, or, in the case of 
beyond-the-midpoint limit orders, from the time such orders first 
become executable to the time of order execution, expressed in 
increments of a millisecond or finer; and
    (E) For shares executed, the share-weighted 99th percentile period 
from the time the order becomes executable to the time of order 
execution, expressed in increments of a millisecond or finer, or, in 
the case of beyond-the-midpoint limit orders, from the time such orders 
first become executable to the time of order execution, expressed in 
increments of a millisecond or finer.
    (2) Every market center, broker, or dealer shall make publicly 
available for each calendar month a report providing summary statistics 
on all executions of covered orders that are market and marketable 
limit orders that it received for execution from any person. Such 
report shall be made available using the most recent version of the XML 
schema and the associated PDF renderer as published on the Commission's 
website for all reports required by this paragraph (a)(2). Such report 
shall include a section for NMS stocks that are included in the S&P 500 
Index as of the first day of that month and a section for other NMS 
stocks. Each section shall include, for market orders and marketable 
limit orders, the following summary statistics for executed orders, 
equally weighted by symbol based on share volume:
    (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.
    (3) Every national securities exchange on which NMS stocks are 
traded and each national securities association shall act jointly in 
establishing procedures for market centers, brokers, and dealers to 
follow in making available to the public the reports required by this 
section in a uniform, readily accessible, and usable electronic form.
    (4) In the event there is no effective national market system plan 
establishing such procedures, market centers, brokers, and dealers 
shall prepare their reports in a consistent, usable, and machine-
readable electronic format, in accordance with the requirements in 
paragraph (a)(1) of this section, and make such reports available for 
downloading from an internet website that is free and readily 
accessible to the public.
    (5) Every market center, broker, or dealer shall keep the reports 
required by paragraphs (a)(1) and (a)(2) of this section 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 on the 
internet website.
    (6) A market center, broker, or dealer shall make available the 
reports required by paragraphs (a)(1) and (a)(2) of this section within 
one month after the end of the month addressed in the reports.
    (7) A broker or dealer that is not a market center shall not be 
subject to the requirements of this section 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'' for purposes of this paragraph). 
For purposes of this section, a broker or dealer that utilizes an 
omnibus clearing arrangement with respect to any of its underlying 
customer accounts shall be considered to carry such underlying customer 
accounts when calculating the number of customer accounts that it 
introduces or carries. Any broker or dealer that meets or exceeds this 
customer account threshold and is also a market center shall produce 
separate reports pertaining to each function. A broker or dealer that 
meets or exceeds the customer account threshold shall be required to 
produce reports pursuant to this section for at least three calendar 
months (``Reporting Period''). The Reporting Period shall begin the 
first calendar day of the next calendar month after the broker or 
dealer met or exceeded the customer account threshold, unless it is the 
first time the broker or dealer has met or exceeded the customer 
account threshold, in which case the Reporting Period shall begin the 
first calendar day four calendar months later. If, at any time after a 
broker or dealer has been required to produce reports pursuant to this 
section for at least a Reporting Period, a broker or dealer falls below 
the customer account threshold, the broker or dealer shall not be 
required to produce a report pursuant to this paragraph for the next 
calendar month.
* * * * *

    By the Commission.

    Dated: December 14, 2022.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-27614 Filed 1-19-23; 8:45 am]
BILLING CODE 8011-01-P


