Disclosure of Order Execution Information, 26428-26617 [2024-05556]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 89, Number 73 (Monday, April 15, 2024)]
[Rules and Regulations]
[Pages 26428-26617]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-05556]



[[Page 26427]]

Vol. 89

Monday,

No. 73

April 15, 2024

Part III





Securities and Exchange Commission





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17 CFR Parts 240 and 242





Disclosure of Order Execution Information; Final Rule

Federal Register / Vol. 89 , No. 73 / Monday, April 15, 2024 / Rules 
and Regulations

[[Page 26428]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 242

[Release No. 34-99679; File No. S7-29-22]
RIN 3235-AN22


Disclosure of Order Execution Information

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

DATES: 
    Effective date: The final rules are effective June 14, 2024.
    Compliance date: See section VII, titled ``Transition Matters,'' 
for further information on transitioning to the final rules.

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

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

Table of Contents

I. Introduction and Background
    A. Overview of Need for Rule Modernization
    B. Overview of the Proposal and Comments Received
    C. Overview of Final Rule 605
II. Modifications to Reporting Entities
    A. Larger Broker-Dealers
    1. Proposed Approach
    2. Final Rule and Discussion
    B. Qualified Auction Mechanisms
    1. Proposed Approach
    2. Final Rule and Discussion
    C. NMS Stock ATSs and SDPs
    1. Proposed Approach
    2. Final Rule and Discussion
III. Modifications to Scope of Orders Covered and Required 
Information
    A. Covered Order
    1. Orders Submitted Pre-Opening/Post-Closing
    2. Stop Orders
    3. Non-Exempt Short Sale Orders
    B. Required Information
    1. Categorization by Order Size
    2. Categorization by Order Type
    3. Timestamp Conventions and Time-to-Execution Statistics
    4. Execution Quality Statistics
IV. Summary Execution Quality Report
    A. Proposed Approach
    B. Final Rule and Discussion
    1. Required Information
    2. Required Format
    3. Investor Testing and Education
V. Requirements for Making Rule 605 Reports Available to the Public
    A. Proposed Approach
    B. Final Rule and Discussion
    1. Accessibility of Rule 605 Reports
    2. Alternatives to Rule 605 Proposal
VI. Existing Commission Exemptive Relief and Staff Statements
VII. Transition Matters
VIII. Paperwork Reduction Act
    A. Summary of Collection of Information
    B. Proposed Use of Information
    C. Respondents
    D. Total PRA Burdens
IX. Economic Analysis
    A. Introduction
    B. Market Failure
    C. Baseline
    1. Regulatory Baseline
    2. Use of Reports under Rule 605 Prior to Rule Amendments
    3. Disclosure Requirements under Preexisting Rule 605
    4. Markets for Brokerage and Trading Services for NMS Stocks 
under Preexisting Rule 605 Disclosure Requirements
    D. Economic Effects
    1. Benefits
    2. Costs
    3. Economic Effects on Efficiency, Competition, and Capital 
Formation
    E. Reasonable Alternatives
    1. Reasonable Alternative Modifications to Reporting Entities
    2. Reasonable Alternative Modifications to Scope of Covered 
Orders
    3. Reasonable Alternative Modifications to Required Information
    4. Reasonable Alternative Modifications to Accessibility
    5. Other Reasonable Alternatives
X. Regulatory Flexibility Act Certification
XI. Other Matters
Statutory Authority

I. Introduction and Background

    On December 14, 2022, the Commission proposed amendments to Rule 
605 under Regulation National Market System (17 CFR 242.600 through 
242.614) (``Regulation NMS'') to update the disclosure of order 
execution quality statistics in national market system (``NMS'') 
stocks.\1\ Rule 605, formerly known as Rule 11Ac1-5, was adopted in 
2000 \2\ and requires market centers \3\ to

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make available standardized monthly reports of statistical information 
concerning covered orders \4\ in NMS stocks \5\ that they received for 
execution.\6\ Prior to these amendments, the Rule 605 report contained 
a number of execution quality metrics for covered orders.\7\ The 
information was categorized: by (1) individual security, (2) one of 
five order types,\8\ and (3) one of four order sizes.\9\ Within each of 
the three categories, the Rule 605 report that was required prior to 
these amendments included statistics about the total number of orders 
submitted, and the total number of shares submitted, shares cancelled 
prior to execution, shares executed at the receiving market center, 
shares executed at another venue, shares executed within different 
time-to-execution buckets, and average realized spread.\10\ For market 
and marketable limit orders specifically, the report required by Rule 
605 prior to these amendments also included statistics about the (1) 
average effective spread; (2) number of shares executed better than the 
quote, at the quote, or outside the quote; (3) average time to 
execution when executed better than the quote, at the quote, or outside 
the quote; and (4) average dollar amount per share that orders were 
executed better than the quote or outside the quote.\11\ To calculate 
the required statistics, the time of order execution and time of order 
receipt were measured to the nearest second.\12\
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    \1\ See Securities Exchange Act Release No. 96493 (Dec. 14, 
2022), 88 FR 3786 (Jan. 20, 2023) (``Proposing Release'').
    \2\ See Securities Exchange Act Release No. 43590 (Nov. 17, 
2000), 65 FR 75414 at 75416 (Dec. 1, 2000) (Disclosure of Order 
Execution and Routing Practices) (``Rule 11Ac1-5 Adopting 
Release''). Along with Rule 11Ac1-5, the Commission also adopted 
Rule 11Ac1-6 as part of the Rule 11Ac1-5 Adopting Release. See 17 
CFR 242.606 (``Rule 606''). When the Commission later adopted 
Regulation NMS in 2005, Rule 11Ac1-5 was re-designated as Rule 605, 
and Rule 11Ac1-6 was re-designated as Rule 606. See Securities 
Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 
2005) (``Regulation NMS Adopting Release''). Rule 606 requires the 
public disclosure of order routing practices and was amended in 
2018. See Securities Exchange Act Release No. 84528 (Nov. 2, 2018), 
83 FR 58338 (Nov. 19, 2018) (``2018 Rule 606 Amendments Release'').
    \3\ Regulation NMS defines the term ``market center'' to mean 
any exchange market maker, over-the-counter (``OTC'') market maker, 
alternative trading system (``ATS''), national securities exchange, 
or national securities association. See final 17 CFR 242.600(b)(55). 
``Exchange market maker'' means any member of a national securities 
exchange that is registered as a specialist or market maker pursuant 
to the rules of such exchange. See final 17 CFR 242.600(b)(37). 
``OTC market makerrdquo; means any dealer that holds itself out as 
being willing to buy from and sell to its customers, or others, in 
the United States, an NMS stock for its own account on a regular or 
continuous basis otherwise than on a national securities exchange in 
amounts of less than a block size. See final 17 CFR 242.600(b)(75). 
``Alternative trading system'' or ``ATS'' means any organization, 
association, person, group of persons, or system: (1) That 
constitutes, maintains, or provides a market place or facilities for 
bringing together purchasers and sellers of securities or for 
otherwise performing with respect to securities the functions 
commonly performed by a stock exchange within the meaning of 17 CFR 
240.3b-16; and (2) That does not: (i) Set rules governing the 
conduct of subscribers other than the conduct of such subscribers' 
trading on such organization, association, person, group of persons, 
or system; or (ii) Discipline subscribers other than by exclusion 
from trading. See 17 CFR 242.300(a). See also final 17 CFR 
242.600(b)(4) (stating that ``alternative trading system'' has the 
meaning provided in 17 CFR 242.300(a)). ``National securities 
exchange'' means any exchange registered pursuant to section 6 of 
the Exchange Act. See final 17 CFR 242.600(b)(63). ``National 
securities associationrdquo; means any association of brokers and 
dealers registered pursuant to section 15A of the Exchange Act. See 
final 17 CFR 242.600(b)(62).
    \4\ Prior to these amendments, a ``covered order'' was defined 
to include any market order or any limit order (including immediate-
or-cancel orders) received by a market center during regular trading 
hours at a time when a national best bid and national best offer 
(``NBBO'') is being disseminated, and, if executed, is executed 
during regular trading hours, and did not include any orders for 
which the customer requests special handling, including, but not 
limited to, market on open and market on close orders, stop orders, 
all or none orders, and ``not held'' orders. See prior 17 CFR 
242.600(b)(22). Generally, a ``not held'' order provides the broker-
dealer with price and time discretion in handling the order, whereas 
a broker-dealer must attempt to execute a ``held'' order 
immediately. See 2018 Rule 606 Amendments Release, 83 FR 58338 at 
58340, n.19 (Nov. 19, 2018).
    \5\ ``NMS stock'' is defined under Regulation NMS as any NMS 
security other than an option. See final 17 CFR 242.600(b)(65). An 
``NMS security'' is defined as any security or class of securities 
for which transaction reports are collected, processed, and made 
available pursuant to an effective transaction reporting plan, or an 
effective national market system plan for reporting transactions in 
listed options. See final 17 CFR 242.600(b)(64).
    \6\ See prior 17 CFR 242.605. The procedures for market centers 
to make their execution quality data available to the public are set 
forth in the National Market System Plan Establishing Procedures 
Under Rule 605 of Regulation NMS (``Rule 605 NMS Plan''). See prior 
17 CFR 242.605(a)(2) and Securities and Exchange Commission File No. 
4-518 (Rule 605 NMS Plan). See also Securities Exchange Act Release 
No. 44177 (Apr. 12, 2001), 66 FR 19814 (Apr. 17, 2001) (order 
approving the Rule 605 NMS Plan) (``Rule 605 NMS Plan Release'').
    \7\ See prior 17 CFR 242.605(a)(1); Rule 11Ac1-5 Adopting 
Release, 65 FR 75414 at 75423-25 (Dec. 1, 2000).
    \8\ See prior 17 CFR 242.605(a)(1). Prior to these amendments, 
``Categorized by order type'' referred to categorization by whether 
an order is: (1) a market order, (2) a marketable limit order, (3) 
an inside-the-quote limit order, (4) an at-the-quote limit order, or 
(5) a near-the-quote limit order. See prior 17 CFR 242.600(b)(14).
    \9\ See prior 17 CFR 242.605(a)(1). Prior to these amendments, 
the size categories were: 100 to 499 shares; 500 to 1,999 shares; 
2000 to 4,999 shares; and 5,000 or greater shares. See prior 17 CFR 
242.600(b)(13). On June 22, 2001, the Commission granted exemptive 
relief to any order with a size of 10,000 shares or greater (``Large 
Order Exemptive Relief''), reasoning that the exclusion of very 
large orders would help assure greater comparability of statistics 
in the largest size category of 5,000 or greater shares. See letter 
from Annette L. Nazareth, Director, Division of Market Regulation to 
Darla C. Stuckey, Assistant Secretary, NYSE Group, Inc., dated June 
22, 2001 (``Large Order Exemptive Letter'').
    \10\ See prior 17 CFR 242.605(a)(1)(i).
    \11\ See prior 17 CFR 242.605(a)(1)(ii).
    \12\ See prior 17 CFR 242.600(b)(91), (92).
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    At the time the Commission adopted Rule 11Ac1-5, there was little 
publicly available information to enable investors to compare and 
evaluate execution quality among different market centers.\13\ Rule 
605, along with Rule 606 of Regulation NMS, was adopted in 2000, and 
together these rules required the public disclosure of execution 
quality and order routing practices.\14\ The Commission intended Rule 
11Ac1-5 to provide awareness about how 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.\15\ The 
Commission reasoned that once investors could evaluate execution 
performance provided by various broker-dealers, competitive forces 
could then be brought to bear on broker-dealers both with respect to 
the explicit trading costs associated with brokerage commissions and 
the implicit trading costs associated with execution quality.\16\
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    \13\ See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75416 
(Dec. 1, 2000). For clarity, when this release discusses the 
adoption of Rule 605, it is referring to the Rule 11Ac1-5 Adopting 
Release, supra note 2.
    \14\ See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75416 
(Dec. 1, 2000).
    \15\ See id. at 75418. Data obtained from Rule 605 reports are 
used by the third parties including academics and the financial 
press to study a variety of topics related to execution quality, 
including liquidity measurement, exchange competition, zero 
commission trading, and broker-dealer execution quality. See 
Proposing Release, 88 FR 3786 at 3833, n.545-547 (Jan. 20, 2023) and 
accompanying text.
    \16\ See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75419 
(Dec. 1, 2000). Although it is difficult to isolate the effects of 
Rule 605 given the evolution of the equity markets over time, one 
academic study examining the introduction of Rule 605 found that the 
routing of marketable order flow by broker-dealers became more 
sensitive to changes in execution quality across market centers 
after Rule 605 reports became available. See Ekkehart Boehmer et 
al., Public Disclosure and Private Decisions: Equity Market 
Execution Quality and Order Routing, 20 REV. FIN. STUD. 315 (2007) 
(``Boehmer et al.''). Another study attributed a significant decline 
in effective and quoted spreads following the implementation of Rule 
605 to an increase in competition between market centers, who 
improved the execution quality that they offered in order to attract 
more order flow. See Xin Zhao & Kee H. Chung, Information Disclosure 
and Market Quality: The Effect of SEC Rule 605 on Trading Costs, 42 
J. FIN. QUANTITATIVE ANALYSIS, 657 (Sept. 2007) (``Zhao & Chung'').
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    The information disclosed under Rule 605 has provided significant 
insight into execution quality at different market centers.\17\ 
However, Rule 605 has not been substantively updated since it was 
adopted in 2000. In the interim, equity market conditions have changed 
due in part to many technological advancements that have altered the 
speed and nature of trading. In addition, the participation of 
individual investors in the equity markets has increased.\18\ 
Accordingly, the Commission is adopting amendments to Rule 605 to 
update and improve the disclosure of execution quality information by

[[Page 26430]]

expanding the scope of entities subject to Rule 605, modifying the 
information required, and making key execution quality metrics more 
accessible to investors.
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    \17\ See Securities Exchange Act Release No. 61358 (Jan. 14, 
2010), 75 FR 3594 at 3604, n.55 (Jan. 21, 2010) (``Concept Release 
on Equity Market Structure'').
    \18\ See Proposing Release, 88 FR 3786 at 3787-88 (Jan. 20, 
2023). As used in this release, ``individual investor'' refers to 
natural persons that trade relatively infrequently for their own or 
closely related accounts.
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A. Overview of Need for Rule Modernization

    The U.S. equity markets have evolved significantly in the last 
couple of decades. For instance, the equities markets have become 
increasingly fragmented, as both the market shares of individual 
national securities exchanges have decreased and an increased 
percentage of order flow has moved off-exchange. In 2000, there were 
nine registered national securities exchanges and one registered 
national securities association.\19\ A large proportion of the order 
flow in listed equity securities was routed to a few, mostly manual, 
trading centers,\20\ and the primary listing exchanges maintained a 
high percentage of the order flow for exchange-listed equities.\21\
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    \19\ See Securities and Exchange Commission, Annual Report for 
fiscal year 2000, at 38 available at https://www.sec.gov/pdf/annrep00/ar00full.pdf.
    \20\ See Securities Exchange Act Release Nos. 78309 (July 13, 
2016), 81 FR 49432 at 49436 (July 27, 2016) (``Rule 606 Amendments 
Proposing Release''); 42450 (Feb. 23, 2000), 65 FR 10577 at 10579-80 
(Feb. 28, 2000) (``Fragmentation Release'').
    \21\ See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75415 
(Dec. 1, 2000) (stating that in Sep. 2000, for example, the New York 
Stock Exchange Inc. (``NYSE'') accounted for 83.3% of the share 
volume in NYSE equities and that the American Stock Exchange, LLC 
(``Amex'') accounted for 69.9% of share volume in Amex equities). 
See also Concept Release on Equity Market Structure, 75 FR 3594 at 
3595 (Jan. 21, 2010) (stating that in Jan. 2005, NYSE executed 
approximately 79.1% of the consolidated share volume in its listed 
stocks, as compared to 25.1% in Oct. 2009). In addition, NYSE-listed 
stocks were traded primarily on the floor of the NYSE in a manual 
fashion until Oct. 2006, at which time NYSE began to offer fully 
automated access to its displayed quotations. See id. at 3594-95. 
However, stocks traded on the NASDAQ Stock Market LLC (``NASDAQ''), 
which in 2000 was owned and operated by a national securities 
association, were already trading in a highly automated fashion at 
many different trading centers. See id. at 3595; Fragmentation 
Release, 65 FR 10577 at 10580 (Feb. 28, 2000). See also Proposing 
Release, 88 FR 3786 at 3791, n.76 (Jan. 20, 2023).
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    In contrast, trading in the U.S. equity markets today is highly 
automated and spread even more among different types of trading 
centers, allowing even more choices about where orders may be routed. 
The types of trading centers that currently trade NMS stocks are: (1) 
national securities exchanges operating self-regulatory organization 
(``SRO'') trading facilities; \22\ (2) ATSs that trade NMS stocks 
(``NMS Stock ATSs''); \23\ (3) exchange market makers; (4) wholesalers; 
\24\ and (5) any other broker-dealer that executes orders internally by 
trading as principal or crossing orders as agent.\25\ Some OTC market 
makers, such as wholesalers, operate single-dealer platforms (``SDPs'') 
through which they execute institutional orders in NMS stocks against 
their own inventory.\26\ In the first quarter of 2023, NMS stocks were 
traded on 16 national securities exchanges, and off-exchange at 33 NMS 
Stock ATSs and at over 220 other Financial Industry Regulatory 
Authority (``FINRA'') members.\27\Approximately 56% of NMS share volume 
was executed on national securities exchanges.\28\ The majority of off-
exchange share volume was executed by wholesalers, who executed over 
one quarter of total share volume (26.9%) and about 61% of off-exchange 
share volume.\29\
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    \22\ See final 17 CFR 242.600(b)(100) (defining ``SRO trading 
facility'' as, among other things, a facility operated by a national 
securities exchange that executes orders in a security).
    \23\ An ``NMS Stock ATS'' as used in this release is an ATS that 
has filed an effective Form ATS-N with the Commission.
    \24\ The term ``wholesaler'' is not defined in Regulation NMS, 
but is commonly used to refer to an OTC market maker that seeks to 
attract orders from broker-dealers that service the accounts of a 
large number of individual investors. The primary business model of 
wholesalers is to trade internally as principal with individual 
investor orders. They do not publicly display or otherwise reveal 
the prices at which they are willing to trade internally as a means 
to attract individual investor orders from broker-dealers.
    \25\ See 15 U.S.C. 78c(a)(4)(A) (defining ``broker'' generally 
as any person engaged in the business of effecting transactions in 
securities for the account of others); 15 U.S.C. 78c(a)(5)(A) 
(defining ``dealer'' generally as any person engaged in the business 
of buying and selling securities for such person's own account 
through a broker or otherwise). The term ``broker-dealer'' is used 
in this release to encompass all brokers, all dealers, and firms 
that are both brokers and dealers. See also final 17 CFR 
242.600(b)(106) (defining ``trading center''). Broker-dealers that 
primarily service the accounts of individual investors (referred to 
in this release as ``retail brokers'') often route the marketable 
orders of individual investors in NMS stocks to wholesalers.
    \26\ See Proposing Release, 88 FR 3786 at 3860, n.768 (Jan. 20, 
2023) and accompanying text.
    \27\ See infra Table 6. See also Proposing Release, 88 FR 3786 
at 3860, n.766 (Jan. 20, 2023) and accompanying text; and 3861 
(Table 7).
    \28\ See infra Table 6. See also Proposing Release, 88 FR 3786 
at 3860, n.767 (Jan. 20, 2023) and accompanying text; and 3861 
(Table 7).
    \29\ See infra Table 6. See also Proposing Release, 88 FR 3786 
at 3861 (Table 7) (Jan. 20, 2023).
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    In addition, developments in trading further point toward the 
utility of amending Rule 605. Average stock prices have continued to 
increase over time,\30\ and odd-lots \31\ and fractional shares \32\ 
continue to trade with increasing frequency. In addition, odd-lot 
quotes in higher-priced stocks continue to offer prices that are 
frequently better than the round lot NBBO for these stocks,\33\ and 
this better-

[[Page 26431]]

priced odd-lot liquidity is distributed across multiple price 
levels.\34\ In addition, odd-lot rates \35\ have increased among lower 
priced stocks.\36\ Because Rule 605 size categories prior to these 
amendments excluded orders smaller than 100 shares, a significant 
proportion of market activity was excluded.\37\ An analysis of Rule 605 
data shows that Rule 605 coverage has declined in the decades since the 
initial adoption of Rule 605.\38\ Further, because order size 
categories were tied to the number of shares, the categories may have 
grouped orders of very different notional values, which might have 
complicated comparisons of aggregate execution quality. Finally, the 
speed of trading in the market has increased exponentially since 
2000,\39\ rendering the 1 second timestamp conventions of preexisting 
Rule 605 less informative.
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    \30\ See Securities Exchange Act Release No. 90610 (Dec. 9, 
2020), 86 FR 18596 at 18606-07 (Apr. 9, 2021) (``Market Data 
Infrastructure (``MDI'') Adopting Release'') (citing Securities 
Exchange Act Release No. 88216 (Feb. 14, 2020), 85 FR 16726 at 16739 
(Mar. 24, 2020) (``MDI Proposing Release'')) (stating that ``between 
2004 and 2019, the average price of a stock in the Dow Jones 
Industrial Average nearly quadrupled''). See also Proposing Release, 
88 FR 3786 at 3787, n.16 (Jan. 20, 2023).
    \31\ See MDI Adopting Release, 86 FR 18596 at 18616 (Apr. 9, 
2021) (describing analyses included in the MDI Adopting Release 
confirming observations made in the MDI Proposing Release that a 
significant proportion of quotation and trading activity occurs in 
odd-lots, particularly for frequently traded, high-priced stocks); 
and Proposing Release, 88 FR 3786 at 3792, n.91 (Jan. 20, 2023) 
(describing analysis using the NYSE Trade and Quote database 
(obtained via Wharton Research Data Services (``WRDS'')) (``TAQ 
data'' or ``NYSE TAQ data'') that found that odd-lots increased from 
around 15% of trades in Jan. 2014 to more than 55% of trades in Mar. 
2022). An analysis of data from the SEC's Market Information Data 
Analytics System (``MIDAS'') analytics tool available at https://www.sec.gov/marketstructure/datavis.html#.YoPskqjMKUk shows that, in 
Q1 2023, odd-lots made up 80.5% of on-exchange trades (37.3% of 
volume) for stocks in the highest price decile and 18.8% of on-
exchange trades (1.2% of volume) for stocks in the lowest price 
decile. See dataset ``Summary Metrics by Decile and Quartile'' 
available at https://www.sec.gov/marketstructure/downloads.html. See 
also Proposing Release, 88 FR 3786 at 3792, n.91 (Jan. 20, 2023).
    \32\ Analysis using Consolidated Audit Trail (``CAT'') data for 
executed orders in Aug. 2023 found that an estimated 67.4 million 
originating orders with a fractional share component were eventually 
executed on- or off-exchange. Orders with a fractional share 
component represented approximately 4% of all executed orders and 
22% of executed orders from ``individual'' accounts. Generally, 
accounts classified as ``individual'' in CAT are attributed to 
natural persons. See also Proposing Release, 88 FR 3786 at 3792, 
n.92 (Jan. 20, 2023).
    \33\ See MDI Adopting Release, 86 FR 18596 at 18729 (Apr. 9, 
2021) (describing analysis using data from May 2020 and finding that 
approximately 45% of all trades executed on exchange and 
approximately 10% of all volume executed on exchange in corporate 
stocks and exchange-traded funds (``ETFs'') (6,926 unique symbols) 
occurred in odd-lot sizes (i.e., less than 100 shares) and 40% of 
those odd-lot transactions (representing approximately 35% of all 
odd-lot volume) occurred at a price better than the NBBO). In 
addition, a recent academic working paper shows that odd-lots offer 
better prices than the NBBO 18% of the time for bids and 16% of the 
time for offers. This percentage increases monotonically in the 
stock price, for example, for bid prices, increasing from 5% for the 
group of lowest-price stocks in their sample, to 42% for the group 
of highest-priced stocks. See Robert P. Bartlett, Justin McCrary, 
and Maureen O'Hara, The Market Inside the Market: Odd-Lot Quotes 
(working paper Feb. 1, 2022), available at SSRN: https://ssrn.com/abstract=4027099 (retrieved from SSRN Elsevier database) 
(``Bartlett, et al.''). See also Elliot Banks, BMLL Technologies, 
Inside the SIP and the Microstructure of Odd-Lot Quotes (observing 
an upward trend in odd-lot trading inside the NBBO from Jan. 2019 to 
Jan. 2022). See also Proposing Release, 88 FR 3786 at 3792, n.93 
(Jan. 20, 2023).
    \34\ See MDI Adopting Release, 86 FR 18596 at 18613 n.202 (Apr. 
9, 2021) (describing analysis included in the MDI Adopting Release 
that examined quotation data for the week of May 22-29, 2020 for 
stocks priced from $250.01 to $1000.00 and found that there is odd-
lot interest priced better than the new round lot NBBO 28.49% of the 
time, and, in 48.49% of those cases, there are better priced odd-
lots at multiple price levels). See also Proposing Release, 88 FR 
3786 at 3792, n.94 (Jan. 20, 2023).
    \35\ The odd-lot rate is the total number of odd-lot trades 
divided by the total number of all trades.
    \36\ For example, odd-lot rates for corporate stock price 
deciles 1-3 (the lowest priced corporate stocks comprising 30% of 
all corporate stocks) have been higher on average in 2021, 2022, and 
Sep. 2023 (34%, 34%, 34%) as compared to 2019 and 2020 (23%, 27%). 
Similarly, exchange-traded products (``ETPs'') also exhibit higher 
average odd-lot rates in price quartiles 1 and 2 (the lowest priced 
ETPs comprising 50% of all ETPs) on average in 2021, 2022, and Sep. 
2023 (26%, 28%, 28%) compared to 2019 and 2020 (19%, 22%). Analysis 
has been updated based on MIDAS, available at https://www.sec.gov/opa/data/market-structure/marketstructuredownloadshtml-by_decile_and_quartile. See also Proposing Release, 88 FR 3786 at 
3792, n.95 (Jan. 20, 2023).
    \37\ See Proposing Release, 88 FR 3786 at 3792, n.91-92 (Jan. 
20, 2023). See also id. at 3840, n.619-622 and accompanying text 
(estimating, based on analysis of Tick Size Pilot data, coverage of 
current Rule 605 reporting requirements).
    \38\ See id. at 3841 (Figure 3) (describing analysis comparing 
one market center's volume (NYSE) to TAQ data that showed that an 
estimated 50% of shares executed during regular market hours were 
included in Rule 605 reports as of Feb. 2021, and showed that this 
number has been on a slightly downward trend since around mid-2012).
    \39\ Analysis of data from the SEC's MIDAS analytics tool shows 
that the percent of on-exchange NMLOs that are fully executed within 
1 millisecond (as a percentage of all fully executed on-exchange 
NMLOs) has increased from 2.1% in Q1 2012 to 11.7% in Q1 2023 for 
small cap stocks, and from 5.9% in Q1 2012 to 14.0% in Q1 2023 for 
large cap stocks. Further, in Q1 2023 nearly half (48.0%) of NMLOs 
executed in less than 1 second in large market capitalization 
stocks. See dataset ``Conditional Cancel and Trade Distribution,'' 
available at https://www.sec.gov/marketstructure/downloads.html. See 
also infra notes 1216-1217 and accompanying text. See also Proposing 
Release, 88 FR 3786 at 3792, n.98 (Jan. 20, 2023).
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    Moreover, since the adoption of Rule 605, the Commission and its 
staff have continually assessed market events and their impact on 
market structure, with much of this effort aimed at achieving enhanced 
transparency for investors.\40\ In 2010, the Commission issued a 
Concept Release on Equity Market Structure seeking public comment on, 
among other things, the metrics for assessing the performance of the 
current market structure and the effectiveness of tools such as Rule 
605 reports to protect investor interests.\41\ In 2015, the Commission 
formed the Equity Market Structure Advisory Committee (``EMSAC''), 
which considered issues related to Regulation NMS and equity market 
structure.\42\ The EMSAC recommended that the Commission amend Rule 605 
to modernize it and increase the usefulness of available execution 
quality disclosures.\43\ In addition, one broker-dealer petitioned the 
Commission to amend Rule 605.\44\
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    \40\ For example, since the adoption of Rule 605 in 2000, the 
Commission has periodically revised certain of its NMS rules, 
including the adoption of Regulation NMS in 2005. See, e.g., 
Regulation NMS Adopting Release, 70 FR 37496 (June 29, 2005); and 
MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021).
    \41\ See Concept Release on Equity Market Structure, 75 FR 3594 
at 3605 (Jan. 21, 2010).
    \42\ The archives of these meetings are available at https://www.sec.gov/spotlight/emsac/emsac-archives.htm.
    \43\ 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.
    \44\ See Letter from Virtu Financial re Petition for Rulemaking 
to Amend SEC Rule 605 (Sept. 20, 2021) (``Virtu Petition''), 
available at https://www.sec.gov/rules/petitions/2021/petn4-775.pdf.
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    In 2018, the Commission modified Rule 606, which requires broker-
dealers to disclose the identity of market centers to which they route 
orders on behalf of customers.\45\ Rule 606(a)(1), which focuses on 
held orders,\46\ requires broker-dealers to produce quarterly public 
reports regarding their routing of non-directed orders \47\ in NMS 
stocks that are submitted on a held basis and these reports include the 
identity of regularly used venues, the percentage of orders routed to 
each venue, and information about the broker-dealer's relationship with 
each venue.\48\ When adopting the 2018 Rule 606 Amendments, the 
Commission identified intensified competition for customer orders, the 
rise in the number of trading centers, and the introduction of new fee 
models for execution services as the main concerns with held orders for 
NMS stocks that it sought to address with the proposal.\49\ The 
Commission adopted enhanced public disclosures pursuant to Rule 
606(a)(1) that focused on increased transparency for the financial 
inducements that broker-dealers face when determining where to route 
held order flow.\50\ The Commission also adopted Rule 606(b)(3) to 
require detailed, customer-specific order handling disclosures that can 
be requested by a customer that places, directly or indirectly, one or 
more orders in NMS stocks that are submitted on a not held basis.\51\
---------------------------------------------------------------------------

    \45\ The amendments to Rule 606 in 2018 (``2018 Rule 606 
Amendments'') also modified Rule 605 to require that the public 
order execution quality reports be kept publicly available for a 
period of three years. See 2018 Rule 606 Amendments Release, 83 FR 
58338 (Nov. 19, 2018).
    \46\ See supra note 4 (discussing held and not held orders).
    \47\ A ``non-directed order'' means any order from a customer 
other than a directed order. See final 17 CFR 242.600(b)(66). A 
``directed order'' means an order from a customer that the customer 
specifically instructed the broker or dealer to route to a 
particular venue for execution. See final 17 CFR 242.600(b)(32).
    \48\ See 17 CFR 242.606(a)(1). Held orders are typically used by 
individual investors. See, e.g., 2018 Rule 606 Amendments Release, 
83 FR 58338 at 58372 (Nov. 19, 2018) (stating that retail investors' 
orders are typically submitted on a held basis and are typically 
smaller in size).
    \49\ See 2018 Rule 606 Amendments Release, 83 FR 58338 at 58372 
(Nov. 19, 2018).
    \50\ See id. at 58373.
    \51\ See 17 CFR 242.606(b)(3); 2018 Rule 606 Amendments Release, 
83 FR 58338 at 58345 (Nov. 19, 2018) (stating that by using the not 
held order distinction, Rule 606(b)(3) as adopted will likely result 
in more Rule 606(b)(3) disclosures for order flow that is typically 
characteristic of institutional customers--not retail customers--and 
will likely cover all or nearly all of the institutional order 
flow).
---------------------------------------------------------------------------

    At the time of the 2018 Rule 606 Amendments, the Commission 
considered suggestions from the EMSAC and other commenters that the 
Commission include more or different execution quality statistics in 
the required disclosures.\52\ But the Commission stated that the 
enhancements to Rule 606(a) that it was adopting were appropriately 
designed to enable customers- and retail customers in particular-to 
better assess their broker-dealers' order routing performance and, in 
particular, potential conflicts of interest that their broker-dealers 
face when routing customer orders and how their broker-dealers manage 
those potential

[[Page 26432]]

conflicts.\53\ The Commission further stated the limited modifications 
being adopted at that time were reasonably designed to further the goal 
of enhancing transparency regarding broker-dealers' order routing 
practices and customers' ability to assess the quality of those 
practices, and that the suggested execution quality statistics were not 
necessary to achieve that goal.\54\ However, the Commission stated that 
its determination not to adopt the additional specific disclosures was 
not an indication that the Commission had formed a decision on the 
validity or usefulness of the suggested execution quality 
statistics.\55\
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    \52\ See 2018 Rule 606 Amendments Release, 83 FR 58338 at 58379 
(Nov. 19, 2018). See also Proposing Release, 88 FR 3786 at 3790, 
n.66 (Jan. 20, 2023) and accompanying text.
    \53\ See 2018 Rule 606 Amendments Release, 83 FR 58338 at 58379 
(Nov. 19, 2018).
    \54\ See id. The Commission further stated that the amendments 
to Rule 606 provide an appropriate level of insight into the 
widespread financial arrangements between broker-dealers and 
execution venues that may affect broker-dealers' order routing 
decisions. See id.
    \55\ See id.
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    Separately, each broker-dealer has a legal duty to seek to obtain 
best execution of customer orders.\56\ The duty of best execution 
requires broker-dealers to execute customers' trades at the most 
favorable terms reasonably available under the circumstances.\57\ When 
adopting Rules 605 and 606, the Commission stated that these rules do 
not address and therefore do not change the existing legal standards 
that govern a broker-dealer's duty of best execution.\58\ The 
Commission recognized that the information contained in the Rule 605 
reports (and Rule 606 reports) will not, by itself, be sufficient to 
support conclusions regarding a broker-dealer's compliance with its 
legal responsibility to obtain the best execution of customer 
orders.\59\ As the Commission stated, any such conclusions would 
require a more in-depth analysis of the broker-dealer's order routing 
practices than will be available from the disclosures required by the 
rules.\60\
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    \56\ See, e.g., Regulation NMS Adopting Release, 70 FR 37496 at 
37537 (June 29, 2005); Newton v. Merrill, Lynch, Pierce, Fenner & 
Smith, Inc., 135 F.3d 266, 269-70, 274 (3d Cir.), cert. denied, 525 
U.S. 811 (1998); Certain Market Making Activities on Nasdaq, 
Securities Exchange Act Release No. 40900, 53 SEC 1150, 1162 (1999) 
(settled case) (citing Sinclair v. SEC, 444 F.2d 399 (2d Cir. 1971); 
Arleen Hughes, 27 SEC 629, 636 (1948), aff'd sub nom. Hughes v. SEC, 
174 F.2d 969 (D.C. Cir. 1949)). In addition, the Commission has 
separately proposed a rule concerning broker-dealers' duty of best 
execution. See Securities Exchange Act Release No. 96496 (Dec. 14, 
2022), 88 FR 5440 (Jan. 27, 2023) (``Regulation Best Execution 
Proposing Release''). See also Proposing Release, 88 FR 3786 at 
3790, n.69 (Jan. 20, 2023).
    \57\ See Regulation NMS Adopting Release, 70 FR 37496 at 37538 
(June 29, 2005) (referring to the best reasonably available price 
and citing Newton, 135 F.3d at 266, 269-70, 274). Newton also 
specified certain other factors relevant to best execution--order 
size, trading characteristics of the security, speed of execution, 
clearing costs, and the cost and difficulty of executing an order in 
a particular market. See Newton, 135 F.3d at 270, n.2. See also 
Proposing Release, 88 FR 3786 at 3791, n.70 (Jan. 20, 2023).
    \58\ See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75420 
(Dec. 1, 2000).
    \59\ See id.
    \60\ See id. For example, the execution quality statistics 
included in Rule 605 do not encompass every factor that may be 
relevant in determining whether a broker-dealer has obtained best 
execution, and the statistics in a market center's reports typically 
will reflect orders received from a number of different routing 
broker-dealers. See id. See also infra notes 1097-1098 and 
accompanying text for discussion of an investment adviser's 
fiduciary duty, including the duty to seek best execution of a 
client's transactions where the investment adviser has the 
responsibility to select broker-dealers to execute client trades. 
See also Proposing Release, 88 FR 3786 at 3791 (Jan. 20, 2023).
---------------------------------------------------------------------------

B. Overview of the Proposal and Comments Received

    In acknowledgment of the myriad changes to the securities markets 
since the adoption of Rule 605 more than two decades ago, the proposed 
amendments to Rule 605 sought to ensure the continued transparency and 
utility of the execution quality statistics required by Rule 605. The 
Commission proposed to amend Rule 605 by expanding the scope of 
reporting entities to include broker-dealers with a larger number of 
customers (``larger broker-dealers'').\61\ The Commission also proposed 
to modify the set of required data to capture execution quality 
information for more order types and sizes, require time-based 
execution statistics to be at a more granular level, and enhance the 
utility of the statistics.\62\ The Commission further proposed to 
require that reporting entities provide a report of summary execution 
quality statistics, in addition to the more detailed reports.\63\
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    \61\ See Proposing Release, 88 FR 3786 at 3796-3801 (Jan. 20, 
2023). Throughout the release, the term ``larger broker-dealer'' 
refers to a broker-dealer that meets or exceeds the ``customer 
account threshold,'' as defined in final Rule 605(a)(7). See also 
infra section II.A.
    \62\ See Proposing Release, 88 FR 3786 at 3804-22 (Jan. 20, 
2023).
    \63\ See id. at 3823-25.
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    The Commission received numerous comment letters in response to the 
Proposing Release, a large portion of which were from individual 
investors.\64\ Many commenters supported updating the disclosures 
required by Rule 605.\65\ Several commenters, including industry 
groups, broker-dealers, financial services firms,\66\ and investor 
advocacy groups, suggested clarifications or changes to the scope of 
reporting entities and to certain proposed metrics included in the 
detailed report or summary report.\67\ Other commenters broadly 
supported the more detailed recommendations of other commenters.\68\
---------------------------------------------------------------------------

    \64\ The Commission received comments from a wide range of 
market participants, including individual investors, broker-dealers, 
academics, securities industry groups, national securities 
exchanges, and investor advocacy groups. Comments received on the 
Proposing Release are available on the Commission's website, 
available at https://www.sec.gov/comments/s7-29-22/s72922.htm.
    \65\ See, e.g., letters from: Ellen Greene, Managing Director, 
Equity Options Market Structure, SIFMA (Mar. 31, 2023) (``SIFMA 
Letter II'') at 2; Stephen John Berger, Managing Director, Global 
Head of Government and Regulatory Policy, Citadel Securities (Mar. 
31, 2023) (``Rule 605 Citadel Letter'') at 1; Stephen W. Hall, Legal 
Director and Securities Specialist, Better Markets, Inc. (Mar. 31, 
2023) (``Better Markets Letter'') at 1-2.
    \66\ As used in this release, ``financial services firm'' refers 
to an entity that includes multiple types of affiliated entities 
providing financial services, including broker-dealers, investment 
advisers, or banks.
    \67\ See, e.g., SIFMA Letter II at 27-28; and letters from: 
Howard Meyerson, Managing Director, Financial Information Forum 
(Mar. 31, 2023) (``FIF Letter'') at 2-5; Tyler Gellasch, President 
and CEO, Healthy Markets Association (Mar. 31, 2023) (``Healthy 
Markets Letter'') at 16-18; Douglas A. Cifu, Chief Executive 
Officer, Virtu Financial, Inc. (Mar. 30, 2023) (``Virtu Letter II'') 
at 10-12. These and other comment letters discussing the scope of 
reporting entities and proposed metrics included in the detailed 
report or summary report are described infra throughout this 
release.
    \68\ See, e.g., Rule 605 Citadel Letter at 5; and letters from: 
Ryan Kwiatkowski, Chairman of the Board, and James Toes, President & 
CEO, Security Traders Association (Apr. 3, 2023) (``STA Letter'') at 
4-5; Derrick Chan, Head of Equities, Fidelity Capital Markets (Mar. 
31, 2023) (``Fidelity Letter'') at 2, 8; Naureen Hassan, President, 
UBS Americas, Robert Karofsky, President, UBS Investment Bank, and 
Suni Harford, President, UBS Asset Management, UBS (Mar. 31, 2023) 
(``UBS Letter'') at 2; Tim Gately, Managing Director, Head of 
Equities Sales, Americas, Citigroup Global Markets Inc. (Mar. 31, 
2023) (``CGMI Letter'') at 1-2, 3; Jason Clague, Managing Director, 
Head of Operations, The Charles Schwab Corporation (Mar. 31, 2023) 
(``Schwab Letter II'') at 2, 30, 33. These and other comment letters 
discussing the recommendations of other commenters are described 
infra throughout this release. Several individual investors stated 
that in Dec. 2022, FINRA and the Commission sent out risk alerts 
regarding a lack of compliance with reports pursuant to Rule 606 of 
Regulation NMS and that ``one would suspect that brokers will be as 
non-compliant with the new 605 reports.'' Letter Type D; Letter Type 
E; and Letter Type H at https://www.sec.gov/comments/s7-29-22/s72922.htm. The Commission will monitor the implementation of the 
amendments to Rule 605.
---------------------------------------------------------------------------

    One industry group recommended that the Commission reissue the 
proposed rule after incorporating comments from it and other market 
participants ``to ensure that the final rule achieves the Commission's 
intended purpose and allow market participants to identify additional 
enhancements.'' \69\ A broker-dealer

[[Page 26433]]

stated that the Commission should provide market participants the 
opportunity to review and comment on such a revised proposal prior to 
finalization.\70\ The Commission does not agree with these commenters. 
Delaying the adoption of a final rule, and thereby delaying the 
benefits of Rule 605, is not warranted. The Commission has reviewed and 
carefully considered the extensive comment file,\71\ which included 
input from a broad array of market participants, and as discussed 
below, has made certain changes in response to these comments.\72\ For 
these reasons, re-proposal of the Rule 605 amendments is not necessary.
---------------------------------------------------------------------------

    \69\ Letter from Howard Meyerson, Managing Director, Financial 
Information Forum (June 22, 2023) (``FIF Letter II'') at 11. See 
also letter from Howard Meyerson, Managing Director, Financial 
Information Forum (Feb. 14, 2024) (``FIF Letter III'') at 2, 5.
    \70\ See letter from Stephen John Berger, Managing Director, 
Global Head of Government & Regulatory Policy, Citadel Securities 
(Dec. 5, 2023) (``Equity Market Structure Citadel Letter II'') at 3.
    \71\ The Commission voted to issue the Proposing Release on Dec. 
14, 2022. The release was posted on the Commission's website that 
day, and comment letters were received beginning the same day. The 
comment period closed on Mar. 31, 2023. The Commission has 
considered comments received since Dec. 14, 2022.
    \72\ In addition, as discussed above, the EMSAC and commenters 
responding to the Commission's Concept Release on Equity Market 
Structure and to the 2018 Rule 606 Amendments recommended that the 
Commission update Rule 605 and one broker-dealer petitioned the 
Commission to amend the Rule. See supra notes 40-44, 52, and 
accompanying text. The Commission considered these suggestions when 
proposing amendments to Rule 605. See Proposing Release, 88 FR 3786 
at 3792-95 (Jan. 20, 2022).
---------------------------------------------------------------------------

    Contemporaneously with the proposal to modify Rule 605, the 
Commission issued three other proposals related to separate aspects of 
equity market structure and Regulation NMS.\73\ A number of commenters 
provided comments on all four proposals jointly.\74\ Some commenters 
requested that the Commission publicly release anonymized subsets of 
CAT data used in connection with the tables and figures in the 
proposals' economic analyses.\75\
---------------------------------------------------------------------------

    \73\ See Regulation Best Execution Proposing Release, 88 FR 5440 
(Jan. 27, 2023) (proposing rule that would establish Commission 
rule-based best execution standards); and Securities Exchange 
Release Nos. 96494 (Dec. 14, 2022), 87 FR 80266 (Dec. 29, 2022) 
(``Minimum Pricing Increments Proposing Release'') (proposing 
amendments to Regulation NMS to reduce minimum pricing increments, 
add a minimum trading increment, reduce access fee caps, improve 
transparency of exchange fees and rebates, and enhance the 
transparency of market data infrastructure); 96495 (Dec. 14, 2022), 
88 FR 128 (Jan. 3, 2023) (``Order Competition Rule Proposing 
Release'') (proposing rule that would enhance competition for the 
execution of marketable orders of individual investors).
    \74\ See, e.g., SIFMA Letter II (Mar. 31, 2023); Equity Market 
Structure Citadel Letter II (Dec. 5, 2023); and letters from: 
Michael Blaugrund, Chief Operating Officer, NYSE Group, Inc., Jason 
Clague, Managing Director, Head of Operations, Charles Schwab & Co., 
and Joseph Mecane, Head of Execution Services, Citadel Securities 
(Mar. 6, 2023) (``NYSE, Schwab, and Citadel Letter''); Christopher 
A. Iacovella, President & Chief Executive Officer, American 
Securities Association (Mar. 31, 2023) (``American Securities 
Association Letter II''); Hope Jarkowski, General Counsel, NYSE 
Group, Inc. (Mar. 31, 2023) (``NYSE Letter''); Stephen John Berger, 
Managing Director, Global Head of Government & Regulatory Policy, 
Citadel Securities (Mar. 31, 2023) (``Equity Market Structure 
Citadel Letter''); Jason Clague, Managing Director, Head of 
Operations, The Charles Schwab Corporation (Mar. 22, 2023) (``Schwab 
Letter''); Kirsten Wegner, Chief Executive Officer, Modern Markets 
Initiative (Mar. 24, 2023) (``Modern Markets Initiative Letter''); 
Joanna Mallers, Secretary, FIA Principal Traders Group (Mar. 31, 
2023) (``FIA PTG Letter II''); Peter D. Stutsman, Global Head of 
Equity Trading, and Timothy J. Stark, Head of Equity Markets and 
Transaction Research, The Capital Group Companies, Inc. (Mar. 31, 
2023) (``Capital Group Letter''); Andrew Hartnett, NASAA President 
and Deputy Commissioner, Iowa Insurance Division, North American 
Securities Administrators Association, Inc. (Mar. 31, 2023) (``NASAA 
Letter''); David Howson, Executive Vice President, Global President, 
Cboe Global Markets, Nathaniel N. Evarts, Managing Director, Head of 
Trading, Americas, State Street Global Advisors, Kimberly Russell, 
Market Structure Specialist, Global SPDR Business, State Street 
Global Advisors, Mehmet Kinak, Global Head of Equity Trading, T. 
Rowe Price, Todd Lopez, Americas Head of Execution Services, UBS 
Securities LLC, and Douglas A. Cifu, Chief Executive Officer, Virtu 
Financial, Inc. (Mar. 24, 2023) (``Cboe, State Street, et al., 
Letter''); John A. Zecca, Executive Vice President, Global Chief 
Legal, Risk & Regulatory Officer, Nasdaq, Inc. (Mar. 30, 2023) 
(``Nasdaq Letter''); Jennifer W. Han, Executive Vice President, 
Chief Counsel & Head of Global Regulatory Affairs, Managed Funds 
Association (Mar. 30, 2023) (``Managed Funds Association Letter''); 
Jonathan Kanter, Assistant Attorney General, Antitrust Division, 
U.S. Department of Justice (Apr. 11, 2023) (``DOJ Letter''); 
Nathanial N. Evarts, Managing Director, Head of Trading, Americas, 
and Kimberly Russell, Market Structure Specialist, Global SPDR 
Business, State Street Global Advisors (Mar. 30, 2023) (``State 
Street Global Advisors Letter''); Michael Markunas, Deputy General 
Counsel, Chief Compliance Officer, B. Riley Securities, Inc. (Mar. 
31, 2023) (``B. Riley Letter'').
    \75\ See, e.g., Virtu Letter at 1; Equity Market Structure 
Citadel Letter at 16-17; Schwab Letter II at 3-4 (``there is a 
distinct absence of economic data to support many aspects of the 
Proposals and to support the Commission's analysis of costs versus 
benefits . . . CAT data is not publicly available and thus public 
commenters . . . do not have access to the very data on which the 
Commission relies''); and letters from: Ellen Greene, Managing 
Director, Equity & Options Market Structure, SIFMA (Feb. 8, 2023) 
(``SIFMA Letter'') at 3-4; Kristen Malinconico, Director, Center for 
Capital Markets Competitiveness, U.S. Chamber of Commerce (Mar. 31, 
2023) (``Chamber of Commerce Letter'') at 2-3. Some of these 
commenters also requested that the Commission identify the specific 
broker-dealers whose Rule 605 and Rule 606 reports, which are 
publicly available, were used in the proposals. See, e.g., SIFMA 
Letter at 2; Virtu Letter at 1-2.
---------------------------------------------------------------------------

    The Commission is not releasing anonymized subsets of CAT data used 
in connection with the proposals, including CAT data used in connection 
with data and figures in the Proposing Release. The CAT database 
contains highly sensitive and granular market information.\76\ The 
Commission fully described in the Proposing Release and this Release 
the CAT data used, the methodology for analysis, and the results of its 
analyses. This provides notice of the Commission's use and analysis of 
CAT data in support of this rulemaking.\77\
---------------------------------------------------------------------------

    \76\ See, e.g., Securities Exchange Act Release No. 67457 (July 
18, 2012), 77 FR 45722 at 56978 (Aug. 1, 2012) (stating that 
maintaining the confidentiality of customer and other information 
reported to CAT ``is essential'' and that ``[w]ithout adequate 
protections, market participants would risk the exposure of highly-
confidential information about their trading strategies and 
positions''); Securities Exchange Act Release No. 84696 (Nov. 15, 
2016), 81 FR 84696 (Nov. 23, 2016) (stating that a security breach 
involving CAT data could, among other things, ``leak highly-
confidential information about trading strategies or positions, 
which could be deleterious for market participants' trading profits 
and client relationships'' or ``expose proprietary information about 
the existence of a significant business relationship with either a 
counterparty or a client, which could reduce business profits'').
    \77\ In addition, the Commission declines to provide the 
identities of the specific broker-dealers whose Rule 606 reports 
were used in connection with the Proposing Release. See supra note 
75. The reports themselves are publicly available and interested 
parties can analyze these reports using their own selection of 
broker-dealers. As with the CAT data, the Commission has fully 
described in the Proposing Release the Rule 606 data used, the 
methodology for analysis, and the results of its analyses. This 
information provides notice of the Commission's use and analysis of 
Rule 606 data used in support of this rulemaking.
---------------------------------------------------------------------------

    Market participants, such as broker-dealers, may analyze their own 
order and transaction information as well as commercially available 
data and use this analysis to provide meaningful comment on the 
Proposing Release from their own perspectives.\78\ The level of 
aggregation that would be required to protect market and proprietary 
information so that it cannot be used, either itself, or with other 
commercially or publicly available information, to reverse engineer or 
otherwise reveal market participants' identities, market

[[Page 26434]]

positions, or trading strategies would also mean that the dataset would 
be substantially dissimilar from the actual data used in the 
Commission's analysis.
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    \78\ For example, the SEC's MIDAS analytics tool collects and 
processes data from the consolidated tapes as well as from the 
separate proprietary feeds made individually available by each 
equity exchange. See MIDAS: Market Information Data Analytics 
System, SEC, available at https://www.sec.gov/marketstructure/midas-system. See also letter from John Ramsay, Chief Market Policy 
Officer, Investors Exchange LLC (``IEX'') (Oct. 13, 2023) (``IEX 
Letter'') at 3 (stating that there are ``myriad sources of 
information that . . . market participants draw on to consider how 
orders are handled and how markets compete with and compare to each 
other,'' including NYSE TAQ data, other exchange proprietary and 
consolidated market data, and FINRA's reports on off-exchange 
trading). See also, e.g., infra note 330 (FIF Letter) and 
accompanying text; notes 113-114 (Professor Christopher Schwarz, 
University of California Irvine, Professor Brad Barber, University 
of California, Davis, Professor Xing Huang, Washington University in 
St. Louis, Professor Philippe Jorion, University of California, 
Irvine, Professor Terrance Odean, University of California, Berkeley 
(Feb. 7, 2023) (``Professor Schwarz et al. Letter'')) and 
accompanying text.
---------------------------------------------------------------------------

    In addition, several commenters suggested a sequencing of the 
equity market structure proposals, such that the Commission would 
implement the amendments to Rule 605 and evaluate the execution quality 
data from the updated reports, before undertaking further action on the 
remaining equity market structure proposals.\79\ One group of members 
of Congress recommended that no equity market structure rule ``should 
be finalized or implemented'' until the Commission ``[c]onduct[s] a 
comprehensive cost-benefit analysis of the aggregate impact of [these 
rules] and seek[s] public comment on this analysis[,]'' and proposes 
``a reasonable, workable, and staggered schedule for public comment on 
the adoption and implementation of the proposals, considering their 
overlapping nature, significant compliance and operational burdens, and 
if they may be insurmountable for smaller or emerging firms.'' \80\ As 
discussed below in the economic analysis, the Commission uses as a 
baseline the world as it exists today, including adopted rules but not 
proposed rules.\81\ Comments on how the adoption of the Rule 605 
amendments should affect the timing or sequence of the other equity 
market structure proposals will be considered if and when those rules 
are acted on. Similarly, because the effects of the final rule are 
measured against the existing regulatory baseline, which does not 
include rules that have not been adopted, the Commission does not agree 
that an additional analysis of the aggregate impact of the several 
equity market structure rules is necessary before the adoption of the 
Rule 605 amendments.\82\
---------------------------------------------------------------------------

    \79\ See, e.g., SIFMA Letter II at 2 (``[o]nce an amended Rule 
605 is implemented, the Commission will have the data it needs to 
fully assess market quality and consider whether additional 
rulemaking is needed and how any such rulemaking should be 
designed''); Equity Market Structure Citadel Letter II at 1-3; NYSE, 
Schwab and Citadel Letter at 1-2; STA Letter at 4; Modern Markets 
Initiative Letter at 2; Cboe, State Street, et al. Letter dated Mar. 
24, 2023 at 1-2; Managed Funds Association Letter at 2; T. Rowe 
Letter at 3; UBS Letter at 1-2; Virtu Letter II at 2; SIFMA Letter 
II at 11; Professor Schwarz et al. Letter at 5; and letters from 
Bill Foster, French Hill, Henry Cuellar, Bill Huizenga, Wiley 
Nickel, Andy Barr, Ritchie Torres, Ann Wagner, Brittany Pettersen, 
Dan Meuser, Josh Gottheimer, Mike Flood, Vicente Gonzalez, Byron 
Donalds, Mike Quigley, Michael V. Lawler, David Scott, Andrew R. 
Garbarino, Gregory W. Meeks, Monica De La Cruz, Sean Casten, Scott 
Fitzgerald, Bradley S. Schneider, Erin Houchin, Jim Himes, Young 
Kim, Steven Horsford, Ralph Norman, Gwen Moore, Tom Emmer, Marc 
Veasey, and Zach Nunn, United States House of Representatives (Sep. 
26, 2023) at 2; Michelle Bryan Oroschakoff, Managing Director and 
Chief Legal Officer, LPL Financial (Mar. 31, 2023) (``LPL Financial 
Letter'') at 3-4; Chester Spatt, Pamela R. and Kenneth B. Dunn 
Professor of Finance, Tepper School, Carnegie Mellon University and 
former Chief Economist, U.S. Securities and Exchange Commission 
(2004-2007), Thomas Ernst, Assistant Professor of Finance, Smith 
School of Business, University of Maryland, Andrey Malenko, 
Professor of Finance, Carroll School of Management, Boston College, 
Jian Sun, Assistant Professor of Finance, Le Kong Chian School of 
Business, Singapore Management University (Nov. 29, 2023) 
(``Professor Spatt et al. Letter'') at 5; see also letter from 
Patrick McHenry, French Hill, Frank Lucas, Pete Sessions, Bill 
Posey, Blaine Luetkemeyer, Bill Huizenga, Ann Wagner, Andy Barr, 
Roger Williams, Tom Emmer, Barry Loudermilk, Alexander X. Mooney, 
Warren Davidson, John Rose, Bryan Steil, William Timmons, Ralph 
Norman, Dan Meuser, Scott Fitzgerald, Andrew R. Garbarino, Young 
Kim, Byron Donalds, Mike Flood, Michael V. Lawler, Zach Nunn, Monica 
De La Cruz, Erin Houchin, and Andy Ogles, United States House of 
Representatives (Sept. 26, 2023) (``McHenry et al. Letter'') at 2. 
But see IEX Letter at 5 (``the premise that Rule 605 updates must be 
a precondition to any other changes looks more like a calculated 
stall than an argument for careful, reasoned decision making''); 
letter from Stephen W. Hall, Legal Director and Securities 
Specialist, Better Markets, Inc. (Oct. 31, 2023) (``Better Markets 
Letter II'') at 5 (``argument that the Commission should first get 
more information is a delaying tactic designed to forestall 
meaningful reforms that are already clearly necessary and 
appropriate'').
    \80\ See McHenry et al. Letter at 2. As discussed further below, 
Rule 605 as amended imposes reporting requirements only on market 
centers and larger broker-dealers that meet the customer account 
threshold (i.e., introduce or carry at least 100,000 customer 
accounts) and thus does not bring smaller or emerging firms within 
scope on the basis of their customer-facing broker-dealer business. 
The Commission addresses the impact of its rulemaking on smaller or 
emerging firms in its releases, including this release. See infra 
section IX.D.1.d)(1). Further, the Regulatory Flexibility Act 
(``RFA'') (5 U.S.C. 601 et seq.) requires Federal agencies, in 
promulgating rules, to consider the impact of those rules on small 
entities. See infra section X for further discussion of the 
Commission's consideration of the impact of the amendments on small 
entities.
    \81\ See infra note 981.
    \82\ See id. The Order Competition Rule Proposing Release, the 
Regulation Best Execution Proposing Release, and the Minimum Pricing 
Increments Proposing Release mentioned by commenters remain at the 
proposal stage. To the extent that the Commission takes final action 
on any or all of those proposals, the baseline in each of those 
subsequent rulemakings will reflect the regulatory landscape that is 
current at that time. See also infra section IX.C.1.d).
---------------------------------------------------------------------------

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

C. Overview of Final Rule 605

    After reviewing the comments received and considering the 
recommendations from commenters,\83\ the Commission has determined to 
adopt the proposal with several modifications. In some cases, final 
amendments to Rule 605 add new data elements that provide additional 
context and information for both the detailed and summary execution 
quality reports. In adopting the final amendments to Rule 605, the 
Commission aims to provide individual investors, institutional 
customers, and broker-dealers with information that they can use to 
choose market centers or broker-dealers that align with their 
investment and execution objectives. Further, as with Rule 605 reports 
prior to these amendments,\84\ the Commission anticipates that third 
parties, such as academics and journalists, will also utilize the 
reported execution quality data for comparison purposes and analysis of 
market conditions.
---------------------------------------------------------------------------

    \83\ See, e.g., FIF Letter, SIFMA Letter II.
    \84\ See, e.g., supra note 16 (discussing studies by Boehmer et 
al. and Zhao & Chung).
---------------------------------------------------------------------------

    As discussed in section II (Modifications to Reporting Entities) 
below, the Commission is adopting the amendments to the scope of 
reporting entities largely as proposed, with a few modifications. The 
Commission is retaining in the adopted amendments to Rule 605 the 
proposed requirements that brokers and dealers introducing or carrying 
100,000 or more customer accounts prepare Rule 605 reports and that 
separate reports be prepared for a firm's broker-dealer activity and 
its market center activity. The Commission is also providing additional 
explanation of these requirements. The Commission has determined not to 
require market centers that operate a proposed qualified auction to 
prepare a separate report for covered orders received for execution in 
the qualified auction. The Commission is specifying that ATSs must 
prepare Rule 605 reports separately from their broker-dealer operators 
as proposed and is also retaining the proposed requirement that a 
broker-dealer that operates an SDP prepare a separate report for 
activity specific to the SDP, but with a modified description of what 
constitutes an SDP.
    In addition, as discussed in section III (Modifications to Scope of 
Orders Covered and Required Information) below, the Commission is 
adopting amendments to the information required to be reported in the 
detailed report required by Rule 605(a)(1) with modifications from the 
proposal. The Commission is adopting amendments to

[[Page 26435]]

the scope of covered orders largely as proposed, with changes to the 
coverage of orders with stop prices. The Commission is also revising 
the categorization by order size from the proposal to incorporate 
notional size buckets and whether an order is for less than a share, is 
an odd-lot, or is a round lot. With respect to the categorization by 
order type, the Commission is adopting the categorization of executable 
NMLOs as proposed, but is modifying the categorization of NMLOs priced 
at or better than the midpoint and adding more categories of immediate-
or-cancel orders and more categories related to orders submitted with 
stop prices. The Commission is also adopting a timestamp convention of 
at least a millisecond as proposed, but eliminating the proposed 
statistics for median and 99th percentile time to execution in favor of 
utilizing more granular time-to-execution buckets. Further, the 
Commission is adopting the other required statistics for inclusion in 
the detailed report with several changes from the proposal, including: 
(1) adding realized spread statistics for more time intervals; (2) 
calculating effective spread and effective spread divided by quoted 
spread for marketable order types and NMLOs priced more aggressively 
than the midpoint only; (3) utilizing spread-based weighting to 
calculate effective spread divided by quoted spread; (4) adding 
statistics for average quoted spread, average midpoint, and cumulative 
notional size; (5) measuring size improvement at time of order receipt 
rather than time of execution, adding an additional size improvement 
statistic focused on orders that can receive size improvement, and 
calculating these size improvement statistics for marketable order 
types and NMLOs priced more aggressively than the midpoint only; and 
(6) adding a relative fill rate statistic for NMLOs based on order 
executions occurring on national securities exchanges.
    Further, as discussed in section IV (Summary Execution Quality 
Report) below, the Commission is adopting a requirement for a summary 
report pursuant to Rule 605(a)(2), with several changes from the 
proposal. The Commission is changing the weighting of certain 
statistics and grouping orders into notional size buckets. The 
Commission is modifying the required statistics related to average 
order size in shares; share-weighted average percentage price 
improvement; and effective spread divided by quoted spread. The 
Commission is including additional metrics in the summary report for 
share-weighted average midpoint; share-weighted average notional size; 
average percentage quoted spread; and average percentage realized 
spread as calculated at two time horizons. The Commission also is 
requiring that the summary report be provided in an alternative format.
    Finally, as discussed in section V (Requirements for Making Rule 
605 Reports Available to the Public) below, the Commission is adopting 
procedures for making the Rule 605 reports publicly available as 
proposed.
    The Commission endeavors to ensure that investors are provided with 
timely and accurate information needed to make informed investment 
decisions, and the final amendments to Rule 605 reflect the 
Commission's ongoing commitment to enhance transparency for investors. 
Facilitating the ability of the public to compare and evaluate 
execution quality among different market centers, brokers, and dealers, 
is an effective means of reconciling the need to promote both vigorous 
price competition and fair competition among market centers and broker-
dealers, to the benefit of individual investors. Section 11A of the 
Exchange Act \85\ grants the Commission the authority to promulgate 
rules necessary or appropriate to assure the fairness and usefulness of 
information on securities transactions \86\ and to assure that broker-
dealers transmit and direct orders for the purchase or sale of 
qualified securities in a manner consistent with the establishment and 
operation of a national market system.\87\ By requiring the uniform 
public disclosure of useful and accessible statistics, amended Rule 605 
will better promote competition among market centers and broker-dealers 
on the basis of execution quality and ultimately improve the efficiency 
of securities transactions, consistent with the objectives of our 
national market system.\88\
---------------------------------------------------------------------------

    \85\ 15 U.S.C. 78k-1.
    \86\ 15 U.S.C. 78k-1(c)(1)(B).
    \87\ 15 U.S.C. 78k-1(c)(1)(E).
    \88\ The national market system objectives of section 11A of the 
Exchange Act include the economically efficient executions of 
securities transactions; fair competition among brokers and dealers, 
among exchange markets, and between exchange markets and markets 
other than exchange markets; the availability of information on 
securities quotations and transactions; and the practicability of 
brokers executing investor orders in the best market. See 15 U.S.C. 
78k-1(a)(1)(C).
---------------------------------------------------------------------------

II. Modifications to Reporting Entities

A. Larger Broker-Dealers

1. Proposed Approach
    Prior to the adopted amendments, Rule 605 of Regulation NMS 
required only market centers, such as national securities exchanges, 
OTC market makers, and ATSs, to produce publicly available, monthly 
execution quality reports. The Commission proposed to expand the scope 
of entities that must prepare Rule 605 reports to include larger 
broker-dealers that introduce or carry at least 100,000 customer \89\ 
accounts. The Commission reasoned that the proposed expansion would 
``improve the usefulness of execution quality statistics, promote fair 
competition, and enhance transparency by providing investors with 
information that they could use to compare the execution quality 
provided by customer-facing broker-dealers.'' \90\ As discussed further 
below, the proposed minimum reporting threshold of 100,000 customers 
was intended to balance the benefits of having broker-dealers produce 
execution quality statistics with the costs of implementation and 
continued reporting.\91\
---------------------------------------------------------------------------

    \89\ ``Customer'' means any person that is not a broker or 
dealer. See final 17 CFR 242.600(b)(28).
    \90\ Proposing Release, 88 FR 3786 at 3795 (Jan. 20, 2023).
    \91\ See id. at 3797.
---------------------------------------------------------------------------

    To implement this proposed expansion, the Commission proposed to 
insert references to ``brokers'' and ``dealers'' where prior Rule 605 
referred to ``market centers.'' \92\ In addition, the Commission 
proposed to revise the definition of ``covered order'' in prior Rule 
600(b)(22), which referred to any market order or any limit order 
(including immediate-or-cancel orders) ``received by a market center,'' 
\93\ to refer to orders ``received by a market center, broker, or 
dealer.'' \94\
---------------------------------------------------------------------------

    \92\ See id. at 3796 (discussing amendments to Rule 605 in 
proposed Rule 605 introductory text, (a) heading, (a)(1) 
introductory text, (a)(1)(i)(D), and (a)(3), (4), (5), and (6)).
    \93\ Prior 17 CFR 242.600(b)(22).
    \94\ See Proposing Release, 88 FR 3786 at 3796 (Jan. 20, 2023); 
proposed Rule 605(b)(30). The Commission also proposed to require 
all market centers and broker-dealers that would be subject to Rule 
605's reporting requirements to produce summary reports with 
aggregated execution quality information. See infra section IV for 
further discussion of the summary report.
---------------------------------------------------------------------------

    Proposed Rule 605(a)(7) stated that a broker or dealer that is not 
a market center shall not be subject to the requirements of Rule 605 
unless that broker or dealer introduces or carries 100,000 or more 
customer accounts through which transactions are effected for the 
purchase or sale of NMS stocks (the ``customer account 
threshold'').\95\ As explained in the Proposing Release, the Commission 
analyzed available data to determine the proposed customer account 
threshold given the additional costs that broad expansion of the rule 
to

[[Page 26436]]

broker-dealers would entail.\96\ Utilizing a 100,000 customer account 
threshold as proposed would allow the Rule 605 reporting requirements 
to capture those broker-dealers that introduce or carry the vast 
majority of customer accounts, while subjecting only a relatively small 
percentage of broker-dealers that accept customer orders for execution 
to the reporting obligation and excluding those broker-dealers that 
introduce or carry fewer customer accounts.\97\
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    \95\ See Proposing Release, 88 FR 3786 at 3797 (Jan. 20, 2023).
    \96\ See id. at 3797, 3886-87.
    \97\ See id. (discussing analysis of the estimated number of 
broker-dealers that would be subject to Rule 605 reporting 
requirements according to different definitions of the customer 
account threshold). See infra note 146 and accompanying text for a 
discussion of an updated analysis.
---------------------------------------------------------------------------

    The proposed customer account threshold also required brokers-
dealers to include in their calculations the public customer accounts 
that they introduce, as well as the customer accounts that they 
carry.\98\ Because an introducing broker-dealer may use an omnibus 
clearing arrangement and not disclose certain information about its 
underlying customer accounts to the clearing firm, the Commission 
proposed that, for purposes of Rule 605, a broker or dealer that 
utilizes an omnibus clearing arrangement for any of its underlying 
customer accounts would be considered to carry such underlying customer 
accounts when calculating the number of customer accounts that it 
introduces or carries.\99\
---------------------------------------------------------------------------

    \98\ See Proposing Release, 88 FR 3786 at 3797 (Jan. 20, 2023). 
An introducing broker-dealer is a broker-dealer that has a 
contractual arrangement with another firm, known as the carrying or 
clearing firm, under which the clearing/carrying firm agrees to 
perform certain services for the introducing firm. Usually, the 
introducing firm transmits its customer accounts and customer orders 
to the clearing/carrying firm, which executes the orders and carries 
the account. See Securities Exchange Act Release No. 31511 (Nov. 24, 
1992), 57 FR 56973 at 56978 (Dec. 2, 1992) (Net Capital Rule). 
Alternatively, some broker-dealers utilize an ``omnibus clearing 
arrangement,'' where the clearing firm maintains one account for all 
customer transactions of the introducing firm, rather than a ``fully 
disclosed introducing relationship.'' In an omnibus arrangement, the 
clearing firm does not know the identity of the customers of the 
introducing firm, whereas in a fully disclosed arrangement, the 
clearing/carrying firm knows the names, addresses, securities 
positions, and other relevant data as to each customer. See id. at 
56978, n.16.
    \99\ See Proposing Release, 88 FR 3786 at 3797-98 (Jan. 20, 
2023); proposed Rule 605(a)(7).
---------------------------------------------------------------------------

    Proposed Rule 605(a)(7) stated that any broker or dealer that meets 
or exceeds the customer account threshold and is also a market center 
shall produce separate reports pertaining to each function.\100\ 
Further, as proposed a broker-dealer is excluded from Rule 605's 
reporting requirements only with respect to its customer-facing broker-
dealer function (as opposed to its market center function, if 
applicable) if the number of customer accounts that it introduces or 
carries is less than the customer account threshold.\101\ However, 
under the proposal, a broker-dealer that meets or exceeds the customer 
account threshold for the first time has a grace period of three 
calendar months before being required to comply with Rule 605's 
reporting requirements.\102\
---------------------------------------------------------------------------

    \100\ See Proposing Release, 88 FR 3786 at 3798 (Jan. 20, 2023).
    \101\ See id. at 3798-99. Proposed Rule 605(a)(7) stated that a 
broker or dealer that meets or exceeds the customer account 
threshold shall be required to produce reports pursuant to this 
section for at least three calendar months (``Reporting Period''). 
See id. at 3799. As proposed, the Reporting Period shall begin the 
first calendar day of the next calendar month after the broker or 
dealer met or exceeded the customer account threshold, unless it is 
the first time the broker-dealer had met or exceeded the customer 
account threshold. See id. Any time after a broker or dealer has 
been required to produce reports pursuant to this proposed section 
for at least a Reporting Period, if a broker or dealer falls below 
the customer account threshold, the broker or dealer shall not be 
required to produce a report pursuant to this paragraph for the next 
calendar month. See id.
    \102\ See id. at 3799. The Commission also proposed that after 
the three-calendar month grace period, the Reporting Period shall 
begin on the first calendar day of the fourth calendar month after 
the broker or dealer has met or exceeded the customer account 
threshold. See id. As proposed, a broker-dealer that crosses the 
customer account threshold for the first time is required to comply 
with the reporting requirements of Rule 605 for at least a Reporting 
Period, even if that broker-dealer falls below the customer account 
threshold during the grace period. See id.
---------------------------------------------------------------------------

    Prior to the amendments, Rule 605 required that reporting entities 
calculate certain statistics based on the time of order receipt.\103\ 
Moreover, Regulation NMS defined ``time of order receipt'' based on the 
time an order was received by a market center for execution.\104\ In 
conjunction with the proposed expansion of Rule 605 to cover larger 
broker-dealers, the Commission proposed to modify the definition of 
``time of order receipt'' to specify that, in the case of a broker or 
dealer that is not acting as a market center, the time of order receipt 
is the time that the order was received by the broker or dealer for 
execution.\105\
---------------------------------------------------------------------------

    \103\ See, e.g., prior 17 CFR 242.605(a)(1)(ii)(D) (measuring, 
for shares executed with price improvement, the share-weighted 
average period from the time of order receipt to the time of order 
execution).
    \104\ See prior 17 CFR 242.600(b)(92). See also Rule 11Ac1-5 
Adopting Release, 65 FR 75414 at 75423 (Dec. 1, 2000) (``The 
definition [of `time of order receipt'] is intended to identify the 
time that an order reaches the control of the market center that is 
expected, at least initially, to execute the order.'').
    \105\ See Proposing Release, 88 FR 3786 at 3799-800 (Jan. 20, 
2023); proposed Rule 600(b)(109). The time that the order is 
received by the market center for execution should be the same as 
the time that the order is received by the broker-dealer for 
execution when the broker-dealer also acts as a market center for 
that order.
---------------------------------------------------------------------------

2. Final Rule and Discussion
    The Commission is adopting amendments to Rule 605 to include larger 
broker-dealers as proposed and addresses certain commenters' questions 
below. These amendments will provide enhanced transparency to 
investors, allowing them to compare and evaluate execution quality 
among different customer-facing larger broker-dealers and promoting 
competition among these broker-dealers. As discussed in section 
II.A.2.a), the Commission is adopting the customer account threshold as 
proposed. In addition, as discussed in section II.A.2.b), the 
Commission is adopting as proposed the requirement that larger broker-
dealers that are also market centers produce separate reports 
pertaining to each function. Finally, as discussed in section 
II.A.2.c), the Commission is adopting as proposed the requirement that 
all reporting entities, including larger broker-dealers, measure 
certain statistics from the time of order receipt.
    The Commission received comments from a variety of market 
participants on the proposed expansion to require larger broker-dealers 
to provide Rule 605 reports. Certain individual investors supported the 
proposed expansion of publicly available Rule 605 reports to include 
broker-dealers because this expansion would increase transparency and 
encourage competition among broker-dealers.\106\ One such commenter 
stated that the proposal would: (1) require broker-dealers to provide 
more detailed information about the execution quality of their trades, 
including data on execution speeds, price improvements, and order 
routing practices, which would help retail investors ``make more 
informed decisions about where to route our orders and which broker-
dealers to work with''; (2) provide more data on execution quality that 
would ``help level the playing field between individual investors and 
large institutional players who currently have an information 
advantage''; and (3) ``encourage broker-dealers to compete on the 
quality of their executions, which would ultimately benefit all 
investors.'' \107\ Two other individual investors supported the 
inclusion of broker-dealers and the proposed rule overall, stating that 
it would ``provide a more detailed and

[[Page 26437]]

comprehensive standard for broker-dealers to follow, resulting in 
consistently robust best execution practices.'' \108\ In addition, an 
academic and an individual investor suggested expanding the Rule 605 
reporting requirement to include all broker-dealers, rather than just 
larger broker-dealers.\109\
---------------------------------------------------------------------------

    \106\ See, e.g., letters from: Dylan Hodges (Dec. 27, 2022); 
Edward Murray (Dec. 26, 2022); Dr. Paul Pritchard (Dec. 27, 2022); 
Cody Welch (Mar. 7, 2023) (``Welch Letter''); Abanes (Mar. 3, 2023) 
(``Abanes Letter''); Ryan Macarthur (Feb. 24, 2023) (``Macarthur 
Letter''); David Genco, Jr. (Feb. 24, 2023) (``Genco Letter'').
    \107\ Letter from Caleb C. (Mar. 18, 2023).
    \108\ Letters from Justin West (Mar. 19, 2023); Ankit (Mar. 19, 
2023).
    \109\ See letter from Aswin Joy (Mar. 7, 2023) (``Joy Letter''); 
letter from James J. Angel, Georgetown University (Mar. 31, 2023) 
(``Angel Letter'') at 2-3. See infra section II.A.2.a) for 
additional discussion about the scope of the broker-dealer reporting 
requirement.
---------------------------------------------------------------------------

    For reasons similar to those offered by individual investors, 
financial services firms, industry groups, and a group of academics 
supported the proposed expansion of Rule 605 reporting requirements to 
larger broker-dealers.\110\ One financial services firm stated that the 
proposed expansion would ``fill a gap in coverage that currently 
obscures the order handling practices of many broker-dealers'' because 
many customer-facing broker-dealers do not meet the definition of a 
market center and thus do not produce Rule 605 reports.\111\ This 
commenter stated that the customers of these broker-dealers are left 
without any ``reliable way to evaluate and compare broker-dealer 
performance.'' \112\ A group of academics that authored an academic 
working paper concerning the execution quality of market orders 
received from various broker-dealers \113\ also submitted a comment 
letter supporting the proposed expansion and cited the need for 
improved public transparency based on their research.\114\ These 
commenters stated that, even if retail investors do not pay attention 
to broker-level disclosures about execution quality if the dollar cost 
to retail investors is low, such disclosures are likely to be 
scrutinized by brokers, leading to greater competition and ultimately 
better execution for retail investors.\115\ A broker-dealer supported 
the proposed expansion to retail brokers, stating that it will make 
order execution quality, and the marketplace generally, more 
transparent to retail investors.\116\ This commenter also stated that, 
given the ``highly competitive state of the current retail brokerage 
market,'' it is not certain that the proposed enhancements to Rule 605 
would improve execution quality for individual investors because 
outcomes for such investors could be ``asymmetric.'' \117\ However, 
this commenter stated that to the extent that there are opportunities 
to optimize execution quality for individual investors, ``empowering 
investors to compare execution quality across retail brokers (and 
consequently to switch brokers based on this information) would be the 
most efficient and effective way to address these concerns.'' \118\
---------------------------------------------------------------------------

    \110\ See Fidelity Letter at 9 (stating that expanding Rule 605 
reporting requirements to new entities will provide greater 
transparency into execution quality differences and increase the 
ability to measure retail order outcomes in a competitive 
environment); letter from Gregory Davis, Managing Director and Chief 
Investment Officer, and Matthew Benchener, Managing Director, 
Personal Investor, The Vanguard Group, Inc. (Mar. 31, 2023) 
(``Vanguard Letter'') at 3 (stating that the proposal will increase 
transparency by empowering investors to compare execution quality 
across broker-dealers and make more informed decisions about their 
choice of broker-dealer); Healthy Markets Letter at 16 (stating that 
Rule 605 reports should cover large brokers that route orders for 
investors); Better Markets Letter at 5 (stating that the proposed 
expansion of entities subject to Rule 605 disclosures will help the 
public compare and evaluate execution quality among different market 
centers and broker-dealers, and thereby increase transparency of 
order execution quality, increase information available to both 
retail and institutional investors, and help promote competition 
among market centers and broker-dealers); Professor Schwarz et al. 
Letter at 2; and letter from John L. Thornton, Co-Chair, Hal S. 
Scott, President, and R. Glenn Hubbard, Co-Chair, Committee on 
Capital Markets Regulation (Mar. 31, 2023) (``CCMR Letter'') at 14 
(stating that the proposed expansion ``will allow retail investors 
to determine the execution quality of their orders'' and ``would 
likely enhance competition among retail broker-dealers based on 
price improvement and overall execution quality'').
    \111\ See Vanguard Letter at 3.
    \112\ Id. at 3-4 (stating that requiring larger broker-dealers 
to make Rule 605 disclosures would address this coverage gap and 
give their customers a ``direct line of sight into broker-dealer 
performance''). See also NASAA Letter at 5-6 (stating that the 
proposed expansion of reporting entities would ``provide the public 
with a more comprehensive view of order execution quality across the 
national market system'' and ``allow brokerage customers to compare 
execution quality among different broker-dealers'').
    \113\ See Proposing Release, 88 FR 3786 at 3832, n.529 (Jan. 20, 
2023) and accompanying text (citing Christopher Schwarz et al., The 
`Actual Retail Price' of Equity Trades (Aug. 28, 2022)).
    \114\ See Professor Schwarz et al. Letter at 1-2 (strongly 
supporting the inclusion of large broker-dealers given their 
research study finding that shows economically and statistically 
significant price execution variation across brokers; the level of 
such differences was previously unknown to retail traders and a 
large portion of the financial industry). A group consisting of some 
of these academics submitted another comment letter in which they 
cited a more recent academic working paper regarding competition 
among wholesalers and stated that their results ``emphasize the need 
for further price execution disclosure at the broker level.'' Letter 
from Xing Huang, Philippe Jorion, and Christopher Schwarz (Dec. 12, 
2023) (``Huang et al. Letter'') at 1 (attaching Xing Huang, Philippe 
Jorion, Jeongmin Lee & Christopher Schwarz, Who Is Minding the 
Store? Order Routing and Competition in Retail Trade Execution (Nov. 
19, 2023)).
    \115\ See Professor Schwarz et al. Letter at 3. See also Better 
Markets Letter at 9-10 (stating that even though some retail 
investors may not read Rule 605 reports, these investors will 
benefit indirectly by virtue of enhanced disclosure that will 
``promote competition, improve regulatory oversight, and facilitate 
use by third-party researchers and academics'' to expose problematic 
order routing and execution practices).
    \116\ See Virtu Letter II at 3.
    \117\ See id. at 9. This commenter stated that the proposal 
``may lead to changes in the equilibrium mix of customer types at 
each broker'' because investors would migrate towards brokers that 
have better execution quality statistics. See id. at 9, n.24. This 
commenter explained that ``order execution quality tends to be 
inversely related to the aggregate cost to provide liquidity to that 
broker's customers' orders because market makers are willing to 
provide more price improvement to orders that are less expensive to 
service.'' Id. This commenter also stated that if the proposal 
``induces retail investors with more costly to service orders to 
move to brokers that previously had less costly to service orders, 
it could cause execution quality to worsen at the broker with 
previously less costly to service orders.'' Id.
    \118\ Id. at 9.
---------------------------------------------------------------------------

    Some broker-dealers and financial services firms opposed the 
proposed expansion to include larger broker-dealers, citing costs and 
the risk of confusion, especially for individual investors.\119\ One 
such broker-dealer stated that retail customers are not asking for or 
seeking information at the level of granularity required by the 
proposed rule, stating that the potential risk of investor confusion 
seems disproportionate to the defined transparency benefits it may 
provide.\120\ Another commenter opposed the proposed expansion because 
the 605 reports are ``overly complicated for the average investor'' and 
may give a ``false

[[Page 26438]]

sense of comfort'' about order execution practices and quality.\121\
---------------------------------------------------------------------------

    \119\ See Robinhood Letter at 41-42 (stating that adding the 
proposed expansion to include larger broker-dealers is not 
realistically going to get usable execution quality information in 
the hands of individual investors because the voluminous data are in 
a format proven not to be particularly useful for them and that the 
Commission underestimates the costs for a type of report not 
generally prepared by broker-dealers that are not also market 
centers); letter from Seth A. Miller, President Advocacy & 
Administration, Cambridge Investment Research, Inc. (Mar. 31, 2023) 
(``Cambridge Letter'') at 7 (stating in its capacity as a broker-
dealer and investment adviser that the broad scope of the proposed 
inclusion of larger retail broker-dealers will impose significant 
costs and is ``likely to lead to misaligned, misleading comparisons 
between totally different entities''); Schwab Letter II at 35 
(stating that differences in certain execution statistics such as E/
Q may be attributable to different business models across firms 
rather than actual differences in E/Q among comparable business 
models, and thus would create investor confusion rather than provide 
useful information); Tastytrade Letter at 4-5 (observing that the 
proposal will significantly increase the number of reported data 
points per ticker on approximately 10,000 NMS traded products, and 
expressing concern about the ability of customers to digest the 
additional ``confusing and complicated'' data points in Rule 605 
reports).
    \120\ See Tastytrade Letter at 4 (``While we agree in general 
that greater transparency results in a level playing field for 
retail customers, it seems counterproductive to do so in a manner 
that risks confusion.'').
    \121\ See letter from Kelvin To, Founder and President, Data 
Boiler Technologies, LLC (Mar. 31, 2023) (``Data Boiler Letter'') at 
27-28.
---------------------------------------------------------------------------

    After considering the comments, the Commission is adopting the 
requirement for broker-dealers that meet the 100,000 customer account 
threshold to produce Rule 605 reports, as proposed. To implement this 
requirement, the Commission also is adopting the related amendments to 
Rules 600 and 605.\122\ The Commission agrees with commenters who 
recognized the need for Rule 605 data pertaining to customer-facing 
larger broker-dealers. Larger broker-dealer reporting will be useful in 
increasing the transparency of larger broker-dealers' order execution 
quality so that investors have information available to compare and 
evaluate order execution quality and order routing practices among 
market centers and larger broker-dealers. As discussed further in 
section II.A.2.a) below, by limiting Rule 605 reporting requirements to 
larger-broker dealers that meet the customer account threshold only, 
Rule 605 will balance the benefits of broker-dealer reporting with the 
costs.
---------------------------------------------------------------------------

    \122\ See final 17 CFR 242.605(a)(7) (establishing the customer 
account threshold for larger broker-dealer reporting requirements, 
production of separate reports, and applicable Reporting Period). 
See also final 17 CFR 242.605 (inserting references to ``brokers'' 
and ``dealers'' in introductory text, heading for (a), (a)(1) 
introductory text, (a)(1)(i)(E), and (a)(3), (4), (5), and (6)). See 
also final 17 CFR 242.600(b)(27) (inserting references to orders 
received by a ``broker'' or ``dealer'' in definition of ``covered 
order'') and final 17 CFR 242.600(b)(103) (specifying that the 
definition of ``time of order receipt,'' in the case of a broker or 
dealer that is not acting as a market center, is the time (at a 
minimum to the millisecond) that an order was received by the broker 
or dealer for execution). For further discussion of these 
amendments, see Proposing Release, 88 FR 3786 at 3796, 3798-99 (Jan. 
20, 2023).
---------------------------------------------------------------------------

    The Commission disagrees with commenters' concerns that larger 
broker-dealer reporting will be too confusing or misleading to 
investors, or will create a ``false sense of comfort'' about order 
execution practices and quality.\123\ Individual investor commenters 
expressed interest in receiving access to execution quality statistics 
pertaining to larger broker-dealers because this increased transparency 
would allow individual investors to make more informed decisions and 
encourage competition among larger broker-dealers.\124\ Due to the 
expansion of Rule 605 reporting requirements to larger broker-dealers, 
customers of these broker-dealers, including individual investors, and 
other market participants will no longer need to make inferences about 
these broker-dealers' execution quality based on a combination of 
broker-dealers' routing information contained in reports required by 
Rule 606 and market centers' Rule 605 reports. Instead, customers will 
be able to use execution quality information contained in larger 
broker-dealers' Rule 605 reports to make comparisons across these 
broker-dealers and select those broker-dealers that offer better 
execution quality. The availability of information about larger broker-
dealers' execution quality also is expected to increase the extent to 
which these broker-dealers compete on the basis of execution quality 
when making their order routing decisions. Further, to the extent that 
broker-dealers increase the extent to which they route orders to the 
market centers offering better execution quality, increased liquidity 
at those venues may further improve execution quality, as a result of 
promoting the flow of orders to market centers that offer better 
execution quality.
---------------------------------------------------------------------------

    \123\ See supra notes 119-121 and accompanying text.
    \124\ See supra notes 106-108 and accompanying text.
---------------------------------------------------------------------------

    The stock-by-stock order execution information that will be 
provided in the detailed report will allow market participants, 
including individual investors familiar with data analysis, to make 
their own determinations about how to group stocks or orders when 
comparing execution quality information across broker-dealers. However, 
the Commission is mindful that the detailed report will contain a 
larger volume of statistical data and many market participants, 
including individual investors, may not have the means to directly 
analyze the detailed report. As discussed further below, the Commission 
is adopting a requirement that every market center, broker, or dealer 
produce a summary execution quality report in addition to the more 
detailed report required by Rule 605(a)(1).\125\ These summary reports 
will make available to market participants and other interested parties 
readily accessible, aggregated data that will allow them to compare 
some of the more significant aspects of the execution quality provided 
by specific market centers and larger broker-dealers. These summary 
reports will provide human-readable information that any investor, 
including individual investors, can assess without needing technical 
expertise or relying on an intermediary.\126\ Moreover, even individual 
investors that do not read Rule 605 reports from larger broker-dealers 
will benefit from independent analysts, consultants, broker-dealers, 
the financial press, or market centers analyzing and producing more 
digestible information using Rule 605 data.\127\
---------------------------------------------------------------------------

    \125\ See infra section IV.B.
    \126\ See infra section IV.B.2. For a discussion of comments 
regarding investor education or testing related to the summary 
reports, see infra section IV.B.3. As the new Rule 605 requirements, 
including the expansion of scope to include larger broker-dealers, 
are implemented, the Commission will consider whether there is a 
need for additional educational resources to assist investors.
    \127\ See infra notes 1075-1077 and accompanying text 
(discussing ways in which third parties have used Rule 605 reports 
to produce information that is meant for public consumption).
---------------------------------------------------------------------------

    One industry group stated that it remains unclear whether broker-
dealers' Rule 605 reports would increase competition.\128\ This 
commenter stated its concern that producing Rule 605 statistics without 
accounting for different broker-dealer business models could lead 
investors to make incorrect decisions regarding broker-dealer 
selection.\129\ This commenter further stated that differences in 
execution quality could be the result of a myriad of factors, including 
``the customers . . . different brokers serve and the equities the 
customers trade.'' \130\ In response to this commenter, the Commission 
agrees that, as a result of different business models, a particular 
broker-dealer's order flow may be made up of a different mixture of 
securities, order types, and order sizes, which may impact or constrain 
that broker-dealer's overall execution quality level.\131\

[[Page 26439]]

However, under these amendments, larger broker-dealers will be required 
to categorize the execution quality information required by Rule 605 by 
individual security, different types of orders, and different order 
sizes. Giving market participants access to this information in Rule 
605 reports will help ensure that they are able to control for these 
differences in order flow characteristics and make apples-to-apples 
comparisons when assessing and comparing execution quality information 
across broker-dealers.\132\
---------------------------------------------------------------------------

    \128\ See SIFMA Letter II at 29.
    \129\ See id. at 30. This commenter also stated it does not 
understand on what basis the Commission believes that differences in 
business models are well-known by market participants, and 
particularly retail investors, for purposes of evaluating execution 
quality statistics. See id. (discussing Proposing Release, 88 FR 
3786 at 3800 (Jan. 20, 2023)). However, the Commission's statement 
in the Proposing Release was made in specific reference to market 
participants' use of Rule 605 reports to compare a market center and 
a broker-dealer, rather than use of Rule 605 reports to compare 
broker-dealers with one another. The Commission agrees with the 
commenter that differences between broker-dealer business models may 
not be ex ante well-known to market participants. However, market 
participants, including individual investors, will be able to use 
the information in Rule 605 detailed reports and the Rule 605 
summary reports to account for differences in broker-dealer order 
flow, and broker-dealers are not precluded from separately providing 
their customers with information that can be used to contextualize 
the information in the Rule 605 reports.
    \130\ See id. at 30 (stating that when pointing to potential 
shifts in order flow from one broker-dealer to another, the 
Commission does not account for any potential effects on execution 
quality caused by the shifting of the order flow itself or the 
potential for order flow to consolidate among a smaller number of 
firms, thereby reducing competition and ultimately hurting execution 
quality).
    \131\ See Proposing Release, 88 FR 3786 at 3831 (Jan. 20, 2023). 
See also infra note 984 for an example of how differences in order 
flow characteristics may impact inferences about execution quality. 
For further discussion, see infra section IX.C.1.a).
    \132\ That some of the information contained in the summary 
execution quality report will be useful for controlling for 
differences across differences in order flow characteristics of 
broker-dealer was supported by comment. See, e.g., comments in 
support of including average notional order size and average 
realized spreads in the summary reports, discussed in infra section 
IV.B.1.b).
---------------------------------------------------------------------------

    An industry group suggested that the Commission allow firms an 
opportunity to provide a statement in their Rule 605 reports explaining 
how to contextualize the report based on the nature of the firm's order 
flow.\133\ In addition, a broker-dealer suggested that the Commission 
permit retail brokers to provide background and contextual information 
to explain how their obligations are different from those of 
wholesalers or other market centers that currently report under Rule 
605.\134\ The Commission is not adopting the suggestion to include a 
descriptive statement within the Rule 605 reports because it would be 
inconsistent with the structure of these reports, which are designed to 
be structured, standardized, machine-readable, quantitative 
disclosures.\135\ As the Commission stated in the original adopting 
release for Rule 605, Rule 605 is intended to establish a baseline 
level of disclosure and facilitate cross-market comparisons of 
execution quality.\136\ Similarly, the adopted amendments to Rule 605 
provide a baseline level of disclosure that all market centers and 
larger broker-dealers must meet. Rule 605 does not preclude larger 
broker-dealers from disclosing additional information concerning their 
order execution practices that they believe would provide useful 
context concerning the quality of their services on their websites or 
through other means of communication.\137\
---------------------------------------------------------------------------

    \133\ See SIFMA Letter II at 31.
    \134\ See Virtu Letter II at 3-4.
    \135\ See Rule 605 NMS Plan at 2 (providing that the detailed 
report must be in standard, pipe-delimited ASCII format); final 17 
CFR 242.605(a)(2) (providing that the summary report must be made 
available using the most recent version of the schema for CSV format 
and the associated PDF renderer).
    \136\ See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75419 
(Dec. 1, 2000).
    \137\ Any such statements will be subject to applicable 
securities laws and regulations.
---------------------------------------------------------------------------

    A broker-dealer recommended that rather than expanding Rule 605 to 
include larger broker-dealers, the Commission should update Rule 606, 
which already applies to nonmarket center broker-dealers, to require 
additional information regarding execution quality.\138\ In response to 
the commenter's suggestion, the Commission considers the inclusion of 
larger broker-dealers in Rule 605 as adopted to be the preferable 
option. Although providing Rule 605 data within an expanded version of 
the existing Rule 606 reports could result in lower compliance costs as 
a result of broker-dealers' existing experience with preparing and 
filing Rule 606 reports, many of the costs associated with the initial 
reporting of execution quality statistics would still be incurred by 
broker-dealers and therefore broker-dealers would not benefit from a 
significant reduction in compliance costs overall. Moreover, the format 
and frequency of the Rule 606 reports differs because the data are more 
aggregated and the reports are issued quarterly.\139\ In contrast, Rule 
605 reports are monthly and provide detailed, symbol-by-symbol data 
that will allow market participants and other users of the report to 
analyze the data and consider the execution quality that a broker-
dealer provides for orders with specific characteristics. Further, 
while Rule 606 covers all brokers or dealers, subject to a de minimis 
exception, as described below, the customer account threshold will 
focus the Rule 605 reporting requirement on those larger broker-dealers 
for which the provision of Rule 605 data will include data for most of 
the customer accounts handled by broker-dealers and, therefore, will 
balance the benefits of broker-dealer reporting with the costs of 
reporting.\140\
---------------------------------------------------------------------------

    \138\ See Robinhood Letter at 42 (``Instead of unnecessarily 
imposing additional costs on the industry to create new Rule 605 
reports that may not have the desired result of empowering investors 
to analyze broker-dealers' execution quality, the SEC should require 
broker-dealers that already publish Rule 606 reports . . . to add 
execution quality statistics to their Rule 606 reports.'').
    \139\ See supra notes 45-51 and accompanying text (discussing 
Rule 606(a)(1) reports that provide quarterly information about 
order routing and payment arrangements).
    \140\ See infra section II.A.2.a) (discussing the Commission's 
analysis to support the adoption of the customer account threshold, 
which indicates that approximately 85 broker-dealers introduce or 
carry more than 100,000 customer accounts and these broker-dealers 
together handle over 98% of customer accounts). See also infra 
section IX.E.5.b) (discussing a reasonable alternative to expand 
Rule 606 reporting requirements).
---------------------------------------------------------------------------

(a) Customer Account Threshold
    An investor advocacy group and a national securities exchange 
specifically supported the proposed customer account threshold that 
would include in scope a broker or dealer that introduces or carries 
100,000 or more customer accounts.\141\ An academic and an individual 
investor suggested that all broker-dealers should be required to submit 
Rule 605 reports.\142\ In contrast, a broker-dealer stated that it is 
not clear why it is necessary to include such a broad scope of larger 
broker-dealers.\143\ According to this commenter, the proposal would 
require larger retail broker-dealers to produce execution quality 
reporting and metrics that are identical to those required of 
securities exchanges and market makers, even if those broker-dealers do 
not direct client orders.\144\
---------------------------------------------------------------------------

    \141\ See Healthy Markets Letter at 16, n.38; Nasdaq Letter at 
43 (stating that the proposed customer account threshold ``appears 
to balance the associated implementation costs on those broker-
dealers that may provide the execution quality statistics with the 
greatest benefit'').
    \142\ See Joy Letter; Angel Letter at 2-3 (stating that all 
broker-dealers should be required to show execution quality 
information, and that CAT could easily produce Rule 605 reports at 
low incremental cost). See also Robinhood Letter at 44-45 
(recommending that, if the Commission decides to proceed with the 
proposed rule, it should require all broker-dealers to report under 
Rule 605, because the number of large broker-dealers is relatively 
small (6.7% of all broker-dealers); the limited application of the 
rule would create an information gap about execution quality for 
investors that use smaller broker-dealers and new retail broker 
entrants). With respect to the commenter's suggestion that CAT data 
could be used to produce Rule 605 reports, see infra section 
V.B.2.b) for a discussion of the potential alternative to generate 
order execution quality reports using CAT data.
    \143\ See Cambridge Letter at 7 (``such breadth cannot be 
justified in light of the likely significant costs to be imposed on 
certain participants'').
    \144\ See id.
---------------------------------------------------------------------------

    After considering the comments, the Commission is adopting the 
100,000 customer account threshold, as proposed. The Commission's 
analysis of available data on the number of broker-dealers that will 
meet the minimum reporting threshold of 100,000 customers confirmed 
that such threshold will balance the benefits of having broker-dealers 
produce execution quality statistics with the costs of implementation 
and continued reporting,\145\ given the smaller amount

[[Page 26440]]

of benefits relative to costs that there would be if the Rule 605 
reporting requirements extended to broker-dealers that introduce or 
carry a smaller number of customer accounts. Specifically, this 
analysis indicates that approximately 85 broker-dealers introduce or 
carry more than 100,000 customer accounts and these broker-dealers 
together handle over 98% of customer accounts.\146\ The Commission is 
not subjecting all broker-dealers to Rule 605 reporting requirements, 
as suggested by certain commenters, because of the lower benefits 
relative to costs for broker-dealers with a smaller number of customer 
accounts.\147\ Conversely, the Commission disagrees with the commenter 
that states that the scope of larger broker-dealers that will be 
required to provide Rule 605 reports is overbroad.\148\ The relative 
market-wide benefit of having a broker-dealer prepare Rule 605 reports 
increases when the broker-dealer has more customers.\149\ The 
Commission's updated analysis indicates that utilizing a lower customer 
account threshold, such as 10,000 customer accounts, would nearly 
triple both initial and ongoing costs for non-market center broker-
dealers (which are not otherwise subject to Rule 605's reporting 
requirements) and yet would result in capturing only modestly more 
customer accounts than the 100,000 customer account threshold.\150\ The 
Commission's updated analysis also indicates that utilizing a higher 
customer account threshold, such as 250,000 customer accounts, would 
lower costs but also decrease coverage of customer accounts and 
customer order originations.\151\ Thus, utilizing 100,000 customer 
accounts as the adopted minimum reporting threshold will better balance 
the benefits of having broker-dealers produce execution quality 
statistics with the costs of implementation and reporting.
---------------------------------------------------------------------------

    \145\ See infra section IX.D.2.a)(1) for a discussion of the 
costs related to expanding the scope of Rule 605 reporting entities. 
As discussed further below, broker-dealers that were not previously 
required to publish Rule 605 reports will incur initial costs to 
prepare and post Rule 605 reports for the first time, which may 
include developing any policies and procedures that may be needed to 
do so, and all broker-dealers will face ongoing costs to continue to 
prepare the reports each month. See also infra section IX.E.1.a) for 
a discussion about the estimated costs of utilizing a different 
number of customer accounts as the minimum reporting threshold.
    \146\ Analysis from the Proposing Release was repeated regarding 
the estimated number of broker-dealers that will be subject to Rule 
605 reporting requirements according to different definitions of the 
customer account threshold. See Proposing Release, 88 FR 3786 at 
3886-87 (Jan. 20, 2023). For a description of how this analysis 
differs from the analysis in the Proposing Release, see infra note 
1747. This updated analysis indicates that approximately 85 broker-
dealers (or approximately 6.7% of customer-carrying broker-dealers) 
introduce or carry more than 100,000 customer accounts and these 
broker-dealers together handle over 98% of customer accounts. See 
infra Table 13 for a cost-benefit analysis of different customer 
account thresholds that could be used to define ``larger broker-
dealer'' and accompanying text for methodology. For example, 
approximately 244 broker-dealers introduce or carry more than 10,000 
customer accounts and these broker-dealers together handle over 99% 
of customer accounts. Further, approximately 1,245 broker-dealers 
introduce or carry at least 1 customer account.
    \147\ See infra section IX.E.1.a) (reducing the customer account 
threshold from 100,000 to 10,000 would almost triple both initial 
and ongoing costs); see also infra section IX.E.1.b) (discussing the 
alternative of requiring all broker-dealers to prepare Rule 605 
reports).
    \148\ See supra notes 143-144 and accompanying text. It is 
unclear, and the commenter does not explain, why any of the required 
execution quality metrics will not be appropriate for reporting by a 
larger broker-dealer and the commenter does not suggest any 
alternative metrics. It is also unclear, and the commenter does not 
explain, how a Rule 605 report prepared by a retail broker will be 
less useful if the retail broker did not direct client orders. Even 
though the same underlying order may be reflected on multiple Rule 
605 reports, the aggregated statistics within each report will 
provide different views of execution quality specific to the group 
of orders received by each reporting entity. Thus, a Rule 605 report 
prepared by a retail broker will allow that retail broker's 
customers, as well as other market participants, to view the 
execution quality specific to those orders received by the specific 
retail broker.
    \149\ See Proposing Release, 88 FR 3786 at 3797, n.167 (Jan. 20, 
2023) and accompanying text (discussing potential initial and 
ongoing costs that broker-dealers would incur as a result of the 
proposed amendments to Rule 605).
    \150\ See infra section IX.E.1.a) and Table 13 (demonstrating 
that, for example, reducing the customer account threshold from 
100,000 to 10,000 would increase estimated initial and ongoing 
compliance costs from about $3.4 million and $4.4 million, 
respectively, to about $9.8 million and $12.6 million, respectively, 
while increasing the coverage of customer accounts by 1.4% and the 
coverage of customer order originations by 21%). See also infra 
notes 1749-1751 (discussing why lowering the customer account 
threshold to include these customers might not be particularly 
beneficial).
    \151\ See Table 13 (demonstrating that raising the customer 
account threshold to 250,000 would lower estimated initial and 
ongoing compliance costs to about $2.4 million and $3.1 million, 
respectively, while decreasing the coverage of customer accounts by 
1.1% and the coverage of customer order originations by 55.7%).
---------------------------------------------------------------------------

    The customer account threshold will require brokers-dealers to 
include in their calculations the customer accounts that they 
introduce, as well as the customer accounts that they carry. Rule 605 
reports that reflect orders received from customer accounts that a 
broker-dealer introduces or carries will provide useful information to 
market participants because both introducing and carrying broker-
dealers make decisions about where to route those orders and it will be 
helpful for customers to be able to evaluate the execution quality 
received as a result of those decisions.
    One industry group requested an exception from the Rule 605 
reporting requirement for an introducing firm that routes all of its 
customer orders to its clearing firm, on a non-directed basis, where 
the clearing firm makes all routing decisions and the introducing firm 
does not receive payment for order flow (``PFOF'').\152\ This commenter 
explained that its request would reduce the reporting burden for 
smaller introducing firms.\153\ This commenter stated that, given its 
suggested conditions for the exception from reporting requirements that 
an introducing broker would be required to examine the clearing firm's 
Rule 605 report and not have reason to believe the clearing firm's 
report materially misrepresents the introducing broker's order flow, 
the quality of the disclosure should not be impacted.\154\ A second 
industry group made a similar request for an exception from reporting 
for certain introducing broker-dealers, stating that when introducing 
broker-dealers send customer orders to a clearing broker that makes the 
routing decisions, the introducing broker may not be in the best 
position to generate Rule 605 reports.\155\
---------------------------------------------------------------------------

    \152\ See FIF Letter at 6.
    \153\ See FIF Letter II at 2.
    \154\ See id.
    \155\ See letter from William C. Thum, Managing Director and 
Assistant General Counsel, SIFMA AMG (Mar. 31, 2023) (``SIFMA AMG 
Letter'') at 6.
---------------------------------------------------------------------------

    The Commission considered these commenters' suggestion that Rule 
605 provide an exception for certain introducing broker-dealers, but is 
not adopting the suggested exception for the following reasons: (1) 
Rule 605 reports prepared by larger broker-dealers will provide market 
participants and other interested parties with information relevant to 
evaluating how relationships among broker-dealers may affect execution 
quality, and the payment of PFOF is not the only circumstance that 
leads to conflicted relationships between an introducing broker-dealer 
and its customers; \156\ (2) an introducing firm would not be able to 
determine whether or not its clearing firm's Rule 605 report materially 
misrepresents the introducing firm's order flow without independently 
calculating its own execution quality statistics, and if the 
introducing firm needed to make these calculations to do this 
assessment, then any additional burden due to the requirement to 
prepare Rule 605 reports will be minimal; (3) different firms

[[Page 26441]]

could have differing interpretations of how much variation there could 
be in execution quality statistics between an introducing firm and its 
clearing firm before the clearing firm's Rule 605 report would 
``materially misrepresent'' the introducing firm's order flow; and (4) 
even if an introducing firm determined that it has no reason to believe 
that its clearing firm's Rule 605 report materially misrepresents the 
introducing firm's order flow, the introducing firm's customers could 
consider certain differences between the execution quality statistics 
of the introducing firm and its clearing firm to be meaningful.\157\
---------------------------------------------------------------------------

    \156\ For instance, retail brokers potentially face conflicts of 
interest when making order routing decisions, including whether to 
route to a particular wholesaler. See infra section IX.C.4.a)(2). As 
an example, broker-dealers face conflicts of interest when making 
routing decisions due to their own affiliation with market centers 
(e.g., if the broker-dealer operates its own ATS), from the presence 
of liquidity fees and rebates on some market centers, or from 
payments that some retail brokers receive from wholesalers to 
attract the order flow of their individual investor customers (i.e., 
PFOF). See infra notes 1300-1304 and accompanying text.
    \157\ In some instances, the same underlying order may be 
reflected on the Rule 605 reports provided by both an introducing 
firm and its clearing firm, but the separate reports will provide 
different views of execution quality specific to the group of orders 
handled by each broker-dealer. See also Proposing Release, 98 FR 
3786 at 3798 (Jan. 20, 2023).
---------------------------------------------------------------------------

    An industry group asked for clarification regarding how firms would 
calculate their number of customer accounts for purposes of the 
customer account threshold.\158\ In response, the Commission is 
providing the following guidance. First, the introducing broker-dealer 
generally should only count the institutional top-level account when an 
introducing broker-dealer that is not a clearing broker-dealer 
establishes a top-level account for an institutional asset 
manager.\159\ The Commission recognizes that in such instances the 
introducing broker-dealer often utilizes an omnibus clearing 
arrangement and thus does not have specific knowledge of how many 
underlying accounts a top-level account may represent.\160\ Second, 
broker-dealers generally should count and only count the accounts for 
all of their customers that are authorized by their broker-dealers to 
trade NMS stocks, including non-U.S. customers. A focus on customers 
that are authorized to trade NMS stocks generally should align with the 
scope of Rule 605 reports because these reports relate to covered 
orders in NMS stocks.\161\ Third, broker-dealers that provide routing 
services for other broker-dealers could have customer accounts for that 
portion of their business and the routing broker-dealer generally 
should consider whether a top-level account pertains to customer orders 
and count only those top-level accounts that the routing broker-dealer 
introduces or carries that are associated with customer orders. Fourth, 
broker-dealers generally should count only active customer accounts. 
Broker-dealers generally should consider customer accounts as active in 
the same manner as defined and reported in their Financial and 
Operational Combined Uniform Single (``FOCUS'') Reports on Form X-17A-
5.\162\ Consistent with their FOCUS reports, larger broker-dealers 
reporting under Rule 605 generally should count only active accounts 
that have a non-zero cash or securities balance at the end of the 
reporting period. Leveraging an existing classification of active 
accounts in these FOCUS reports generally should facilitate the 
identification of inactive accounts.
---------------------------------------------------------------------------

    \158\ See FIF Letter at 5-6 (requesting clarifications on how a 
firm would calculate its number of accounts to determine whether it 
meets the customer account threshold in the following circumstances: 
(1) an introducing firm that is not a clearing firm, where the 
introducing firm establishes a top-level trading account for an 
institutional asset manager and the asset manager allocates trade 
executions to sub-accounts; (2) a firm that has accounts for non-
U.S. customers; (3) a firm that provides routing services for other 
broker-dealers; and (4) a firm that has authorized an account to 
trade NMS stocks but that account has never traded an NMS stock or 
has not traded an NMS stock for an extended period of time).
    \159\ In this scenario as presented by the commenter, the asset 
manager submits orders using this top-level account and separately 
establishes multiple underlying accounts with the clearing broker-
dealer to allocate trades post-execution. See id. at 5-6.
    \160\ See supra note 98 and accompanying text (discussing 
omnibus clearing arrangements in which the clearing firm does not 
know the identity of the customers of the introducing firm). Having 
an introducing broker-dealer count the top-level account through 
which trading occurs is consistent with the approach for reporting 
transactions to the CAT. See FINRA CAT FAQ M4, available at https://catnmsplan.com/faq (stating that in scenarios involving managed 
accounts where an order may be placed in a master account with 
subaccount allocations made at a later time, the identifier 
representing the master/top account should be reported to CAT for 
transaction events requiring such identifier).
    \161\ See final 17 CFR 242.605(a)(1); final 17 CFR 
242.605(a)(7).
    \162\ See Instructions to FOCUS Report--Form X-17A-5 at 2.
---------------------------------------------------------------------------

(b) Production of Separate Reports
    Two investor advocacy groups expressed their support for the 
proposed requirement that larger broker-dealers that are also market 
centers produce separate reports for each activity.\163\
---------------------------------------------------------------------------

    \163\ See Healthy Markets Letter at 16 (``[B]rokers that are 
also market centers (including as OTC market makers) should be 
required to separately report their market center functions for all 
covered orders (e.g., ATS or SDP operations).''); Better Markets 
Letter at 5, n.12.
---------------------------------------------------------------------------

    After considering the comments, the Commission is adopting the 
requirement that larger broker-dealers that are also market centers 
produce separate reports pertaining to each function, as proposed. As 
explained in the Proposing Release, requiring a firm to produce 
separate reports pertaining to its market center function and its 
broker-dealer function will allow market participants and other 
interested parties to view the firm's execution quality from the 
perspective of how it operates in each of these separate roles.\164\
---------------------------------------------------------------------------

    \164\ See Proposing Release, 88 FR 3786 at 3798 (Jan. 20, 2023).
---------------------------------------------------------------------------

    An industry group stated that the proposed distinction between 
broker-dealer activity and market center activity in Rule 605 reports 
requires clarification and asked specific questions to clarify this 
distinction for purposes of grouping orders to prepare the separate 
reports.\165\ In response, the Commission provides the following 
clarifications. First, a firm that is an OTC market maker and 
introduces or carries over 100,000 customer accounts (i.e., meets the 
customer account threshold for larger broker-dealers) generally should 
include in its Rule 605 report pertaining to its broker-dealer function 
all covered orders in NMS stocks that the firm's broker-dealer received 
for execution as part of its customer-facing line of business. The firm 
generally should include in its Rule 605 report pertaining to its 
market center function all covered orders in NMS stock that the firm 
received for execution that are the type of order for which the firm 
serves as an OTC market maker. The set of orders pertaining to a firm's 
broker-dealer function may overlap with the set of orders pertaining to 
its market center function. The firm generally should include an order 
in both of its Rule 605 reports if its broker-dealer received the order 
from a customer and the firm also acts as a market center for that type 
of order.
---------------------------------------------------------------------------

    \165\ See SIFMA Letter II at 28 (asking the following questions 
as to how a firm should group different transactions for Rule 605 
separate reports: (1) ``If a firm is an OTC market maker and 
introduces or carries 100,000+ customer accounts, how should the 
firm determine which orders to report as broker-dealer trades versus 
those executed as a market center?''; (2) ``If a firm engages in a 
mixed capacity trade involving both a portion executed as agent and 
a portion executed as principal, would this order need to be 
bifurcated between the two reports?''; (3) ``If a firm trades in a 
riskless principal capacity, but the transaction was part of its 
internal broker-dealer business and not its OTC market making 
business, should the firm nonetheless attribute the riskless 
principal trade to its market center Rule 605 report? The Commission 
only discusses a market center engaging in riskless principal 
transactions, but it seems possible that a non-market center might 
transact on a riskless principal basis as well.'').
---------------------------------------------------------------------------

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

[[Page 26442]]

the firm's execution of a portion of the order as principal, as a 
general matter, the firm acts as an OTC market maker for that type of 
order and, because an OTC market maker falls within the definition of a 
``market center,'' \166\ that portion of the order generally should be 
included in its report pertaining to its market center function. The 
firm's execution of a portion of the order as agent generally should 
not be determinative of whether the firm acts as an OTC market maker 
for that type of order. The firm also generally should include in its 
Rule 605 report pertaining to its market center function the portion of 
the covered order that it executed as agent if it received the order 
for execution as an OTC market maker.\167\ Whether the firm received 
the entire covered order in its capacity as an OTC market maker (and 
thus as market center) or only a portion of the order in its capacity 
as an OTC market maker generally will depend on the types of orders for 
which it acts as an OTC market maker.\168\
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    \166\ See final 17 CFR 242.600(b)(55).
    \167\ When a market center, broker, or dealer receives a covered 
order for execution, it may execute in part at the receiving market 
center, broker, or dealer and in part at an away venue, but the 
entire covered order will be included in the firm's Rule 605 report. 
See final 17 CFR 242.605(a)(1)(i)(E) (requiring a market center, 
broker, or dealer to report the cumulative number of shares of 
covered orders executed at the receiving market center, broker, or 
dealer, excluding shares executed on a riskless principal basis) and 
final 17 CFR 242.605(a)(1)(i)(F) (requiring a market center, broker, 
or dealer to report the cumulative number of shares of covered 
orders executed at any other venue).
    \168\ The Commission agrees with the previous guidance provided 
by the staff that the Rule 605 reporting requirement for market 
centers generally should apply to broker-dealers insofar as they act 
as a market center with respect to orders received from other 
persons. See Proposing Release, 88 FR 3786 at 3798, n.180 (Jan. 20, 
2023) (citing Division of Market Regulation: Staff Legal Bulletin 
No. 12R (Revised), Question 4 (June 22, 2001), available at https://www.sec.gov/interps/legal/slbim12a.htm). The Commission provides the 
following example to illustrate. Assume that Firm A generally acts 
as an OTC market maker for XYZ stock. If Firm A receives an order 
for 100 shares of XYZ stock, it may choose to execute as principal 
50 shares of XYZ stock that it holds in inventory and execute as 
agent the 50 shares of XYZ stock necessary to fill the entire order. 
Firm A generally would have received the entire 100-share order in 
its capacity as an OTC market maker, notwithstanding its execution 
of a portion of the order as agent. In contrast, Firm B acts as an 
OTC market maker for XYZ stock but not ABC stock. If Firm B receives 
an order for 50 shares of XYZ stock and an order for 50 shares of 
ABC stock, Firm B generally would have received the order for 50 
shares of XYZ stock in its capacity as an OTC market maker, 
regardless of whether it executed those shares as principal or as 
agent. In this scenario, Firm B generally would not have received 
the order for 50 shares of ABC stock in its capacity as an OTC 
market maker and therefore generally would have received this order 
in connection with its broker-dealer function only.
---------------------------------------------------------------------------

    Third, a firm that trades in a riskless principal capacity with 
respect to a transaction handled by its non-market center, internal 
broker-dealer business rather than its OTC market making business 
generally should not need to include the transaction in its Rule 605 
report pertaining to its market center function because this division 
of business lines suggests that the firm is acting in its capacity as a 
broker-dealer only. However, the firm generally should evaluate whether 
or not it acts as an OTC market maker in connection with its internal 
broker-dealer business, in which case that portion of the business may 
be a market center and thus be required to be reported as such.
    A financial services firm requested clarification of whether a 
broker-dealer that principally facilitates the trading of fractional 
shares must publish a separate Rule 605 report as a market center.\169\ 
In response, the Commission clarifies that under the adopted amendments 
to Rule 605 a reporting entity must produce a separate Rule 605 report 
as a market center if it meets the definition of an ``OTC market 
maker'' and receives ``covered orders'' for execution in such 
capacity.\170\ As stated in the Proposing Release, as a general matter, 
a broker-dealer generally should categorize a customer's submitted 
order for an NMS stock, whether it be for a fractional share, whole 
shares, or whole shares with a fractional share component, as a 
``held'' order (and thus a covered order) if the customer reasonably 
expects its broker-dealer to attempt to execute such order 
immediately.\171\
---------------------------------------------------------------------------

    \169\ See Fidelity Letter at 9-10.
    \170\ See supra note 3 for the definition of ``OTC market 
maker.'' The term ``covered order'' is defined in final 17 CFR 
242.600(b)(27). As discussed above, a firm may act as an OTC market 
maker for certain types of orders only. For example, Firm C acts as 
an OTC market maker for fractional shares only. If Firm C receives 
an order for 51.25 shares of XYZ stock, it may execute as principal 
0.25 shares of XYZ stock and execute as agent 51 shares of XYZ 
stock. Firm B generally would have received only the fractional 
share component of the order (i.e., 0.25 shares) in its capacity as 
an OTC market maker and therefore only the fractional share 
component generally should be included in Firm C's Rule 605 report 
pertaining to its market center function.
    \171\ See Proposing Release, 88 FR 3786 at 3789, n.36 (Jan. 20, 
2023).
---------------------------------------------------------------------------

    One group of academics suggested that the Commission require 
separate disclosures for each account type at each broker-dealer to 
reflect the observation that execution quality differs across platforms 
with different commission and PFOF structures.\172\ A group consisting 
of some of these academics also suggested that the Commission require 
separate disclosures of specific ``broker-wholesaler pairs'' consisting 
of a broker-dealer and each wholesaler to which the broker-dealer 
routes orders from retail investors.\173\ A broker-dealer stated that 
execution quality metrics, including the proposed summary reports, 
would be more informative if Rule 605 reports differentiated between 
retail investors and professional customers because the nature of order 
flow and resulting execution quality may be quite different.\174\ 
Another broker-dealer stated that ``each firm's order flow is unique'' 
and suggested that the Commission ``consider the balance of this 
additional transparency of order flow'' both: (1) ``in the context of 
reporting fragmentation for trading venues that have built in 
segmentation (i.e., ATS with multiple pools or an exchange that has a 
continuous order book and a retail price improvement order book)''; and 
(2) ``in the context of retail brokers where experience may be 
materially different within a broker-dealer (i.e., a retail broker 
chooses to offer retail customers different experiences within the same 
broker-dealer).''
---------------------------------------------------------------------------

    \172\ See Professor Schwarz et al. Letter at 5. See also Better 
Markets Letter at 5, n.14 (agreeing with this recommendation).
    \173\ See Huang et al. Letter at 1 (``[O]ur results suggest that 
disclosures for each broker-wholesaler pair should provide 
additional helpful information to monitor broker and wholesaler 
performance. This would allow within-broker comparisons of execution 
quality that are more meaningful than comparisons solely across 
brokers.'').
    \174\ See Rule 605 Citadel Letter at 8 (recommending that the 
Commission engage with market participants to appropriately define a 
retail order, such as by reference to an order or trade threshold 
and stating that forty trades per day would be inappropriately 
high).
---------------------------------------------------------------------------

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

[[Page 26443]]

order because, in the commenter's view, the use of the time the order 
was received would show if there are order-delays and thereby provide a 
useful metric for anyone examining order-routing latency across 
brokers.\175\ An industry group and a financial services firm suggested 
instead of the proposed rule text that broker-dealers should be 
required to calculate time of order receipt based on the time that the 
broker-dealer first routes the order.\176\ The industry group 
questioned whether execution metrics should be measured before or after 
the broker-dealer has applied risk controls and decided whether to 
reject the order.\177\ This commenter stated that current order 
management systems may not generate a timestamp for when risk controls 
have been applied and it would be costly to generate such markers.\178\ 
For this reason, this commenter suggested permitting a routing firm to 
use the time of its first route as the time of order receipt and stated 
that the time of first route would be consistent with the Staff 
frequently asked questions (FAQs) regarding Rule 606.\179\ The 
financial services firm stated that Rule 605 reports for a non-market 
center should use the time of order routing, not the time of order 
receipt, because broker-dealers perform necessary review activities 
following receipt of the order but prior to routing the order.\180\
---------------------------------------------------------------------------

    \175\ See Healthy Markets at 16-17.
    \176\ See FIF Letter at 18-19; Schwab Letter II at 33; letter 
from Jason Clague, Managing Director, Head of Operations, The 
Charles Schwab Corporation (Sep. 28, 2023) (``Schwab Letter III'') 
at 5.
    \177\ See FIF Letter at 19.
    \178\ See id.
    \179\ See id. (citing Rule 606 Staff FAQs, FAQ 11.01). Rule 606 
Staff FAQs are available at: https://www.sec.gov/tm/faq-rule-606-regulation-nms. Staff reports, Investor Bulletins, and other staff 
documents (included those cited herein) represent the views of 
Commission staff and are not a rule, regulation, or statement of the 
Commission. The Commission has neither approved nor disapproved the 
content of these staff documents and, like all staff documents, they 
have no legal force or effect, do not alter or amend the applicable 
law, and create no new or additional obligations for any person.
    \180\ See Schwab Letter II at 33; Schwab Letter III at 5 (``The 
use of order receipt time rather than route time would result in 
some execution quality statistics like execution speed not being 
fairly represented in the reports due to outliers caused by market 
access review activities.'').
---------------------------------------------------------------------------

    After consideration of comments, the Commission is adopting the 
requirement that larger broker-dealers calculate time of order receipt 
based on the time that they received the initial order, as 
proposed.\181\ Time of order receipt, rather than order route time, is 
more relevant to customers of a broker-dealer because it will show how 
the broker-dealer handled the order from the time of receipt by the 
broker-dealer. Time of order receipt will show any delays in executing 
the order, and any resulting consequences on the execution quality the 
broker-dealer obtained for that order, because the execution quality 
statistics will be measured based on the prevailing market prices at 
the time the order was received. In addition, counting time of order 
receipt from the time that a broker-dealer initially receives the order 
will allow broker-dealers to assign a time of order receipt in a prompt 
and uniform manner and thus help to ensure that the time of order 
receipt is assigned in a non-manipulatory manner.\182\
---------------------------------------------------------------------------

    \181\ See final 17 CFR 242.600(b)(103).
    \182\ See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75423 
(Dec. 1, 2000) (discussing a commenter's concern that a market 
center might attempt to manipulate the time of receipt for its order 
flow by, for example, monitoring market movements before and/or 
after receipt of any order and assigning the NBBO that is most 
favorable to them during that brief option period).
---------------------------------------------------------------------------

    A financial services firm that suggested the use of order route 
time stated that larger share orders are more likely to be sent to a 
review queue and could have a ``disproportionate negative impact'' on 
average execution speed.\183\ This commenter further stated that, 
``[c]onsequently, using order receipt time could create a perverse 
incentive for firms to diminish time spent on necessary reviews in an 
effort to improve execution speed statistics.'' \184\ The Commission 
disagrees that broker-dealers will be incentivized to circumvent their 
risk controls because time-to-execution statistics take into account 
the period during which a broker-dealer is performing various reviews 
and before the broker-dealer routes an order. Broker-dealers have 
multiple reasons to implement risk controls upon the receipt of 
customer orders. For example, broker-dealers are subject to other 
regulatory requirements, including the Commission's market access rule, 
that will continue to apply.\185\ The existence of such requirements 
means that broker-dealers will continue to utilize risk controls 
necessary to comply with these requirements, including risk controls 
implemented to comply with the market access rule, because the 
potential consequences of failing to comply with these requirements 
likely would counterbalance any perceived benefits of being able to 
report faster execution times. Broker-dealers also have reputational 
and business concerns that serve as additional incentives to continue 
to apply risk controls. Further, to the extent that larger orders 
received by broker-dealers may result in slower execution times due to 
the application of risk controls, measuring time to execution at the 
time of order receipt may motivate broker-dealers to make their risk 
controls more efficient. Moreover, time-to-execution statistics are 
only one aspect of execution quality statistics and price-based 
execution quality statistics will provide a different dimension of the 
reporting firms' execution quality.
---------------------------------------------------------------------------

    \183\ See Schwab Letter II at 33; Schwab Letter III at 5.
    \184\ Schwab Letter II at 33; Schwab Letter III at 5.
    \185\ See 17 CFR 240.15c3-5.
---------------------------------------------------------------------------

    An industry group requested confirmation that orders rejected based 
on the application of risk and compliance controls would not count as 
having been received for purposes of Rule 605 reporting.\186\ In 
response, the Commission confirms that a broker-dealer generally should 
not include orders rejected based on the application of risk and 
compliance controls within its Rule 605 reports. Including these 
rejected orders in Rule 605 reports would not provide data useful to 
understanding the execution quality provided by the reporting broker-
dealer because these orders would not have been received by the firm in 
a form where execution was possible. Thus, these rejected orders 
generally should not be treated as ``received'' by the broker-dealer 
for Rule 605 reporting purposes.
---------------------------------------------------------------------------

    \186\ See FIF Letter at 19.
---------------------------------------------------------------------------

B. Qualified Auction Mechanisms

1. Proposed Approach
    In today's equity markets, retail brokers often identify and route 
the marketable orders of individual investors in NMS stocks to 
wholesalers and the wholesalers often internalize these orders.\187\ At 
the same time that the Commission proposed the amendments to Rule 605 
discussed herein, the Commission separately proposed rules that 
generally would require that individual investor orders be exposed to 
order-by-order competition in fair and open auctions designed to obtain 
the best prices before such orders could be internalized by wholesalers 
or any other type of trading center that restricts order-by-order 
competition.\188\ The proposal focused on the treatment of segmented 
orders, which the Commission proposed to define as an order for an NMS 
stock that

[[Page 26444]]

is for an account that is: (1) of a natural person or an account held 
in legal form on behalf of a natural person or group of related family 
members; and (2) in which the average daily number of trades executed 
in NMS stocks was less than 40 in each of the six preceding calendar 
months.\189\ The intent of the proposed definition was to encompass the 
marketable orders of individual investors that retail brokers currently 
route to wholesalers for handling and execution.\190\ Under those 
proposed rules, a ``restricted competition trading center'' would not 
be allowed to execute internally a segmented order for an NMS stock 
until after a broker or dealer has exposed such order to competition at 
a specified limit price in a ``qualified auction'' that met certain 
requirements and was operated by an ``open competition trading 
center.'' \191\
---------------------------------------------------------------------------

    \187\ This practice of separately identifying and routing the 
marketable orders of individual investors to wholesalers is a form 
of ``segmentation.''
    \188\ For a full description and discussion of the order 
competition rule proposal, see Order Competition Rule Proposing 
Release, 88 FR 128 (Jan. 3, 2023); proposed 17 CFR 242.615 (``Rule 
615'').
    \189\ See Order Competition Rule Proposing Release, 88 FR 128 at 
149 (Jan. 3, 2023); proposed Rule 600(b)(91) (defining ``segmented 
order'').
    \190\ See Order Competition Rule Proposing Release, 88 FR 128 at 
149 (Jan. 3, 2023).
    \191\ See id. at 243; proposed Rule 600(b)(87) (defining 
``restricted competition trading center''); proposed Rule 615(a) 
(describing the order competition requirement). An ``open 
competition trading center'' would be a national securities exchange 
or NMS Stock ATS that meets certain requirements, including being 
transparent and having a substantial trading volume in NMS stocks 
independent of qualified auctions. See Order Competition Rule 
Proposing Release, 88 FR 128 at 243 (Jan. 3, 2023); proposed Rule 
600(b)(64) (defining ``open competition trading center''). A 
``qualified auction'' would be an auction operated by an open 
competition trading center pursuant to specified requirements that 
are designed to achieve competition. See Order Competition Rule 
Proposing Release, 88 FR 128 at 243 (Jan. 3, 2023); proposed Rule 
600(b)(81) (defining ``qualified auction''); proposed Rule 615(c) 
(setting forth requirements for operation of a qualified auction).
---------------------------------------------------------------------------

    If the Commission adopts the order competition rule proposal, a 
national securities exchange or NMS Stock ATS that serves as an open 
competition trading center and is required to prepare execution quality 
reports under Rule 605 would be required to include covered orders that 
it received for execution in a qualified auction within its blended 
execution quality statistics. Because of concerns that differences in 
execution quality for orders executed within proposed qualified 
auctions as compared to orders executed outside of these qualified 
auctions would not be apparent in blended execution quality statistics, 
the Commission proposed to amend Rule 605(a)(1) to state that market 
centers that operate a qualified auction must prepare a separate report 
under Rule 605 pertaining only to covered orders that the market center 
receives for execution in a qualified auction.\192\
---------------------------------------------------------------------------

    \192\ See Proposing Release, 88 FR 3786 at 3802 (Jan. 20, 2023).
---------------------------------------------------------------------------

2. Final Rule and Discussion
    In this release, the Commission is not acting on the proposal to 
require separate Rule 605 reports for orders that a market center 
receives for execution from a qualified auction. The Commission 
received generally supportive comments from a variety of market 
participants, including individual investors, on this proposed 
amendment.\193\ Some industry commenters suggested that Rule 605 
reports should distinguish between segmented and non-segmented orders, 
as described in the Order Competition Rule Proposing Release.\194\
---------------------------------------------------------------------------

    \193\ See, e.g., Joy Letter; Pritchard Letter; and letters from 
Julio Cesar (Feb. 24, 2023) (``Cesar Letter''); Nevin Varghese (Dec. 
26, 2022) (``Varghese Letter'').
    \194\ See FIF Letter at 13 (stating that segmented orders would 
likely need to be separate from non-segmented orders); Fidelity 
Letter at 9 (recommending that the Commission distinguish Rule 605 
data by segmented and non-segmented order flow and display such 
orders separately in detailed reports and summary reports); SIFMA 
Letter II at 29 (stating that it is unclear why retail broker-
dealers should have to report on segmented orders because execution 
quality will depend on the qualified auction rather than actions by 
the originating broker, and suggesting instead a single Rule 605 
report that evaluates all qualified auctions).
---------------------------------------------------------------------------

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

C. NMS Stock ATSs and SDPs

1. Proposed Approach
    Under Rule 605 prior to the amendments, firms that operate two 
separate markets must prepare separate Rule 605 reports for each market 
center.\195\ This requirement allows market participants to assess the 
execution quality of each market individually and prevents differences 
in the nature of each market from obscuring information about execution 
quality. The Commission proposed to specify in Rule 605(a)(1) that an 
NMS Stock ATS (as defined in Regulation ATS) \196\ shall prepare 
reports separately from their broker-dealer operators to the extent 
such entities are required to prepare reports.\197\ The Commission also 
proposed to require in Rule 605(a)(1) that any market center that 
provides a separate routing destination that allows persons to enter 
orders for execution against the bids and offers of a single dealer 
shall produce a separate report pertaining only to covered orders 
submitted to such routing destination.\198\ This provision would have 
covered an SDP operated by a broker-dealer and required a separate 
report pertaining to those orders submitted to the SDP, allowing 
customers and other market participants to distinguish SDP activity 
from more traditional dealer activity.\199\
---------------------------------------------------------------------------

    \195\ See prior 17 CFR 242.605(a)(1) (requiring ``every'' market 
center to produce a report). See also Rule 605 NMS Plan at n.1 (``An 
entity that acts as a market maker in different trading venues 
(e.g., as a specialist on an exchange and as an OTC market maker) 
would be considered as a separate market center under the Rule for 
each of these trading venues. Consequently, the entity should 
arrange for a Designated Participant for each market center/trading 
venue (e.g., an exchange for its specialist trading and an 
association for its OTC trading).'') For a description of 
``Designated Participant'' as defined in the Rule 605 NMS Plan, see 
infra note 869.
    \196\ 17 CFR 242.300(k). ``Regulation ATS'' consists of 17 CFR 
242.300 through 242.304 (Rules 300 through 304 under the Exchange 
Act).
    \197\ See Proposing Release, 88 FR 3786 at 3803 (Jan. 20, 2023).
    \198\ See id. To the extent that a reporting firm produces more 
than one Rule 605 report, the firm could label each report with the 
type of business reflected on the report.
    \199\ See id.
---------------------------------------------------------------------------

2. Final Rule and Discussion
    The Commission is specifying that NMS Stock ATSs must report 
separately from their broker-dealer operators, as proposed, and 
adopting a separate reporting requirement for SDPs largely as proposed. 
In each instance, separate reporting under Rule 605 will bring 
transparency to these segments of the OTC equity market.
    The Commission received generally supportive comments from a 
variety of market participants regarding having firms produce separate 
Rule 605 reports for NMS Stock ATSs and for SDPs.\200\ After 
considering the comments, and for the reasons discussed in the 
Proposing Release, the Commission is specifying

[[Page 26445]]

the separate reporting requirement for NMS Stock ATSs as proposed.
---------------------------------------------------------------------------

    \200\ See, e.g., Healthy Markets Letter at 16 (``[B]rokers that 
are also market centers (including as OTC market makers) should be 
required to separately report their market center functions for all 
covered orders (e.g., ATS or SDP operations).''); Better Markets 
Letter at 5, n.10 (``[R]equiring SDPs and ATSs to produce Rule 605 
reports independently from their broker-dealers operations would 
increase transparency by allowing market participants to distinguish 
such activity from more traditional broker-dealer activity.''); 
Varghese Letter (``Expanding the scope of entities subject to Rule 
605 to include . . . single dealer platforms will ensure that a 
wider range of market participants are held to the same standards of 
transparency and accountability.'').
---------------------------------------------------------------------------

    Two commenters requested clarification and confirmation that order 
and execution management systems (``OEMSs'') will not need to register 
as ATSs under the Commission's proposal to amend the definition of 
``exchange'' under 17 CFR 240.3b-16 (``Rule 3b-16'') \201\ and thus 
need not comply with Rule 605's separate reporting requirement for NMS 
Stock ATSs.\202\ The Commission is still considering whether to adopt 
the proposed changes to the definition of ``exchange'' discussed in the 
2022 Regulation ATS/Definition of Exchange Proposing Release and 2023 
Regulation ATS/Definition of Exchange Reopening Release. Any need to 
comply with Rule 605's separate reporting requirement under any future 
rulemaking is outside the scope of this rulemaking.
---------------------------------------------------------------------------

    \201\ Securities Exchange Act Release No. 94062 (Jan. 26, 2022), 
87 FR 15496 (Mar. 18, 2022) (``2022 Regulation ATS/Definition of 
Exchange Proposing Release''). The comment period was reopened on 
May 9, 2022, and ended on June 13, 2022: Securities Exchange Act 
Release No. 94868 (May 9, 2022), 87 FR 29059 (May 12, 2022). The 
Commission reopened the comment period for the 2022 Regulation ATS/
Definition of Exchange Proposing Release again in the 2023. See 
Securities Exchange Act Release No. 97309 (Apr. 14, 2023), 88 FR 
29448 (May 5, 2023) (``2023 Regulation ATS/Definition of Exchange 
Reopening Release''). The 2023 Regulation ATS/Definition of Exchange 
Reopening Release provided supplemental information and economic 
analysis regarding trading systems that trade crypto asset 
securities that would be newly included in the definition of 
``exchange'' under the proposed rules. See id.
    \202\ See letter from Hubert De Jesus, Managing Director, Global 
Head of Market Structure and Electronic Trading, Samantha DeZur, 
Managing Director, Global Public Policy Group, BlackRock, Inc. (Mar. 
31, 2023) (``BlackRock Letter'') at 4-5 (``Unlike market centers, 
OEMSs only route orders based on explicit order handling direction 
provided by a user. . . . OEMSs would not have the necessary data--
and are not structured in a manner--that would allow them to file 
Rule 605 reports.''); Managed Funds Association Letter at 5-6 
(``[I]t would be inappropriate for [OEMSs] to fall within the 
communication protocol systems definition. . . . [OEMSs], which are 
essentially software systems that help to facilitate and manage 
trade executions, do not have (and should not be required to 
develop) the operational capabilities to gather and disseminate 
information required by Rule 605 reports . . . due to [their] 
limited role.'').
---------------------------------------------------------------------------

    An industry group and a broker-dealer requested additional clarity 
around what constitutes an SDP.\203\ The broker-dealer suggested that 
the Commission avoid an over-inclusive definition of SDPs by focusing 
on the order types used by non-retail investors to interact with SDPs, 
such as immediate-or-cancel (``IOC'') orders and fill-or-kill orders 
(``FOKs''), while also capturing substantially similar trading 
activities to ensure a level playing field.\204\ This commenter stated 
that ``the Commission should consider whether certain Rule 605 metrics 
may be unduly impacted by differences in SDP business models, rather 
than execution quality'' (e.g., ``a SDP that sends indications of 
interest (``IOIs'') to customers may have materially higher fill rates 
than a SDP that solely receives blind IOCs'').\205\ This commenter 
further suggested that the Commission ``conduct a more holistic review 
of the Rule 605 reports already produced by ATSs in order to determine 
whether any additional revisions are warranted in order to accurately 
report execution quality for non-retail orders'' (e.g., ``the 
definition of a `covered order' may need to be amended in order to 
ensure that the Rule 605 reports are sufficiently comprehensive for 
non-retail orders'').\206\ Another broker-dealer opposed the separate 
reporting requirement for SDPs, stating that it is ``unnecessary to 
report these execution quality statistics separately, as users of SDPs 
are all sophisticated entities capable of carrying out their own 
execution quality measurements,'' and thus the requirement ``imposes an 
additional cost on SDPs without any clear benefit.'' \207\
---------------------------------------------------------------------------

    \203\ See SIFMA Letter II at 28 (noting that the Commission 
provides no formal SDP definition); Rule 605 Citadel Letter at 7 
(stating its views about the importance of clearly defining what 
constitutes an SDP).
    \204\ See Rule 605 Citadel Letter at 7 (recommending that the 
Commission review FINRA Regulatory Notice 18-28, and the comments 
submitted in response, to define ``SDP'' more precisely).
    \205\ Id. at 7.
    \206\ Id. at 8.
    \207\ Virtu Letter II at 12-13.
---------------------------------------------------------------------------

    After considering the comments, the Commission is adopting separate 
reporting for SDPs largely as proposed. The Commission acknowledges 
that SDPs have different business models and that SDPs that receive 
blind IOCs throughout the trading day (so-called ``blind pinging'') 
would likely have execution quality statistics that differ 
significantly from the statistics of SDPs that send out IOIs. Although 
a commenter raised concerns about potential differential impacts on 
Rule 605 metrics for SDPs with different business models,\208\ in the 
Commission's experience SDPs largely receive institutional orders and 
therefore those market participants that send orders to SDPs generally 
are or represent sophisticated market participants that would likely be 
aware of and understand these differences in business models; thus 
these market participants can contextualize the Rule 605 reports 
appropriately. To the extent that OTC market makers operating SDPs 
think that additional context would help market participants understand 
their Rule 605 reports, these firms generally should consider whether 
to provide additional explanation on their websites about the nature of 
their order flow and how it affects the particular SDP's execution 
quality statistics.
---------------------------------------------------------------------------

    \208\ See Virtu Letter at 12.
---------------------------------------------------------------------------

    In response to one commenter's statement that imposing a separate 
reporting requirement on SDPs lacks any clear benefit to justify the 
additional cost,\209\ these order flow differences highlight the 
transparency benefits that justify the costs of requiring OTC market 
makers operating SDPs to produce Rule 605 reports separate from their 
other trading activity.\210\ Otherwise, commingling SDP activity with 
other market center activity in Rule 605 reports may obscure 
differences in execution quality or distort the general execution 
quality metrics for the market center. Moreover, Rule 605's description 
of what constitutes SDP activity for purposes of the separate reporting 
requirement will help ensure that the SDP-specific Rule 605 reports 
reflect comparable activity.
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    \209\ See supra note 207 and accompanying text.
    \210\ See section IX.D.2.a)(1) for a discussion of compliance 
costs related to expanding the scope of Rule 605 reporting entities. 
See also section IX.D.1.a)(2) for a discussion of the benefits of 
requiring separate Rule 605 reports for SDPs.
---------------------------------------------------------------------------

    In response to one commenter's suggestion that the Commission 
consider revisions to Rule 605 ``in order to accurately report 
execution quality for non-retail orders,'' \211\ no further changes to 
Rule 605 are necessary to accommodate reporting by SDPs. Prior to the 
amendments, market centers included non-retail orders in their Rule 605 
reports, to the extent that such orders were held orders, and therefore 
the reporting requirement for SDPs will not represent the first time 
that market centers were required to report execution quality for non-
retail orders. It is more appropriate in the context of Rule 605 to 
require the same metrics for all reporting entities. As discussed 
above, market participants that utilize SDPs generally understand 
nuances of different market centers. Further, the Commission is 
adopting a requirement that SDPs prepare Rule 605 reports separate from 
the Rule 605 reports of their associated broker-dealers so that their 
customers and market participants will be able to distinguish SDP 
activity from more traditional dealer activity and separately evaluate 
reporting firms' execution quality with respect to each type of 
activity. It is not necessary for the achievement of this goal to make 
adjustments to the scope of Rule 605 to

[[Page 26446]]

include more non-retail orders because the amendments to Rule 605 
address this separation of SDPs' execution quality statistics.
---------------------------------------------------------------------------

    \211\ See supra note 206 and accompanying text.
---------------------------------------------------------------------------

    The Commission also agrees with the two commenters regarding the 
need for additional clarity around the scope of entities that are SDPs 
for purposes of Rule 605. After considering commenter suggestions,\212\ 
the Commission is replacing the proposed description of what type of 
broker-dealer activity constitutes SDP activity for purposes of the 
separate SDP reporting obligation. In its place, the Commission is 
adopting a modified description of SDP activity that states: ``Any OTC 
market maker that provides a trading system for only a single dealer 
\213\ to solely buy and sell securities against all other persons 
entering orders in that system shall produce a separate report 
pertaining only to covered orders entered in such trading system.'' 
\214\ Specifically, the Commission's modified SDP description contains 
two substantive changes to the proposed SDP description. First, the 
Commission is replacing the term ``market center'' with the term ``OTC 
market maker'' because the term ``market center'' would have been 
overbroad. ``Market center'' includes an ATS, national securities 
exchange, or national securities association, none of which can be a 
single dealer.\215\ Second, the Commission is replacing ``separate 
routing destination'' with ``trading system'' to focus on the activity 
that occurs on SDPs and adding ``only'' before ``a single dealer'' to 
clarify that the trading system offered will not be for multiple 
dealers and instead will be limited to one dealer.\216\
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    \212\ In response to the commenter's suggestion that the 
Commission consider FINRA Regulatory Notice 18-28 to define ``SDP'' 
more precisely (see supra note 204), the Commission observes that 
FINRA requested comment on a definition of SDP but did not propose 
or adopt a definition. See FINRA Regulatory Notice 18-28.
    \213\ A dealer is defined in Exchange Act section 3(a)(5), 15 
U.S.C. 78c(a)(5).
    \214\ Final 17 CFR 242.605(a)(1). Compare final 17 CFR 
242.605(a)(1) with proposed Rule 605(a)(1) (``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.''). SDPs are a type of market 
center as defined in Regulation NMS Rule 600(b)(55) because the 
description of an SDP in the adopted amendments to Rule 605 includes 
the term ``OTC market maker'' and the definition of ``market 
center'' lists OTC market maker as one of the included entities. See 
final 17 CFR 242.600(b)(55). Therefore, as a general matter, SDPs 
are a type of market center and, as such, are within the scope of 
Rule 605 reporting entities without reference to the 100,000 
customer account threshold.
    \215\ See final 17 CFR 242.600(b)(55) (defining ``market 
center'' to mean any exchange market maker, OTC market maker, ATS, 
national securities exchange, or national securities association). 
Compare final 17 CFR 242.600(b)(75) (defining ``OTC market maker'' 
to mean 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 and continuous basis 
otherwise than on a national securities exchange in amounts of less 
than a block size).
    \216\ Unlike an ATS, on an SDP the broker-dealer operator is the 
only counterparty to any trade that occurs on the SDP. See, e.g., 
Where Do Stocks Trade?, FINRA.org (Sep. 28, 2023), available at 
https://www.finra.org/investors/insights/where-do-stocks-trade#::text=The%20most%20familiar%20type%20of,in%20popularity%20in%20recent%20years. In contrast, an ATS meets the criteria of 17 CFR 
240.3b-16(a) and ``brings together the orders for securities of 
multiple buyers and sellers.''
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    A broker-dealer recommended that the Commission clarify: (i) the 
circumstances in which an SDP can be considered to be embedded within 
an ATS (e.g., by constituting a separate tier within an ATS that can be 
specifically targeted by IOC or FOK orders), and (ii) whether SDP 
activity includes orders received from both the client (whether a 
broker-dealer or not) and from internal smart order routers.\217\ 
First, executions that occur on or through an NMS Stock ATS are 
attributable to that NMS Stock ATS and covered orders received for 
execution on or through an ATS must be included in the Rule 605 report 
pertaining to the ATS rather than on a separate Rule 605 report.\218\ 
Therefore Rule 605 reporting requirements are not dependent on whether 
``an SDP [could] be considered to be embedded within an ATS.'' The 
Commission understands that certain NMS Stock ATSs offer counterparty 
selection and segmentation procedures that may allow the orders of a 
particular participant to interact with the orders of only a subset of 
participants, and in this respect trading activity that occurs on 
certain NMS Stock ATSs may resemble trading activity that occurs on 
SDPs.\219\ Providing separate Rule 605 reports for SDP-like activity on 
ATSs would not be practicable given the lack of uniformity among NMS 
Stock ATSs' operations, particularly their counterparty and 
segmentation procedures. Another factor that could decrease 
comparability across reports if they were divided, as suggested by the 
commenter, is that trading activity on an NMS Stock ATS occurs within 
the context of regulatory requirements specific to NMS Stock ATSs.\220\ 
In contrast, SDPs (as defined for purposes of Rule 605) operate as 
broker-dealer trading systems that are not ATSs and thus that are not 
subject to ATS regulatory requirements. Given the differences in 
operations and regulatory requirements between the types of trading 
systems, which affect order interaction and execution, the execution 
quality statistics for SDP-like trading activity occurring on ATSs 
could significantly vary in a manner that differs from the variation in 
execution quality statistics among SDPs, thereby reducing the utility 
of comparing execution quality statistics for trading activity 
occurring on SDPs. Second, SDP activity includes orders received from 
both a client (whether or not a broker-dealer) and internal smart order 
routers. Orders received from internal smart order routers are included 
in Rule 605 reports specific to SDPs because the determination that a 
trading system is an SDP for purposes of Rule 605 reporting 
requirements depends on the type of trading system that receives the 
orders and the single dealer counterparty that interacts with the 
orders that the system receives.\221\
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    \217\ See Rule 605 Citadel Letter at 7.
    \218\ See final 17 CFR 242.605(a)(1).
    \219\ NMS Stock ATSs may offer counterparty selection or certain 
segmentation profiles that allow a single participant to interact 
with one or certain counterparties. Form ATS-N requires public 
disclosures about these aspects of an NMS Stock ATS. See Form ATS-N, 
Part III, Items 13 and 14. An NMS Stock ATS that permits a 
subscriber to use its counterparty selection or segmentation 
procedures to trade with only one subscriber or a certain subset of 
subscribers can be required, depending on its operations and 
arrangement with the subscriber, to disclose additional information 
in response to other requirements of the Form ATS-N. These 
disclosures can include, among others, Part II, Item 2 (Affiliates 
Trading Activities on ATS), Part II, Item 4 (Arrangements with 
Trading Centers), Part III, Item 7 (Order Types and Attributes), 
Part III, Item 11 (Trading Services, Facilities, and Rules), and 
Part III, Item 18 (Fees).
    \220\ See, e.g., 17 CFR 242.301(b)(3) (containing requirements 
for ATSs pertaining to order display and execution access); 17 CFR 
242.301(b)(5) (containing requirements for ATSs that have a 
significant percentage of overall trading volume in a security or 
category of securities during a certain period of time to comply 
with fair access requirements, which include, among other things, 
that the ATS establish written standards for granting access to 
trading on the ATS and not unreasonably prohibit or limit access by 
applying those access standards in an unfair or discriminatory 
manner).
    \221\ See final 17 CFR 242.605(a)(1) (defining an SDP as a 
trading system for only a single dealer to solely buy and sell 
securities against ``all other persons entering orders in that 
system'').
---------------------------------------------------------------------------

    An industry group asked specific questions about how to distinguish 
between OTC market making and SDP activities in Rule 605 reports.\222\ 
The

[[Page 26447]]

Commission provides the following responses. First, Rule 605(a), as 
adopted, defines the separate Rule 605 reporting obligation as applying 
to any OTC market maker that provides a separate trading system that 
meets specified criteria; therefore, as it pertains to Rule 605 
reporting, any SDP required to prepare Rule 605 reports will be a type 
of OTC market maker and therefore a market center.\223\ Second, the 
Commission is not changing the definition of ``OTC market maker'' in 
Rule 600. Thus, any other rule that refers to an ``OTC market maker'' 
will utilize the same definition in Rule 600. Third, the Commission is 
not assuming that an SDP accepts only IOC orders. As such, an SDP is 
not limited to accepting or receiving a particular type of covered 
order for execution. Fourth, as described above, although a 
subscriber's activity on an NMS Stock ATS may resemble SDP activity, 
the trading activity occurs on the ATS and thus is attributable to the 
ATS for purposes of Rule 605 reporting requirements. Fifth, as 
described above, SDP activity includes orders received from both a 
client (whether or not a broker-dealer) and from internal smart order 
routers.
---------------------------------------------------------------------------

    \222\ See SIFMA Letter II at 28 (posing the following 
interpretive questions to distinguish between OTC market makers and 
SDPs: (1) ``Is the Commission suggesting that an SDP is a type of 
OTC market maker and therefore a market center?''; (2) ``Would an 
SDP be considered an OTC market maker for purposes of any other 
rule?''; (3) ``Is the Commission assuming that an SDP only accepts 
IOC orders?''; (4) ``Under what circumstances can an SDP be 
considered to be embedded within an ATS (such as when an SDP can be 
specifically targeted within an ATS by IOC or FOK orders)?''; (5) 
``Would SDP activity include orders received from both a client 
(whether or not a broker-dealer) and from internal smart order 
routers?'').
    \223\ See supra note 214.
---------------------------------------------------------------------------

III. Modifications to Scope of Orders Covered and Required Information

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

A. Covered Order

    The scope of Rule 605's reporting requirements is limited to 
covered orders.\224\ The Commission proposed expanding the definition 
of ``covered order'' to include: (1) certain orders received outside of 
regular trading hours; and (2) orders submitted with stop prices. The 
Commission also addressed whether non-exempt short sale orders would be 
covered orders when a price test restriction is in effect for the 
security.
---------------------------------------------------------------------------

    \224\ See prior 17 CFR 242.605(a)(1); final 17 CFR 
242.605(a)(1). See supra note 4.
---------------------------------------------------------------------------

1. Orders Submitted Pre-Opening/Post-Closing
(a) Proposed Approach
    Prior to these amendments, Rule 605 reports were required to 
include only orders received during regular trading hours \225\ at a 
time when an NBBO is being disseminated. When the Commission adopted 
Rule 11Ac1-5, the Commission excluded orders submitted during the pre-
opening or after the close, among other order types, from the scope of 
reporting because nearly all of Rule 605's statistical measures 
required the availability of the NBBO at the time of order receipt as a 
benchmark.\226\ Similarly, orders for which customers requested special 
handling, including orders to be executed at a market opening price, 
were excluded from Rule 605 reports because of a concern that their 
inclusion would skew the general statistics.\227\
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    \225\ ``Regular trading hours'' is defined as the time between 
9:30 a.m. and 4 p.m. Eastern Time, or such other time as is set 
forth in the procedures established pursuant to 17 CFR 
242.605(a)(3). See final 17 CFR 242.600(b)(88).
    \226\ See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75421 
(Dec. 1, 2000).
    \227\ See id.
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    In the Proposing Release, the Commission proposed to: (1) expand 
the scope of Rule 605 reporting to include certain NMLOs submitted 
outside of regular trading hours if they become executable after the 
opening or reopening of trading during regular trading hours; \228\ (2) 
amend the definition of ``marketable limit order'' to specify that the 
marketability of an order received when the NBBO is not being 
disseminated would be determined using the NBBO that is first 
disseminated after the time of order receipt; \229\ and (3) exclude 
from Rule 605 reports market or limit orders received during regular 
trading hours at a time when an NBBO is being disseminated but prior to 
the dissemination of the primary listing market's first firm, uncrossed 
quotations for a trading day (``Opening Exemption''),\230\ thereby 
incorporating previously granted exemptive relief into the proposed 
definition of ``covered order.'' \231\ The Commission's proposed 
definition of ``covered order'' would have excluded market orders and 
marketable limit orders submitted prior to open or during a trading 
halt; therefore, any limit order received outside of regular trading 
hours or during a trading halt that is marketable based on the first 
disseminated NBBO during regular trading hours after the time of order 
receipt would not have been a covered order for purposes of Rule 
605.\232\ Additionally, the Commission proposed amending Rule 605(a)(1) 
to require a market center, broker, or dealer to include in its monthly 
report, in addition to the covered orders in NMS stocks that it 
received for execution from any person, those covered orders in NMS 
stocks that it received for execution in a prior calendar month but 
which remained open.\233\
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    \228\ See Proposing Release, 88 FR 3786 at 3804 (Jan. 20, 2023). 
The Commission proposed to revise the definition of ``categorized by 
order type'' to include executable NMLOs and executable orders 
submitted with stop prices. See id. at 3804, n. 227; proposed Rule 
600(b)(20). The Commission also proposed to expand the definition of 
``covered order'' to cover NMLOs received by a market center or 
broker-dealer outside of regular trading hours or when an NBBO is 
not being disseminated and, if executed, executed during regular 
trading hours. See Proposing Release, 88 FR 3786 at 3804 (Jan. 20, 
2023); proposed Rule 600(b)(30).
    \229\ See Proposing Release, 88 FR 3786 at 3804 (Jan. 20, 2023). 
Specifically, the Commission proposed 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. See id.; proposed Rule 600(b)(57).
    \230\ See Proposing Release, 88 FR 3786 at 3804-05 (Jan. 20, 
2023); proposed Rule 600(b)(30). The Commission stated that, 
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 
would have been considered covered orders, provided the NMLOs were 
not executed outside of regular trading hours. See Proposing 
Release, 88 FR 3786 at 3805 (Jan. 20, 2023).
    \231\ 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. The 
Commission proposed to rescind the Opening Exemption. See Proposing 
Release, 88 FR 3786 at 3805 (Jan. 20, 2023).
    \232\ See Proposing Release, 88 FR 3786 at 3804 (Jan. 20, 2023).
    \233\ See id. at 3805.

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[[Page 26448]]

(b) Final Rule and Discussion
    The Commission is adopting as proposed an expansion to the scope of 
Rule 605 reporting to include NMLOs submitted outside of regular 
trading hours that become executable after the opening or reopening of 
trading during regular trading hours.\234\ The Commission is adopting 
the definition of ``covered order'' as it relates to orders submitted 
outside of regular trading hours largely as proposed, but with a 
modification to accept a commenter's recommendation as discussed below. 
The Commission is similarly modifying the proposed definitions of 
``executable,'' ``marketable limit order,'' and ``beyond-the-midpoint 
limit order'' \235\ to accommodate this modification. Further, the 
Commission is adopting as proposed the requirement for a market center, 
broker, or dealer to include in its monthly report those covered orders 
in NMS stocks that it received for execution in a prior calendar month 
but which remained open.\236\
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    \234\ See final 17 CFR 242.600(b)(19) (defining ``categorized by 
order type'').
    \235\ As discussed further below, the Commission is making 
additional modifications to this order type category and renaming 
the associated definition as ``midpoint-or-better limit order.'' See 
infra section III.B.2.b).
    \236\ See final 17 CFR 242.605(a)(1).
---------------------------------------------------------------------------

    Generally, individual investors supported including certain orders 
submitted outside of regular trading hours within the scope of covered 
orders.\237\ One individual investor who supported the proposed change 
stated that after-market and pre-market trades play a greater role 
today than ever before, with many of the price changes occurring during 
these times rather than during market hours.\238\
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    \237\ See, e.g., Pritchard Letter; letter from Dan Liefwalker 
(Mar. 7, 2023); Macarthur Letter; Genco Letter; Varghese Letter; 
letter from Jeremy B. Beddo (Mar. 30, 2023) (``Beddo Letter'').
    \238\ See Joy Letter. However, an individual investor who 
opposed the proposal stated that including as covered orders certain 
orders submitted outside of regular trading hours (as well as 
certain orders submitted with stop prices) ``could make it difficult 
for retail investors to place orders at the best possible price'' 
and ``[t]his could lead to retail investors being left with less 
favorable prices and missing out on potential gains in the dark 
markets.'' Letter from Jacob Gillmore (Feb. 24, 2023) (``Gillmore 
Letter''). It is not clear--and the commenter does not explain--how 
including orders submitted outside of regular trading hours in Rule 
605 reports could make it difficult for retail investors to place 
orders at the best possible price.
---------------------------------------------------------------------------

    A broker-dealer supported the inclusion of pre-market orders in 
Rule 605 reports, stating these orders (along with other included order 
types) would provide investors with a more complete picture of order 
execution quality across the marketplace.\239\ Another commenter stated 
that NMLOs entered outside of ``normal hours'' should not be included 
because ``these will likely skew the statistics.'' \240\ Specifically, 
this commenter stated that frequently the first quote after opening is 
wide and not representative of the quote when the primary exchange 
opens, and many orders deemed NMLOs by this benchmark would likely fill 
as soon as the primary exchange opens. Therefore, according to this 
commenter, ``including these orders will skew the NMLO stats and lead 
to difficult comparisons between brokers.'' \241\
---------------------------------------------------------------------------

    \239\ See Virtu Letter II at 3.
    \240\ Schwab Letter II at 32.
    \241\ Id.
---------------------------------------------------------------------------

    A national securities exchange supported inclusion of certain 
orders submitted outside of regular trading hours within the definition 
of ``covered order.'' \242\ An investor advocacy group recommended that 
Rule 605 run from primary market open to primary market close (e.g., 
9:30 a.m. to 4 p.m. eastern standard time).\243\
---------------------------------------------------------------------------

    \242\ See Nasdaq Letter at 43, text accompanying n.121.
    \243\ See Healthy Markets Letter at 17. This commenter's 
suggestion of when Rule 605 should be in effect is consistent with 
the definition of ``regular trading hours.'' See final 17 CFR 
242.600(b)(88) (``Regular trading hours means the time between 9:30 
a.m. and 4 p.m. Eastern Time, or such other time as is set forth in 
the procedures established pursuant to Sec.  242.605(a)(3).'') This 
commenter did not address whether to include certain orders 
submitted outside of regular trading hours but executed during 
regular trading hours within the scope of Rule 605's reporting 
requirements as proposed.
---------------------------------------------------------------------------

    An industry group stated that the proposed definition of ``covered 
order,'' in the context of NMLOs, does not address orders received 
during regular trading hours but prior to the primary listing market 
disseminating its first firm, uncrossed quotations in a security 
(referred to herein as the ``interim opening period'').\244\ This 
commenter recommended that the demarcation point for whether an order 
should be treated as a pre-open (or post-close) order or an order 
received during regular trading hours should be the point at which the 
primary listing market disseminates its first firm, uncrossed 
quotations for the applicable security.\245\ To address orders received 
during the interim opening period, this commenter recommended that the 
Commission change each of the references to the ``time when a national 
best bid and national best offer is being disseminated'' in the 
proposed definitions of ``marketable limit order'' and ``beyond-the-
midpoint limit order'' to reflect not only that a national best bid and 
national best offer has been disseminated but also that the primary 
market has disseminated its first firm, uncrossed quotations for the 
security.\246\
---------------------------------------------------------------------------

    \244\ See FIF Letter at 8.
    \245\ See id. at 7.
    \246\ See id. at 8.
---------------------------------------------------------------------------

    After a review of the comments, for the reasons discussed in the 
Proposing Release and discussed below, the Commission is adopting the 
definition of ``covered order,'' along with other changes addressing 
the expansion of the scope of Rule 605 to include certain orders 
received outside of regular trading hours, largely as proposed.\247\ 
However, in response to comments, the Commission is making several 
modifications that address the treatment of orders received during the 
interim opening period. As discussed below, these changes help address 
the concerns of one of the commenters that the inclusion of NMLOs 
entered outside of normal hours in Rule 605 reports would skew the 
reported execution quality statistics.\248\
---------------------------------------------------------------------------

    \247\ As discussed below, the Commission also is rescinding a 
portion of the Market Systems Exemptive Letter and updating a 
related staff FAQ. See infra section VI.
    \248\ See supra note 240 and accompanying text.
---------------------------------------------------------------------------

    When proposing to incorporate the exemptive relief contained in the 
Opening Exemption \249\ into the definition of ``covered order'' with 
respect to market or limit orders received during regular trading hours 
at a time when an NBBO is being disseminated, the Commission recognized 
that quotations disseminated prior to a primary listing market 
disseminating its first quotations in a security often reflect spreads 
that vary significantly from the norm and intended that the proposed 
changes to the definition would prevent such quotations from skewing 
execution quality statistics.\250\ In proposing to expand the scope of 
Rule 605 reporting requirements to include certain NMLOs submitted 
outside of regular trading hours if they become executable during the 
opening or reopening of trading during regular trading hours, the 
Commission intended to provide increased visibility into the execution 
quality for individual investor orders.\251\ The Commission agrees with 
the commenter who recommended additional changes to the definition of 
``covered order'' (along with related changes to the definitions of 
``marketable limit order'' and ``beyond-the-midpoint limit order'') and 
stated that treating orders received during the interim opening period 
in the same manner as orders received outside of

[[Page 26449]]

regular trading hours will be consistent with the Commission's stated 
objectives.\252\
---------------------------------------------------------------------------

    \249\ See supra note 230 and accompanying text.
    \250\ See Proposing Release, 88 FR 3786 at 3804-05 (Jan. 20, 
2023).
    \251\ See id. at 3804.
    \252\ See FIF Letter at 7-8.
---------------------------------------------------------------------------

    Accordingly, the Commission is adopting a definition of ``covered 
order'' that scopes in any NMLO (including an order submitted with a 
stop price) that is received by a market center, broker, or dealer at a 
time before the primary listing market has disseminated its first firm, 
uncrossed quotations in the security and that, if executed, is executed 
during regular trading hours.\253\ The ``covered order'' definition, as 
proposed and as the Commission is adopting, does not include within its 
scope those market orders and marketable order types received outside 
of regular trading hours. Keeping market and marketable limit orders 
received during the interim opening period outside the scope of covered 
orders is consistent with how these orders are treated when received 
outside of regular trading hours. The changes to the definition of 
``covered order,'' together with the modifications to the definition of 
``executable'' and ``marketable limit order'' discussed below, will 
help ensure that an order received or executed during the interim 
opening period will be treated in the same manner as any other order 
received or executed pre-open or post-close.
---------------------------------------------------------------------------

    \253\ See final 17 CFR 242.600(b)(27).
---------------------------------------------------------------------------

    The Commission is also adopting a modified version of the proposed 
definition of ``executable'' that specifies that whether an NMLO is 
executable will be determined based on the order's limit price during 
regular trading hours and after the primary listing market has 
disseminated its first firm, uncrossed quotations in the security.\254\ 
Under the definition of ``executable'' as proposed, an NMLO (including 
an order submitted with a stop price) received during the interim 
opening period would have had the possibility of becoming executable 
before the primary listing market has disseminated its first firm 
uncrossed quotations in the security. During this interim opening 
period, quotations and execution prices may be less representative of 
the value of the security than during the rest of regular trading hours 
because, as stated above, quotations disseminated prior to a primary 
listing market disseminating its first quotations in a security often 
reflect spreads that vary significantly from the norm during regular 
trading hours. Therefore, a scenario in which an NMLO becomes 
executable (as defined in the proposal) during the interim opening 
period led to two potential ways in which including these orders could 
skew execution quality statistics. First, if the NMLO executed during 
the interim period (including at the opening of the primary listing 
market), that order would have been included in reports required 
pursuant to proposed Rule 605(a)(1) as an NMLO that became executable 
and executed during regular trading hours. Second, the benchmark that 
would have been used for those statistics to measure from the time that 
an order becomes executable \255\ would have been a quotation price 
from the interim opening period. The modification to the proposed 
definition of ``executable'' that the Commission is adopting addresses 
both concerns. Pursuant to the adopted rule, an NMLO (including an 
order submitted with a stop price) received during regular trading 
hours will not have the possibility of being considered executable 
until after the primary listing market has disseminated its first firm, 
uncrossed quotations in the security.\256\ Further, the benchmark used 
for those statistics that are measured from the time that an order 
becomes executable will be measured from a point in time that is after 
the primary listing market has disseminated its first firm, uncrossed 
quotations in the security. These changes to the final rule will help 
to prevent the potential skewing of execution quality statistics caused 
by reliance on quotations from the interim opening period, and thereby 
increase the comparability of Rule 605 reports.
---------------------------------------------------------------------------

    \254\ See final 17 CFR 242.600(b)(39).
    \255\ The Commission proposed to measure the time to execution 
for non-marketable orders from the time such orders become 
executable. See infra section III.B.3.
    \256\ An NMLO (including orders submitted with stop prices) that 
executes during the interim opening period (including an NMLO that 
executes at the opening of the primary listing market) will not have 
the opportunity to meet the definition of executable; therefore, 
such an order will not be included in a Rule 605 report because the 
reports required by Rule 605(a)(1) include only NMLOs that are 
executable. See final 17 CFR 242.600(b)(39). This treatment of an 
NMLO that executes during the interim opening period will be similar 
to the treatment of an NMLO that executes outside of regular trading 
hours and will similarly prevent order executions where quotations 
may vary significantly from the norm from skewing execution quality 
statistics. See section III.A.2.b) infra for additional discussion 
of orders submitted with stop prices and section III.B.2.a)(2) infra 
for additional discussion of the defined term ``executable.''
---------------------------------------------------------------------------

    In addition, the Commission is revising the proposed definition of 
``marketable limit order'' so that, with respect to an order received 
at a time when the NBBO is being disseminated but before the primary 
listing market has disseminated its first firm, uncrossed quotations in 
the security (i.e., during the interim opening period), whether the 
order is a marketable limit order will be determined from the time that 
the primary listing market disseminates its first firm, uncrossed 
quotations in the security.\257\ This change will move the 
determination of whether an order is a marketable limit order or a NMLO 
to a time when the NBBO is more representative of the security's price 
than may be the case during the interim opening period. The Commission 
is also modifying the definition of ``midpoint-or-better limit order'' 
from the proposed definition \258\ in a similar manner so that the 
price used to determine whether an order is a midpoint-or-better limit 
order will be more representative of the security's price. The 
definition that the Commission is adopting specifies that, for orders 
received when an NBBO is being disseminated and the primary listing 
market has disseminated its first firm, uncrossed quotations in the 
security (i.e., after the interim opening period), whether the order is 
a midpoint or better limit order will be determined based on the time 
of order receipt.\259\ The adopted definition also specifies that, for 
orders received at a time when the NBBO is being disseminated but 
before the primary listing market has disseminated its first firm, 
uncrossed quotations in the security (i.e., during the interim opening 
period), whether the order is a midpoint-or-better limit order will be 
determined from the time that the primary listing market disseminates 
its first firm, uncrossed quotations in the security.\260\ These 
changes also will help to prevent skewing of execution quality 
statistics and thereby increase the comparability of Rule 605 reports.
---------------------------------------------------------------------------

    \257\ See final 17 CFR 242.600(b)(56).
    \258\ As discussed further below, the Commission is making 
additional modifications to this order type category and renaming 
the proposed term ``beyond-the-midpoint limit order'' to be 
``midpoint-or-better limit order.'' See infra section III.B.2.b).
    \259\ See final 17 CFR 242.600(b)(57).
    \260\ See id.
---------------------------------------------------------------------------

2. Stop Orders
(a) Proposed Approach
    Orders submitted with stop prices were not included in Rule 605 
reports prior to these amendments because the definition of ``covered 
order'' excluded orders with special handling instructions, including 
orders submitted with stop prices.\261\ The Commission

[[Page 26450]]

proposed to remove this exclusion and measure the execution quality of 
orders submitted with stop prices from the time such orders become 
executable.\262\ As part of the proposed definition of ``executable,'' 
the Commission specified that executable means, for any buy order 
submitted with a stop price, that the stop price is equal to or greater 
than the national best bid during regular trading hours, and, for any 
sell order submitted with a stop price, that the stop price is equal to 
or less than the national best offer during regular trading hours.\263\ 
In addition, the Commission proposed to modify the definition of 
``categorized by order type'' to add executable orders submitted with 
stop prices as a separate order type category.\264\
---------------------------------------------------------------------------

    \261\ See prior 17 CFR 242.600(b)(22). Generally, an order 
submitted with a stop price may become either a market order or a 
limit order when the offer (bid) reaches the stop price for a buy 
(or sell) order or the security trades at or above (or below) the 
stop price for a buy (or sell) order.
    \262\ See Proposing Release, 88 FR 3786 at 3805 (Jan. 20, 2023); 
proposed Rule 600(b)(30).
    \263\ See Proposing Release, 88 FR 3786 at 3805, 3810, n.302 
(Jan. 20, 2023); proposed Rule 600(b)(42).
    \264\ See Proposing Release, 88 FR 3786 at 3805, n.241 (Jan. 20, 
2023); proposed Rule 600(b)(20).
---------------------------------------------------------------------------

(b) Final Rule and Discussion
    The Commission is adopting the definition of ``covered order'' as 
proposed to include orders submitted with stop prices within the scope 
of Rule 605. However, the Commission is modifying the proposed 
definition of ``executable'' as it pertains to orders submitted with 
stop prices in response to recommendations from commenters. 
Additionally, the Commission is modifying the proposed definition of 
``categorized by order type'' to include separate categories for 
executable market orders submitted with stop prices, executable 
marketable limit orders submitted with stop prices (``executable stop 
marketable limit orders''), and executable non-marketable limit orders 
submitted with stop prices (``executable stop non-marketable limit 
orders'' or ``executable stop NMLOs''), in response to comments. As 
part of adding these separate stop order categories, the Commission is 
also adding new definitions of ``executable stop marketable limit 
order'' and ``executable stop non-marketable limit order.''
    Individual investors generally supported including certain orders 
submitted with stop prices within the definition of ``covered order.'' 
\265\ A national securities exchange supported inclusion of orders 
submitted with stop prices within the definition of ``covered order.'' 
\266\ One broker-dealer supported the inclusion of executable stop 
orders as an order type.\267\
---------------------------------------------------------------------------

    \265\ See Macarthur Letter; Cesar Letter; Genco Letter; Varghese 
Letter. See also supra note 238 (discussing Gillmore Letter, which 
relates to whether to include as covered orders certain orders 
submitted outside of regular trading hours and orders submitted with 
stop prices).
    \266\ See Nasdaq Letter at 44.
    \267\ See Virtu Letter II at 3.
---------------------------------------------------------------------------

    Another broker-dealer supported including stop orders, but stated 
that there are many different types of stop orders. This commenter 
stated that, ``rather than attempting to define what constitutes a 
trigger and its corresponding reference market for purposes of 
determining whether and how a stop order is included within Rule 605, 
it would be preferable to simply require that all stop orders that are 
triggered be included in Rule 605 reports to the extent that the 
resulting market or limit order is a covered order.'' \268\ Another 
commenter stated that the definition of executable stop order ``runs 
counter to how stop orders actually become executable.'' \269\ 
According to this commenter, while FINRA Rule 5350 defines a stop order 
as ``an order to buy (or sell) that becomes a market order to buy (or 
sell) when a transaction occurs at or above (below) the stop price,'' 
broker-dealers may elect to trigger a stop order in a different fashion 
but are prevented from calling it a ``stop order.'' \270\
---------------------------------------------------------------------------

    \268\ Rule 605 Citadel Letter at 12.
    \269\ Schwab Letter III at 5-6.
    \270\ Id. at 6. According to this commenter, the most common 
other trigger condition on a sell stop is the bid, but very rarely 
do equity sell stop orders trigger off the ask. See id.
---------------------------------------------------------------------------

    An industry group suggested that the Commission and FINRA adopt 
consistent usage of the term ``stop order'' and other relevant terms 
because the proposed definition is inconsistent with the terminology in 
FINRA Rule 5350 in a number of respects.\271\ The commenter stated that 
stop orders should be reported separately from other types of orders, 
but suggested that the Commission modify the criteria for when to 
include stop orders in Rule 605(a)(1) reports and expand the order type 
categories related to stop orders.\272\ This commenter recommended that 
stop orders become reportable if the order is ``triggered'' or 
``activated'' and that an alternate term along these lines be used 
instead of ``executable.'' \273\ According to this commenter, requiring 
reporting pursuant to Rule 605 ``with respect to any time period prior 
to the triggering of a stop order would provide no value to market 
participants and would provide misleading information to the market'' 
because there is no action that a firm can take to execute a stop order 
prior to the point when the order is triggered.\274\
---------------------------------------------------------------------------

    \271\ See FIF Letter at 9, 12. This commenter stated that it was 
using the term ``stop order'' in a manner consistent with the 
Commission's usage of the term in the Proposing Release. See id. at 
9. This commenter stated that it used ``stop order'' to include stop 
orders and stop limit orders, as those terms are defined in FINRA 
Rule 5350, but also included orders that are triggered upon the stop 
price matching (or passing) a quoted price, in addition to those 
orders triggered upon the stop price matching (or passing) a trade 
price, and trailing stop orders. See id.
    \272\ See id. at 9-11.
    \273\ See id. at 10, 11-12. This commenter stated that the terms 
``triggered'' and ``activated'' are used interchangeably in FINRA 
Rule 5350, Supplementary Material .01 and .02 and that the commenter 
considers these terms to have the same meaning as applied to stop 
orders. See id. at 10 & n.25. This commenter also stated that its 
members do not believe that it would be necessary for the Commission 
to define ``triggering'' or ``activation'' because this concept for 
a stop order is well-understood by industry members and regulators. 
See id. at 11. See also FIF Letter II at 2. Further, this commenter 
stated that a material percentage of stop orders are triggered based 
on a change in the NBBO (in most cases, but not always, the 
opposite-side quote) and a material percentage of stop orders are 
triggered based on a change in the last sale price. See id.
    \274\ See FIF Letter at 10.
---------------------------------------------------------------------------

    After review of the comments, the Commission is adopting a modified 
definition of ``executable'' as it pertains to orders submitted with 
stop prices. As adopted, ``executable,'' with respect to orders 
submitted with stop prices, means that the stop price has been 
triggered during regular trading hours and after the primary listing 
market has disseminated its first firm, uncrossed quotations in the 
security.\275\ As stated by commenters, orders may be submitted with 
stop prices that trigger or activate based on different conditions, 
such as a last sale price or a change in the NBBO.\276\ The definition 
of ``executable'' that the Commission is adopting will more broadly 
encompass the different conditions that may convert an order with a 
stop price into an order that may execute.\277\ Additionally, this 
change addresses a commenter's suggestion by preventing stop orders 
from being executable before they have been triggered.\278\
---------------------------------------------------------------------------

    \275\ See final 17 CFR 242.600(b)(39). The addition of the 
reference to the interim opening period is discussed in section 
III.A.1.b) supra.
    \276\ The Commission's analysis of stop order volume 
demonstrates that most stop orders are triggered by the last sale 
price, but there is also nontrivial order flow associated with other 
trigger events, including changes to the quotation. See infra text 
accompanying note 1167; Table 3.
    \277\ Although the Commission is not adopting a commenter's 
suggestion to use the term ``triggered'' or ``activated'' instead of 
``executable'' when used in connection with stop orders (see supra 
note 273 and accompanying text), redefining ``executable'' to mean 
that an order's stop price has been triggered during regular trading 
hours will have the same substantive effect.
    \278\ See supra note 274 and accompanying text. In addition, 
revising the definition of ``executable'' to focus on when a stop 
order has been triggered is consistent with the Commission's goal of 
helping investors compare the performance of market centers and 
broker-dealers from a point in time when such orders could 
reasonably be expected to execute. See Proposing Release, 88 FR 3786 
at 3805 (Jan. 20, 2023).

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

[[Page 26451]]

    A commenter suggested that Rule 605 reports should exclude stop 
orders to ``avoid confusion'' and allow firms to disclose the relevant 
details to their clients in a manner consistent with the clients' 
trading experience.\279\ However, such disclosures would not be an 
adequate substitute because they would not be required, might not be 
provided in a uniform format, and might not be available to market 
participants that are not clients of a particular firm, all of which 
would impede market participants' ability to compare statistics across 
firms.
---------------------------------------------------------------------------

    \279\ See Schwab Letter III at 5-6. This commenter raised, but 
did not recommend, an alternative approach. See infra note 282 and 
accompanying text.
---------------------------------------------------------------------------

    An industry group recommended that: (1) once a stop order without a 
limit price has been triggered, the order should be reported as a stop 
market order; and (2) once a stop limit order has been triggered, the 
order should be reported in one of several new order type categories 
based on the status of the order at the time the order is 
triggered.\280\ This commenter further suggested that, for purposes of 
representing all of these order type categories, the Commission should 
add a column to Rule 605(a)(1) reports to indicate whether the 
applicable row pertains to stop orders.\281\ A commenter that 
recommended excluding stop orders from Rule 605 reports stated that 
``stop orders can have at least three distinct behaviors after they are 
triggered--market order, marketable limit order, and nonmarketable 
limit order'' and suggested that a ``more transparent way to include 
these orders would be to create three separate categories of stop 
orders reflecting these triggers.'' \282\
---------------------------------------------------------------------------

    \280\ See FIF Letter at 10-11. Specifically, this commenter 
suggested the following new order type categories for limit orders 
with a stop price: (a) stop marketable limit order for an order that 
is a marketable limit order at the trigger time; (b) stop beyond-
the-midpoint limit order for an order that is a beyond-the-midpoint 
limit order at the trigger time; and (c) stop executable NMLO for an 
order that is an NMLO at the trigger time. See id. This commenter 
also stated that a material percentage of stop orders have a limit 
price and a material percentage of stop orders do not have a limit 
price. See FIF Letter II at 2.
    \281\ See FIF Letter at 9; FIF Letter III at 4.
    \282\ Schwab Letter III at 6. This commenter did not recommend 
this approach because, according to the commenter, it would ``create 
increased complexity with little benefit for the individual 
investor.'' Id. The Commission disagrees. The Commission continues 
to believe that including stop orders within the scope of the Rule 
will benefit market participants by allowing them to analyze 
variations in execution quality. See Proposing Release, 88 FR 3786 
at 3805 (Jan. 20, 2023). Moreover, stop orders make up a nontrivial 
percentage of orders from individual investors. See infra Table 3.
---------------------------------------------------------------------------

    In consideration of these comments, the Commission is modifying 
Rule 605's treatment of stop orders from the proposal to split 
executable stop orders into three categories--executable market orders 
submitted with stop prices, executable stop marketable limit orders, 
and executable stop NMLOs--based on the stop orders' status at the time 
that they are triggered. Separating executable stop orders into these 
three categories will group orders with similar execution 
profiles.\283\ To implement these changes to the treatment of stop 
orders, the Commission is: (1) modifying the proposed definition of 
``categorized by order type'' to replace the category for executable 
orders submitted with stop prices with categories for executable market 
orders submitted with stop prices, executable stop marketable limit 
orders, and executable stop non-marketable limit orders; \284\ (2) 
adding new defined terms of ``executable stop marketable limit order'' 
and ``executable stop non-marketable limit order;'' \285\ and (3) 
modifying the execution quality statistics required for stop orders to 
align the three categories of stop orders with the type of order they 
most resemble once triggered.\286\
---------------------------------------------------------------------------

    \283\ See infra note 1387 and accompanying text.
    \284\ See final 17 CFR 242.600(b)(19).
    \285\ See final 17 CFR 242.600(b)(40) and (41).
    \286\ See final 17 CFR 242.605(a)(1)(i), (ii), and (iii).
---------------------------------------------------------------------------

    In response to comments received, the Commission conducted a 
supplemental analysis of the distribution of stop orders that fell into 
six existing order type categories once triggered using a sample of CAT 
data for 400 stocks for March 2023. The results are presented in Table 
1 and show that the majority of orders submitted with a stop price that 
trigger are market orders when triggered (almost 86%). However, a 
significant percentage of orders submitted with a stop price that 
trigger are limit orders.\287\
---------------------------------------------------------------------------

    \287\ In addition, the Commission's analysis of stop order 
volume shows that there is a significant volume of stop orders with 
and without limit prices. See infra Table 3 (showing that stop 
orders placed by institutional investors are 36.1% market orders and 
63.9% limit orders, and stop orders placed by individual investors 
are 89.0% market orders and 11.0% limit orders). These results are 
consistent with the commenter who stated that a material percentage 
of stop orders have a limit price and a material percentage of stop 
orders do not have a limit price. See FIF Letter II at 2.

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

[[Page 26452]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.002

    The Commission is adopting definitions for ``executable stop 
marketable limit order'' and ``executable stop non-marketable limit 
order'' to provide that the determination of which of these two 
categories a limit order submitted with a stop price falls into is made 
using the point in time that the order submitted with a stop price is 
triggered.\288\ Utilizing this determination point in time will help 
align the sub-grouping of limit orders submitted with stop prices with 
the characteristics of these orders once the stop price is triggered. 
Under the adopted definitions, an ``executable stop marketable limit 
order'' will be an order whose limit price is equal to or greater than 
the best offer (for a buy order) or equal to or less than the national 
best bid (for a sell order) at the time the stop price is triggered, 
i.e., when the limit order submitted with a stop price becomes 
executable.\289\ Similarly, an ``executable stop non-marketable limit 
order'' will be an order whose limit price is less than the best offer 
(for a buy order) or greater than the national best bid (for a sell 
order) at the time the order becomes executable.\290\
---------------------------------------------------------------------------

    \288\ See final 17 CFR 242.600(b)(40) and (41). Measurement of 
the execution quality of an executable stop marketable limit order 
and an executable stop non-marketable limit order begins when the 
stop price is triggered because that is the point in time at which 
customers generally expect such orders to be eligible to execute. 
While the determination of whether a limit order is a marketable 
limit order is calculated differently, i.e., based on the time of 
order receipt, see final 17 CFR 242.600(b)(56), the time of order 
receipt will similarly allow customers to compare execution quality 
from a point in time when such orders could reasonably be expected 
to execute.
    \289\ See final 17 CFR 242.600(b)(40).
    \290\ See final 17 CFR 242.600(b)(41).
---------------------------------------------------------------------------

    As proposed, Rule 605 would have required that the execution 
quality statistics provided for executable orders submitted with stop 
prices include those execution quality statistics required for non-
marketable order types.\291\ However, executable market orders 
submitted with stop prices and executable stop marketable limit orders 
(together, ``marketable stop order types'') will behave like market and 
marketable limit orders once triggered rather than NMLOs. Therefore, 
the Commission is modifying the proposed execution quality statistics 
for marketable stop order types to provide that the same statistics 
required of other marketable order types (e.g., price improvement 
statistics) be calculated for these types of stop orders.\292\ However, 
because executable stop NMLO orders will behave like other NMLOs once 
triggered, the Commission is requiring that the same statistics 
required of other non-marketable order types (e.g., relative fill rate) 
be calculated for these stop orders.\293\
---------------------------------------------------------------------------

    \291\ See Proposing Release, 88 FR 3786 at 3805, 3821 (Jan. 20, 
2023); proposed Rule 605(a)(1)(i) and (iii).
    \292\ See final 17 CFR 242.605(a)(1)(ii).
    \293\ See final 17 CFR 242.605(a)(1)(iii).

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

[[Page 26453]]

    The Commission is not adopting the commenter's recommendation to 
add an additional column to the Rule 605(a)(1) detailed report to 
denote whether a particular row pertains to stop orders.\294\ The 
additional order type categories in amended Rule 605 for executable 
market orders submitted with a stop price, executable stop marketable 
limit orders, and executable stop NMLOs partially align Rule 605 with 
this recommendation substantively because they will require firms to 
provide execution quality statistics for these types of stop orders 
that are grouped according to the characteristics of the orders once 
triggered. However, the commenter's recommendation would in effect have 
created a separate order type category for stop orders with 
characteristics of each of the other order types (e.g., executable 
midpoint-or-better limit order with a stop condition, executable 
marketable IOC with a stop condition). The Commission does not believe 
the execution profiles for an order type category or categories for 
executable midpoint-or-better order types with a stop condition would 
vary significantly enough from other executable stop NMLOs to warrant 
additional order type categories. A significant portion of midpoint-or-
better limit orders may have the expectation of executing immediately, 
for example, against hidden or odd-lot liquidity inside of the 
spread.\295\ Because these orders are likely to have different 
execution profiles than other types of NMLOs,\296\ the Commission is 
requiring separate order type categories for midpoint-or-better limit 
orders.\297\ In contrast, an order submitter placing a stop limit order 
likely does not have an expectation of executing immediately and does 
not know ex ante what the market conditions will be when the stop price 
is triggered, i.e., how aggressive the limit price will be when the 
order is converted into a limit order. Therefore, because executable 
midpoint-or-better order types with a stop condition are not likely to 
have significantly different execution profiles than other executable 
stop NMLOs, the Commission is not requiring the use of order type 
categories that would further sub-divide executable stop NMLOs. In 
addition, it is not likely that orders will have both an IOC 
instruction (which indicates an expectation of immediacy) and a stop 
condition (which indicates an intention to wait until market conditions 
change and trigger the stop condition). Even if such orders are 
utilized, they are not likely to have significantly different execution 
profiles than other stop orders that fall within the same order type 
categories. Thus, the Commission is not requiring the use of order type 
categories that would further sub-divide the categories for orders 
submitted with stop prices.
---------------------------------------------------------------------------

    \294\ See supra note 281 and accompanying text.
    \295\ See infra section IX.D.1.b)(2)(a)(ii).
    \296\ See infra section IX.C.3.c)(3).
    \297\ See infra section III.B.2.b)(2).
---------------------------------------------------------------------------

3. Non-Exempt Short Sale Orders
(a) Proposed Approach
    Commission staff has taken the position that staff would view all 
short sale orders that are not marked ``short exempt'' (``non-exempt 
short sale orders'') as special handling orders and, in the staff's 
view, these orders may be excluded from the definition of ``covered 
order.'' \298\ Non-exempt short sale orders are subject to a price test 
under 17 CFR 242.201 (``Rule 201'' of Regulation SHO (17 CFR 242.200 
through 242.204)) that sets forth a short sale circuit breaker that is 
triggered in certain circumstances, after which time a price 
restriction will apply to short sale orders in that security for that 
day and the following day.\299\ The Commission proposed that non-exempt 
short sale orders would not be considered special handling orders 
unless a price test restriction is in effect for the security. As 
proposed, non-exempt short sale orders would fall within the definition 
of ``covered order'' and thus be subject to Rule 605 reporting, unless 
another exclusion applies. Conversely, during a short sale price test, 
a short sale order not marked ``exempt'' would continue to be subject 
to special handling and would be excluded from the definition of 
``covered order'' and thus from Rule 605 reporting.\300\
---------------------------------------------------------------------------

    \298\ See prior 17 CFR 242.600(b)(22); ``Responses to Frequently 
Asked Questions Concerning Rule 605 of Regulation NMS'' (Feb. 22, 
2013) (``2013 FAQs'').
    \299\ 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 10% 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).
    \300\ See Proposing Release, 88 FR 3786 at 3806 (Jan. 20, 2023).
---------------------------------------------------------------------------

(b) Final Rule and Discussion
    The Commission is adopting as proposed its position that non-exempt 
short sales orders will not be considered special handling orders 
unless a price test restriction is in effect for the security. The 
Commission received several comments on this aspect of the proposal. 
One national securities exchange supported the proposed treatment of 
non-exempt short sale orders.\301\ Another national securities exchange 
suggested that the Commission provide more detailed instructions 
relating to any order types that would be excluded from the definition 
of ``covered order,'' e.g., order types that are considered ``special 
handling,'' ``to ensure that such orders are treated uniformly by 
respondents in their data disclosures.'' \302\ Two broker-dealers 
supported the proposal,\303\ as did an individual investor who stated 
that non-exempt short sale orders are ``a core component of the current 
market.'' \304\ An industry association also supported this aspect of 
the proposal, but asked how the Commission intends to document the 
change, which is not reflected in any change to the definition of 
``covered order.'' \305\
---------------------------------------------------------------------------

    \301\ See Nasdaq Letter at 43-44.
    \302\ NYSE Letter at 8.
    \303\ See Virtu Letter II at 3; Robinhood Letter at 45-46.
    \304\ See Joy Letter.
    \305\ See FIF Letter at 12.
---------------------------------------------------------------------------

    After consideration of the comments, the Commission is adopting the 
position that non-exempt short sale orders will not be considered 
special handling orders unless a price test restriction is in effect 
for the security, as proposed. As discussed in the Proposing Release, 
when a non-exempt short sale order is subject to a price test 
restriction under Rule 201 of Regulation SHO, a trade may only take 
place at least one tick above the national bid or offer; however, non-
exempt securities are infrequently subject to such a price test 
restriction.\306\ The inclusion of non-exempt short sale orders within 
the scope of Rule 605 when a short sale price test is not in effect 
will not skew execution quality statistics because non-exempt short 
sale orders are not tick-sensitive during this period. However, when a 
price test restriction under Rule 201 of Regulation SHO is in effect, 
any non-exempt short sale order (i.e., an order that is tick-sensitive) 
will be an ``order to be executed only on a particular type of tick or 
bid'' which is one of the types of special handling orders specified as 
being excluded from the definition of ``covered order.'' \307\ Such 
orders will

[[Page 26454]]

therefore be excluded from the definition of ``covered order.'' In 
addition, including non-exempt short sale orders for which a price test 
restriction is not in effect within the scope of Rule 605 reports will 
lead to a more complete picture of reporting entities' execution 
quality.\308\ As discussed further below, the prior staff statements 
that conflict with the Commission's adopted position will be 
rescinded.\309\
---------------------------------------------------------------------------

    \306\ See Proposing Release, 88 FR 3786 at 3806 (Jan. 20, 2023). 
See also infra note 1172 and accompanying text.
    \307\ See final 17 CFR 242.600(b)(27).
    \308\ See Proposing Release, 88 FR 3786 at 3806 (Jan. 20, 2023).
    \309\ See infra section VI. As stated earlier, when a short sale 
price test restriction is in place for the security, a short sale 
order not marked ``exempt'' generally would continue to be subject 
to special handling and generally would be excluded from the 
definition of covered order and thus from Rule 605 reporting. See 
supra note 300 and accompanying text. At this time, no further 
guidance concerning additional order types that require ``special 
handling'' is required because it is not possible for the Commission 
to provide an exhaustive list of the types of orders that may be 
considered ``special handling'' and no specific questions regarding 
whether particular order types should be considered ``special 
handling'' have been raised.
---------------------------------------------------------------------------

B. Required Information

1. Categorization by Order Size
(a) Proposed Approach
    Prior to the amendments, Rule 605 reports utilized order size 
categories based on the numbers of shares in the order (e.g., 100-499 
shares and 500-1,999 shares). Historically, round lots generally have 
been viewed as groups of 100 shares, and Rule 605 prior to these 
amendments reflected this: it did not require reporting of orders 
smaller than 100 shares, including odd-lot orders or fractional share 
orders (i.e., orders for less than one share).\310\ Additionally, 
preexisting Rule 605 reports did not include orders with a size of 
10,000 shares or greater, pursuant to exemptive relief provided by the 
Commission in 2001.\311\
---------------------------------------------------------------------------

    \310\ 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).
    \311\ See Large Order Exemptive Letter.
---------------------------------------------------------------------------

    The Commission proposed to amend the definition of ``categorized by 
order size'' to designate the following categories for order sizes: (i) 
less than 1 share; (ii) odd-lot; (iii) 1 round lot to less than 5 round 
lots; (iv) 5 round lots to less than 20 round lots; (v) 20 round lots 
to less than 50 round lots; (vi) 50 round lots to less than 100 round 
lots; and (vii) 100 round lots or greater.\312\ The proposed 
modifications to the order size categories would have utilized the new 
definition of round lot adopted in the Market Data Infrastructure rule 
(the ``MDI Rules''),\313\ and included odd-lots, fractional shares 
(i.e., orders for less than one share), and larger order sizes.\314\
---------------------------------------------------------------------------

    \312\ See Proposing Release, 88 FR 3786 at 3807 (Jan. 20, 2023); 
proposed Rule 600(b)(19).
    \313\ For NMS stocks priced $250.00 or less per share, a round 
lot will be 100 shares; for NMS stocks priced $250.01 to $1,000.00 
per share, a round lot will be 40 shares; for NMS stocks priced 
$1,000.01 to $10,000.00 per share, a round lot will be 10 shares; 
and for NMS stocks priced $10,000.01 or more per share, a round lot 
will be 1 share. See prior 17 CFR 242.600(b)(82); MDI Adopting 
Release, 86 FR 18596 at 18617 (Apr. 9, 2021). Separately, the 
Commission proposed to accelerate the implementation of the round 
lot definition. See Minimum Pricing Increments Proposing Release, 87 
FR 80266 at 80270 (Dec. 29, 2022). 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 at 18698-701 (Apr. 9, 2021). At a minimum, round lot 
implementation will be two years after the Commission's approval of 
the plan amendment(s) required by 17 CFR 242.614(e) (``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.
    \314\ The Commission proposed to rescind the exemptive relief 
for orders of 10,000 or more shares and include these orders within 
the scope of Rule 605 reports. See Proposing Release, 88 FR 3786 at 
3808 (Jan. 20, 2023).
---------------------------------------------------------------------------

(b) Final Rule and Discussion
    In response to comments, the Commission is adopting a definition of 
``categorized by order size'' that differs from the proposal's focus on 
round lot increments. Instead, as adopted, each order size category 
reflects a notional dollar value range, along with an indication that 
the category reflects orders that were for an odd-lot, a round lot, or 
less than a share. As adopted, this amendment will increase 
transparency regarding distribution of order sizes that a reporting 
entity handles, particularly for higher-priced stocks. The Commission 
also is adopting an execution quality statistic for cumulative notional 
order size of covered orders.
    Individual investors generally supported the proposed order size 
categories.\315\ Some individual investors stated that these categories 
would help them achieve investor confidence or better executions.\316\ 
Another individual investor stated that reporting execution quality 
information across orders of different sizes would be ``incredibly 
beneficial'' to understanding the ``degree of fairness in the market.'' 
\317\ An investor advocacy group supported the proposed changes to the 
definition of categorized by order size.\318\ But one broker-dealer 
stated that ``because the Commission has simultaneously submitted for 
proposal a new rule that would change tick sizes and round lot 
definitions'' (i.e., the Minimum Pricing Increments Proposing 
Release),\319\ the reporting requirements pertaining to categorization 
by order size ``are subject to change which in turn could create 
customer confusion.'' \320\
---------------------------------------------------------------------------

    \315\ See, e.g., Welch Letter (supporting the inclusion of 
fractional, odd-lot, and large size orders); Abanes Letter; 
Macarthur Letter.
    \316\ See Joy Letter (stating that the ``inclusion of fractional 
shares [and] odd-lots are also essential in the provided data as 
these are the most commonly used orders by retail'' and that 
including these order size categories ``provides retail more 
information confidence to invest more frequently with smaller order 
sizes''); letter from Art. R Medina (Dec. 26, 2022) (``Medina 
Letter'') (stating that the proposed new size categories would 
``help for better execution in the lit market exchanges'' and ``help 
these systems better execute customer orders for broker-dealers and 
ensure competition'').
    \317\ See letter from Creighton Bledsoe (Feb. 28, 2023) 
(``Bledsoe Letter``).
    \318\ See Healthy Markets Letter at 17.
    \319\ See Minimum Pricing Increments Proposing Release, 87 FR 
80266 (Dec. 29, 2022).
    \320\ Tastytrade Letter at 5.
---------------------------------------------------------------------------

    Other commenters addressed specific elements of the proposed order 
size categories. An investor advocacy group supported basing the order 
size categories on round lots, stating that doing so not only would 
harmonize Rule 605 disclosure with the MDI Rules \321\ that established 
a price-based definition of ``round lot'' but also would better enable 
Rule 605 reports to group orders in a way that provides useful order 
execution information.\322\ However, a number of commenters suggested 
using notional dollar value categories instead of or in addition to the 
share-based categories.\323\
---------------------------------------------------------------------------

    \321\ See supra text accompanying note 313 (defining MDI Rules).
    \322\ See Better Markets Letter at 6.
    \323\ See SIFMA Letter II at 32; Angel Letter at 2; Schwab 
Letter II at 33; Fidelity Letter at 9; Rule 605 Citadel Letter at 6. 
Further, an academic recommended using dollar rather than share 
amounts and stated that ``[r]ound lots are obsolete.`` Angel Letter 
at 2.
---------------------------------------------------------------------------

    Similarly, several commenters, including a broker-dealer and 
financial services firms, suggested using notional size categories 
rather than round lot-based size categories.\324\ One of the financial 
services firms stated that ``the process for assigning the number of 
shares per round lot per security is not

[[Page 26455]]

dynamic enough to make this a meaningful delineation.'' \325\ In 
addition, according to this commenter, ``after the size of an order has 
achieved round lot status, there is no intrinsic difference in the size 
of the order until it reaches 10,000 shares or $200,000,'' and 
therefore ``bucketing by round lots has no application to the broader 
market structure.'' \326\ Another financial services firm stated that 
creating order size categories based on notional dollar amounts would 
provide investors with clearer views of the execution experiences 
associated with their orders.\327\ A broker-dealer stated that grouping 
orders by notional size would allow for a more accurate comparison of 
execution quality.\328\
---------------------------------------------------------------------------

    \324\ See Schwab Letter II at 33, Fidelity Letter at 9, Rule 605 
Citadel Letter at 6. When discussing a potential average notional 
order size metric for the summary report, one of these broker-
dealers stated that notional size is measured by multiplying the 
number of shares by the midpoint at the time of order entry. See 
Schwab Letter III at 3. In addition, an industry group stated that 
notional value should be based on the midpoint at the time of order 
receipt. See FIF Letter II at 11. See also infra notes 792 and 793 
and accompanying text.
    \325\ Schwab Letter II at 33. This commenter stated that the 
``price of a stock can vary dramatically in the three-month period 
in which the round lot size is set,`` so an intent to approximate 
the notional order size by the round lot category would ``frequently 
fail.`` Id.
    \326\ Id.
    \327\ See Fidelity Letter at 9. This commenter stated that 
notional sizes would: (1) be more easily compared over time as lot 
sizes change or stocks splits occur; and (2) provide ``a more 
representative view of the cost to implement different types of 
trades and [be] more consistent with increased market use of 
fractional/notional trading.`` Id.
    \328\ See Rule 605 Citadel Letter at 6.
---------------------------------------------------------------------------

    Two industry groups also recommended grouping orders based on their 
notional dollar values.\329\ One of these industry groups stated that 
in 2018 and 2019 it had recommended a set of notional size buckets for 
Rule 605 reporting.\330\ This commenter suggested that the Commission 
utilize CAT data to conduct an analysis similar to the one conducted by 
IHS Markit for Q1 2018 ``to determine whether [those] notional value 
categories would still be appropriate or whether these notional value 
categories should be adjusted.'' \331\ This commenter also specifically 
suggested that one of the thresholds separating notional value 
categories be $200,000.\332\ The other industry group supported 
revising Rule 605 to utilize notional buckets for the order size 
categorizations instead of, or in addition to, using the number of 
round lots as proposed.\333\ This commenter recommended that the 
Commission ``calculate appropriately informative notional size 
buckets.'' \334\
---------------------------------------------------------------------------

    \329\ See SIFMA Letter II at 32; FIF Letter at 14-15.
    \330\ See FIF Letter at 14-15. This commenter also stated that 
it was providing information on the percentage of orders that fell 
within each notional value category, as estimated by IHS Markit for 
Q1 2018. See id. at 15. Specifically, the notional size buckets and 
associated percentage of orders were as follows: (1) $1 to $999 
(33%); (2) $999 to $4,999 (29%); (3) $5,000 to $19,999 (24%); (4) 
$20,000 to $49,999 (8%); and (5) $50,000 to $500,000 (6%). See id. 
at 14-15.
    \331\ Id. at 15. As discussed below, consistent with this 
commenter's recommendation, the Commission analyzed current CAT data 
to establish the notional size buckets it is adopting.
    \332\ See id. See also infra note 353 and accompanying text.
    \333\ See SIFMA Letter II at 32.
    \334\ Id. This commenter suggested that, for example, the 
Commission could use the notional buckets recommended by the first 
industry group in 2019. See id. at 32, n.78 and accompanying text 
(citing a letter to Brett Redfearn, Director, Division of Trading & 
Markets, Commission, from Christopher Bok, Financial Information 
Forum (Jan. 30, 2019), available at https://www.sec.gov/comments/s7-02-10/s70210-5002077-182848.pdf).
---------------------------------------------------------------------------

    A national securities exchange suggested using the following 
notional value buckets rather than share size categories: less than 
$10,000; $10,000 to less than $50,000; $50,000 to less than $100,000; 
$100,000 to less than $200,000; and $200,000 to $400,000.\335\ This 
commenter stated that this alternative would avoid the drawbacks of the 
current order size categories based on number of shares while ensuring 
coverage of most retail trades.\336\
---------------------------------------------------------------------------

    \335\ See Nasdaq Letter at 46.
    \336\ See id. at 44.
---------------------------------------------------------------------------

    To address the Commission's concern that defining order size 
buckets according to notional dollar values would no longer produce a 
meaningful distinction between round lot and odd-lot orders, one 
industry group suggested adding a column to the Rule 605 report to 
signify whether the orders in the applicable row are round lot or odd-
lot orders.\337\ This commenter also recommended that mixed lot orders 
be classified as round lot orders for purposes of Rule 605 
reporting.\338\ Another industry group and a broker-dealer recommended 
distinguishing round lot and odd-lot orders using a separate flag.\339\
---------------------------------------------------------------------------

    \337\ See FIF Letter at 15.
    \338\ See id.; FIF Letter II at 3.
    \339\ See SIFMA Letter II at 32; Rule 605 Citadel Letter at 6. A 
group of academics also recommended having a separate entry solely 
for round lot trades, which they said accounts of a large fraction 
of trade sizes and dollar values. See Professor Schwarz et al. 
Letter at 5.
---------------------------------------------------------------------------

    Several individual investor commenters supported the proposed 
inclusion of odd-lot and fractional share orders in Rule 605 
reports.\340\ A group of academics stated that odd-lots currently 
account for over 60% of trades \341\ and, under current disclosure 
requirements, retail traders are unable to evaluate market center 
execution quality for a majority of their trades.\342\ These commenters 
also stated that fractional share market orders receive widely 
different price improvement across broker-dealers and full share price 
improvement statistics are not informative for the execution quality of 
fractional trades.\343\ These commenters stated that these factors 
justify adding fractional and odd-lot trades to Rule 605 reports.\344\ 
A broker-dealer similarly supported the proposed new category for 
fractional share orders as well as a category for orders from one share 
to 99 shares.\345\ Another broker-dealer also supported including odd-
lot orders in Rule 605 reports and stated this would particularly 
benefit retail investors seeking to accurately assess execution quality 
delivered by wholesale broker-dealers.\346\
---------------------------------------------------------------------------

    \340\ See, e.g., Pritchard Letter; Welch Letter; Macarthur 
Letter; Genco Letter; Cesar Letter; Joy Letter.
    \341\ See Professor Schwarz et al. Letter at 3.
    \342\ See id. at 4.
    \343\ See id.
    \344\ See id.
    \345\ See Virtu Letter II at 3.
    \346\ See Rule 605 Citadel Letter at 11.
---------------------------------------------------------------------------

    Explaining that when a round lot or odd-lot order has a fractional 
share component, the time to execution and execution price may be 
impacted, one industry group recommended that: (1) fractional share 
orders (i.e., orders for less than one share) be reported separately 
from round lot and odd-lot orders; and (2) round lot and odd-lot orders 
be broken-out further to differentiate between those orders that have, 
and do not have, a fractional share component.\347\ However, another 
industry group suggested eliminating the requirement to include orders 
for fractional shares in Rule 605 reports, contending that ``this 
information is of limited value to investors.'' \348\ This commenter 
stated that ``[t]here is also no clear way to execute fractional shares 
in a purely agency capacity'' and, ``[a]s a result, to the extent 
fractional share orders are required to be included in Rule 605 
reports, any broker-dealer, even a small broker-dealer, that wanted to 
facilitate a fractional share order for its customer would be 
considered a market center for purposes of Rule 605.'' \349\ 
Additionally, this commenter stated that ``much of today's market 
infrastructure does not yet support fractional share trading'' and the 
``costs to fully modify this infrastructure would

[[Page 26456]]

be high compared to the minimal benefit of including fractional share 
reporting.'' \350\
---------------------------------------------------------------------------

    \347\ See FIF Letter at 15; FIF Letter II at 3. This commenter 
recommended that orders be broken out into the following categories 
within each notional value range because orders in each of these 
categories have distinct execution characteristics: round lot 
without fractional component; round lot with fractional component; 
odd-lot without fractional component; odd-lot with fractional 
component; and fractional (less than one share). See FIF Letter II 
at 3. According to the commenter, if these five categories are 
separately reported for each notional value range, reporting based 
on the number of shares would not provide any material value for 
market participants. See id.
    \348\ SIFMA Letter II at 31.
    \349\ Id.
    \350\ Id. This commenter stated as an example that ``FINRA does 
not currently have a mechanism to report fractional share trades, 
because all of these trades are rounded up today.'' Id.
---------------------------------------------------------------------------

    With respect to the proposed inclusion of larger-sized orders, a 
commenter stated that a ``natural breakpoint'' between size categories 
exists at $200,000 and suggested establishing a size bucket of $200,000 
and greater.\351\ Another commenter supported the proposed order size 
category for orders greater than 10,000 shares.\352\ An industry group 
recommended designating one of the thresholds for separating notional 
value categories at $200,000 because in the Order Competition Rule 
Proposing Release the Commission proposed to utilize a $200,000 
threshold for an exception from the obligation to submit a segmented 
order to a qualified auction.\353\ A national securities exchange 
stated that the Commission should ``consider increasing the current cap 
of $200,000 [the notional block size], as this benchmark has not 
changed with the market or inflation over time.'' \354\ This commenter 
stated that increasing the cap may provide ``information that is 
helpful for institutional buyers.'' \355\
---------------------------------------------------------------------------

    \351\ See Schwab Letter II at 33.
    \352\ See Virtu Letter II at 3.
    \353\ See FIF Letter at 14-15.
    \354\ Nasdaq Letter at 46.
    \355\ Id.
---------------------------------------------------------------------------

    Taking into consideration the comments received, the Commission is 
adopting a modified definition of ``categorized by order size.'' The 
Commission followed the suggestion that it use CAT data to examine 
which notional order size buckets would be appropriate.\356\ Based on 
this analysis (discussed below), the Commission is adopting order size 
categories that utilize the following notional dollar value ranges: (i) 
less than $250; (ii) $250 to less than $1,000; (iii) $1,000 to less 
than $5,000; (iv) $5,000 to less than $10,000; (v) $10,000 to less than 
$20,000; (vi) $20,000 to less than $50,000; (vii) $50,000 to less than 
$200,000; and (viii) $200,000 or more.\357\
---------------------------------------------------------------------------

    \356\ See supra note 331 and accompanying text. See also supra 
note 334 and accompanying text (suggesting that the Commission 
calculate appropriate notional size buckets).
    \357\ See infra Figure 16 and Figure 17. In aggregate, order 
flow appears reasonably well-distributed across the various notional 
order size buckets that the Commission is adopting, with the 
exceptions of the smallest size bucket (orders for $250 or less) and 
the largest size bucket (orders for $200,000 or more), both of which 
have little order flow. See infra Section IX.D.1.b)(2)(a)(i). The 
Commission is adopting these notional order size buckets for the 
reasons described below.
---------------------------------------------------------------------------

    Each adopted order size category reflects one of these notional 
dollar value ranges, along with an indication that the orders were for 
an odd-lot, a round lot, or less than a share.\358\ Accordingly, as 
adopted, ``categorized by order size'' means dividing orders into 
separate categories for the following sizes:
---------------------------------------------------------------------------

    \358\ Some commenters suggested utilizing a column or a flag to 
designate whether orders in a particular row are odd-lots or round 
lots. See supra notes 337-339 and accompanying text. Instead, the 
Commission is incorporating into the defined order size categories 
whether an order is for a round lot, odd-lot, or less than a share 
for ease of application. The two approaches have the same 
substantive effect of having a single row representing each possible 
combination of round lot, odd-lot, and fractional share with each 
notional value size range.
---------------------------------------------------------------------------

     Less than $250 and less than a share;
     Less than $250 and odd-lot;
     Less than $250 and at least a round lot;
     $250 to less than $1,000 and less than a share;
     $250 to less than $1,000 and odd-lot;
     $250 to less than $1,000 and at least a round lot;
     $1,000 to less than $5,000 and less than a share;
     $1,000 to less than $5,000 and odd-lot;
     $1,000 to less than $5,000 and at least a round lot;
     $5,000 to less than $10,000 and less than a share;
     $5,000 to less than $10,000 and odd-lot;
     $5,000 to less than $10,000 and at least a round lot;
     $10,000 to less than $20,000 and less than a share;
     $10,000 to less than $20,000 and odd-lot;
     $10,000 to less than $20,000 and at least a round lot;
     $20,000 to less than $50,000 and less than a share;
     $20,000 to less than $50,000 and odd-lot;
     $20,000 to less than $50,000 and at least a round lot;
     $50,000 to less than $200,000 and less than a share;
     $50,000 to less than $200,000 and odd-lot;
     $50,000 to less than $200,000 and at least a round lot;
     $200,000 or more and less than a share;
     $200,000 or more and odd-lot; and
     $200,000 or more and at least a round lot.\359\
---------------------------------------------------------------------------

    \359\ See final 17 CFR 242.600(b)(18). The adopted categories 
address the concern expressed by a commenter that the proposed 
categories, which were based on round lots (and also included 
categories for orders for less than one share and for odd-lots), may 
cause confusion because the definition of round lot may change. See 
supra note 320 and accompanying text.
---------------------------------------------------------------------------

    As discussed further below, the adopted categories will facilitate 
market participants' ability to compare across orders of different 
sizes in higher-priced stocks, while controlling for potential 
differences in the treatment of larger-sized orders. Additionally, the 
adopted buckets better account for potential differences in the 
distribution of order sizes that reporting entities typically handle 
for a given stock when comparing execution quality metrics across 
reporting entities, facilitating apples-to-apples comparisons of 
execution quality across reporting entities.
    For purposes of the order size categories, a mixed lot order (i.e., 
an order for an amount of shares greater than a round lot that is not a 
multiple of such round lot) will be grouped in the ``at least a round 
lot'' category and an order for an odd-lot with a fractional share 
component or a round lot with a fractional share component will be 
grouped with other odd-lots or round lots, respectively.\360\ Reporting 
entities generally should calculate a limit order's notional value by 
multiplying the number of shares by the order's limit price. In 
addition, reporting entities generally should calculate a market order 
to buy's notional value by multiplying the number of shares by the 
national best offer at the time of order receipt and a market order to 
sell's notional value by multiplying the number of shares by the 
national best bid at the time of order receipt.\361\ Calculation of the 
notional value of a stop order generally should follow these principles 
based on whether the order once triggered is a limit order or a market 
order, except that the notional value of a stop market order should be 
based upon the national best bid or national best offer at the time the 
order is triggered rather than the time of order receipt.
---------------------------------------------------------------------------

    \360\ See final 17 CFR 242.600(b)(18).
    \361\ The Commission does not agree with the commenters' 
suggestion that notional value of an order generally should be 
calculated based on the midpoint of the national best bid and 
national best offer at time of order receipt. See supra note 324. 
The order size categories reflect the order from the perspective of 
the order submitter. Likewise, calculating an order's notional value 
for purposes of categorization by order size by referencing the 
limit price for a limit order or the far touch for a market order 
generally should better reflect the order submitter's expectation of 
the order's notional value.
---------------------------------------------------------------------------

    The Commission used CAT data to examine the distribution of orders

[[Page 26457]]

across a granular set of notional order size buckets to determine which 
breakpoints form the most appropriate notional order size buckets. 
Figure 1 presents the distribution of orders across the notional order 
size buckets and shows that orders tend to be clustered around certain 
round notional values (e.g., $100, $1,000, $10,000, and $50,000).
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TR15AP24.003

    When trying to determine the optimal cut-off points between 
notional order size buckets, the Commission considered how the order 
size buckets selected could meaningfully capture variations in order 
sizes across a variety of different factors, including stock prices, 
market centers, lot type and order share size categorization (i.e., 
round lot, odd-lot, and fractional share orders). Based on its 
analysis, the Commission makes the following observations about the 
types of variations in order characteristics that will be captured by 
the adopted order size buckets. First, Figure 2 below presents the 
cumulative order flow (as a percentage of total orders) across notional 
order size buckets. These results show that, for stocks priced less 
than $5,\362\ 87.6% of orders are valued below $1,000 and 66.9% of 
orders are valued below $500. Given that nearly a quarter of stocks are 
priced below $5, including a set of smaller notional order size buckets 
(i.e., less than $250; and $250 to less than $1,000) will help ensure 
that orders are meaningfully distributed across order size categories 
and not clustered within a single category. Additionally, odd-lot 
orders tend to be valued less than $1,000, so the smaller notional 
order size buckets are useful for capturing the distribution of odd-lot 
orders specifically.\363\
---------------------------------------------------------------------------

    \362\ This number is based on an analysis of the volume-weighted 
average price (``VWAP'') calculated for each stock during normal 
trading hours for Q1 2023 using data from WRDS Intra-Day Indicators.
    \363\ Based on an analysis of the CAT data described in note 
1261 infra, 17.4% of odd-lot orders are valued below $1,000, and for 
stocks priced less than $50 (which represent 85% of all stocks), 
this percentage increases to 68.9%.

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

[[Page 26458]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.004

    Second, orders valued below $250 contain a higher percentage of 
individual investor orders than higher-valued orders. To proxy for 
small individual investor orders, the Commission analyzed the 
distribution of non-IOC orders that are valued less than $1,000 and 
that originate from Individual Customer \364\ accounts and are handled 
by wholesalers.\365\ The Commission found that 54.2% of these orders 
are valued less than $250. Furthermore, 99.7% of fractional orders for 
less than a share, the majority of which are originated from Individual 
Customer accounts, are valued less than $250. Figure 3 below shows the 
breakdown of orders originating from Individual and Institutional 
Customer account types and shows that nearly three-fourths of orders 
valued under $250 originate from Individual Customers. Therefore, a 
separate notional order size category for orders valued less than $250 
will be particularly useful in allowing individual investors to compare 
the execution quality of their orders across reporting entities.
---------------------------------------------------------------------------

    \364\ See infra note 1144 for a description of an ``Individual 
Customer'' account.
    \365\ This proxy was employed for two reasons. First, it was 
utilized because a high percentage of individual investors' orders 
are handled by wholesalers. See Proposing Release, 88 FR 3786 at 
3839, n.614 (Jan. 20, 2023) (describing a Commission analysis of 
Rule 606 reports that showed that, in Q1 2022, a sample of 46 retail 
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). Second, it 
was utilized because it is the Commission's understanding that IOC 
orders handled by wholesalers are likely to be orders directed to 
wholesaler SDPs. See infra note 1110. Based on an analysis of the 
CAT data described in in note 1261 infra, non-IOC orders that are 
valued less than $1,000 and that originate from Individual Customer 
accounts make up around 10.2% of wholesalers' total order flow.

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[[Page 26459]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.005

BILLING CODE 8011-01-C
    Third, for stocks priced less than $50 (which, again, represent 85% 
of all stocks \366\), 68.0% of orders are valued between $1,000 and 
$10,000. Two of the adopted notional order size buckets ($1,000 to less 
than $5,000; and $5,000 to less than $10,000) will capture some 
variation across the majority of orders for the majority of stocks.
---------------------------------------------------------------------------

    \366\ See supra note 363.
---------------------------------------------------------------------------

    Fourth, 69.6% of round lots have relatively higher notional order 
sizes of between $10,000 and $200,000. In addition, some market centers 
seem to specialize in larger orders. For example, 63.3% of order flow 
to ATSs is valued between $10,000 and $200,000. The remaining adopted 
notional order size buckets ($10,000 to less than $20,000; $20,000 to 
less than $50,000; and $50,000 to less than $200,000) capture the 
distributions of these larger notional value orders, and thus allow for 
measurement of execution quality at market centers that specialize in 
larger notional value order sizes.
    Lastly, the additional notional order size category for orders for 
valued $200,000 or more will be useful because these orders typically 
warrant different treatment than smaller orders.\367\
---------------------------------------------------------------------------

    \367\ See, e.g., 17 CFR 242.606(a)(1) (requiring reports on the 
routing of customer orders) and prior 17 CFR 242.600(b)(25) 
(defining ``customer order'' to exclude an order with a market value 
of $200,000 or more); 17 CFR 242.604(b)(4) (providing an exception 
for orders of block size from required limit order display) and 
prior 17 CFR 242.600(b)(12) (defining ``block size'' as, in part, an 
order for a quantity of stock having a market value of at least 
$200,000). In addition, the adopted rule is consistent with the 
recommendations by two commenters to establish a $200,000 threshold 
and to increase the cap above $200,000. See supra notes 353 and 354 
and accompanying text.
---------------------------------------------------------------------------

    Designating order size categories based on notional order size 
buckets represents a shift in approach from the proposed order size 
categories based on round lot size ranges. In the Proposing Release, 
the Commission stated that modifying the order size categories to 
reflect the number of round lots would better allow Rule 605 reports to 
group orders with similar characteristics and notional values, and 
thereby provide more useful execution quality information.\368\ The 
Commission also stated its belief that notional buckets and caps would 
not be necessary because the definition of round lot, as modified by 
the MDI Rules, incorporates the current market price of the 
security.\369\ However, the Commission requested and, as described 
above, received, comments supporting the use of order size categories 
based on

[[Page 26460]]

notional value.\370\ In the Proposing Release, the Commission 
recognized advantages to defining order size categories based on dollar 
value of the order, while also recognizing that this approach would no 
longer produce a meaningful distinction between round lot and odd-lot 
orders according to the new definitions under the MDI Rules and 
therefore it would not be possible to distinguish orders that may not 
be at the same price as quotes protected under 17 CFR 242.611 (``Rule 
611'').\371\ Many commenters favored utilizing order size categories 
based on notional dollar value.\372\ Further, accepting commenters' 
suggestion to combine notional dollar value ranges with an indication 
of whether a category represents round-lot orders and odd-lot 
orders,\373\ and also indicating whether a category represents orders 
of less than a share, will preserve the ability to distinguish between 
such orders.\374\ Designating order size categories according to 
notional value and whether the order represents a round lot, an odd-
lot, or an order smaller than a single share preserves the 
comparability of order execution quality statistics within an order 
size category and is responsive to comments.\375\
---------------------------------------------------------------------------

    \368\ See Proposing Release, 88 FR 3786 at 3807 (Jan. 20, 2023).
    \369\ See id.
    \370\ See id. at 3809.
    \371\ See id. at 3891-92 (describing reasonable alternative to 
define order sizes based on dollar volume categories rather than 
number of round lots).
    \372\ See supra notes 323-335 and accompanying text.
    \373\ See supra notes 337-339 and accompanying text.
    \374\ One commenter supported the proposed order sized 
definitions in part because they would harmonize Rule 605 
disclosures with the price-based definition of round lot from the 
MDI Rules. See supra note 322. Because the adopted order size 
categories combine notional value with an indication of whether the 
order was a round lot, odd-lot, or order less than a share, the 
order size categories will reflect the price-based definition of 
round lot when it is implemented.
    \375\ The Commission disagrees with a commenter's statement that 
the reporting requirements relating to order size categories are 
subject to change and thus could create confusion because of the 
changes being proposed in the Minimum Pricing Increments Proposing 
Release. See supra notes 319-320 and accompanying text. The Minimum 
Pricing Increments Proposing Release includes a proposal to 
accelerate the implementation of the round lot definition adopted 
under the MDI Rules that will assign NMS stocks priced over $250 to 
round lot sizes smaller than 100 shares. See Minimum Pricing 
Increments Proposing Release, 87 FR 80266 at 80270 (Dec. 29, 2022). 
Although the new round lot definition when implemented will be 
dynamic and lead to changes in the round lot for stocks priced over 
$250, market participants will have notice of these changes. 
Further, the use of notional value in the adopted order size 
categories will help users of Rule 605 reports understand the effect 
of a change in round lot size for a security because a notional 
value range will remain constant even if the size of a round lot 
changes. Moreover, it is not clear, and the commenter does not 
explain, how the proposals to modify tick sizes in the Minimum 
Pricing Increments Proposing Release would potentially affect Rule 
605's requirements concerning categorization by order size.
---------------------------------------------------------------------------

    In addition, in response to commenters' suggestions that the 
statistics in the summary report should be derivable from the detailed 
report,\376\ the Commission is adding a metric to the detailed report 
under Rule 605(a)(1) for the cumulative notional order size of all 
covered orders.\377\ Specifically, users of the detailed reports can 
use the cumulative notional order size metric to calculate average 
notional order size, which is a metric in the summary report, and thus 
either reconstruct a firm's calculations in its summary report or 
calculate the metric for different combinations of orders.\378\ Users 
of the detailed report also can use the cumulative notional order size 
metric to calculate the average share price for covered orders received 
by combining the metric with shares submitted. Further, the cumulative 
notional order size metric provides information to users of the 
detailed report regarding whether the orders that the reporting entity 
received are more heavily weighted towards the higher or the lower end 
of a notional order size range.
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    \376\ See infra note 769 and accompanying text. One commenter 
specifically recommended ``adding to the [605](a)(1) report the 
aggregate notional value of covered orders for each row.'' See FIF 
Letter II at 11.
    \377\ See final 17 CFR 242.605(a)(1)(i)(B) (requiring the 
reporting of the cumulative notional value of covered orders for all 
order types).
    \378\ See final 17 CFR 242.605(a)(2)(ii). See also infra note 
796 and accompanying text (discussing the average notional order 
size metric in the summary report).
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    For the reasons discussed in the Proposing Release and as described 
below, the Commission continues to believe that fractional, odd-lot, 
and larger-sized orders of 10,000 or more shares represent important 
order flow segments.\379\ By incorporating these orders into the new 
order size categories, Rule 605 reports will contain information about 
some orders that were previously missing from Rule 605 reports. The 
Commission disagrees with the commenter that stated that execution 
quality information for fractional share orders is of limited value to 
investors and suggested not including such orders in Rule 605 
reports.\380\ Fractional share orders have become increasingly popular 
with individual investors and the Commission continues to believe that 
it is important to provide standardized execution quality metrics for 
this segment of order flow.\381\ Analysis of CAT data from August 2023 
found that executed orders with a fractional share component originated 
from almost five and a half million unique accounts. Further, orders 
for less than a single share represented a significant portion of 
fractional order executions.\382\ While fractional share orders 
continue to represent a small percentage (around 4.1%) of originating 
orders that eventually execute, they represent a significant percentage 
(21.6%) of order executions originating from individual accounts.\383\
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    \379\ See Proposing Release, 88 FR 3786 at 3808 (Jan. 20, 2023). 
The Commission is rescinding the portion of the Large Order 
Exemptive Letter that grants the Large Order Exemptive Relief 
because it is inconsistent with, and will be obsolete in light of, 
the new order size categories. See infra section VI for further 
discussion.
    \380\ See supra note 348 and accompanying text.
    \381\ See Proposing Release, 88 FR 3786 at 3808 (Jan. 20, 2023). 
A broker-dealer that principally facilitates the trading of 
fractional shares must produce a separate Rule 605 report as a 
market center if it meets the definition of an ``OTC market maker'' 
and receives covered orders for execution in such capacity. See 
final 17 CFR 242.600(b)(18) (defining ``categorized by order size'' 
to include categories for orders of less than a share); final 17 CFR 
242.600(b)(55) (defining ``market center''); final 17 CFR 
242.600(b)(75) (defining ``OTC market maker''); final 17 CFR 
242.605(a)(1) (``Every market center . . . shall make available for 
each calendar month . . . 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.''). See also supra note 170 and accompanying text. As 
discussed below, the inclusion of orders less than one share will 
expand the number of market centers filing Rule 605 reports, and 
therefore this change will increase transparency about the execution 
quality achieved by those market centers. See infra notes 1436-1438 
and accompanying text.
    \382\ Analysis of CAT data from Mar. 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 
Proposing Release, 88 FR 3786 at 3808, n.279 (Jan. 20, 2023). 
Updated analysis from Aug. 2023 found that both the number and 
percentage of orders for less than a share increased. In Aug. 2023, 
approximately 81% (54.7 million) of the 67.4 million executed orders 
with a fractional component were for less than a single share.
    \383\ This considers any order with a fractional component. 
However, orders for less than one share still account for over 16% 
of order executions originating from individual accounts. See infra 
note 1424. Generally, accounts classified as ``individual'' in CAT 
are attributed to natural persons.
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    With respect to the commenter's statement that the cost of 
modifying market infrastructure to accommodate fractional share trading 
``would be high compared to the minimal benefit'' of including 
fractional shares in Rule 605 reports,\384\ this commenter has not 
provided data to quantify the projected increased costs. Although this 
commenter provides as an example of potential infrastructure issues 
that FINRA ``does not currently have a mechanism to report fractional 
share trades, because all of these trades are

[[Page 26461]]

rounded up today,'' \385\ these trades must still be reported to 
FINRA's trade reporting facility.\386\ Further, CAT accepts reports 
involving fractional shares.\387\ Only market centers or larger broker-
dealers that accept orders with fractional shares for execution will 
need to include fractional shares in their Rule 605 reports, and those 
firms have the necessary systems to handle fractional shares.\388\ 
Therefore, the Commission does not agree that the cost to implement any 
modifications to infrastructure needed to provide for the inclusion of 
fractional shares in Rule 605 reports would be so high as to exceed the 
benefits of providing standardized execution quality metrics for this 
segment of order flow.\389\
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    \384\ See supra note 350 and accompanying text.
    \385\ SIFMA Letter II at 31.
    \386\ See FINRA Trade Reporting FAQs, available at https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq (``Q101.15: Must trades for less than one share be 
reported? A101.15: Yes . . . where a trade is executed for less than 
one share, e.g., \1/3\ share, firms should round up and report a 
share quantity of 1.'').
    \387\ See CAT FAQ B.10 available at https://catnmsplan.com/faq.
    \388\ For example, a broker-dealer that accepts orders with 
fractional shares for execution will need to provide a trade 
confirmation to its customer that includes the execution price. In 
addition, such broker-dealer will need to have the ability to 
compare the execution price to the NBBO at the time of execution in 
order to help ensure compliance with the order protection rule. See 
17 CFR 242.611.
    \389\ See infra notes 1674-1676 and accompanying text 
(discussing costs and benefits).
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    In addition, the Commission is not adopting the commenter's 
suggestion that Rule 605 reports also include separate reporting 
categories for round lot orders with a fractional share component and 
odd-lot orders with a fractional share component.\390\ The majority of 
orders that have a fractional share component are orders for less than 
one share and these orders will appear separately in Rule 605 reports 
in the designated order size category. The value of including an 
additional category of orders of larger than one share with a 
fractional share component is unclear.\391\ Such orders will be grouped 
with orders of the same notional size and according to whether the 
order based on overall share size is an odd-lot or a round lot, which 
should provide sufficient comparability for such orders.
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    \390\ See supra note 347.
    \391\ As discussed below, the Commission did not find execution 
quality to systematically vary significantly between odd-lots and 
rounds lots with fractional components and their counterparts 
without fractional components. See infra at section IX.E.3.(a)(2).
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2. Categorization by Order Type
    Rule 605 reports include data for orders as categorized by order 
type. Prior to the amendments, Rule 605 defined ``categorized by order 
type'' to mean dividing orders into separate categories for market 
orders, marketable limit orders, inside-the-quote limit orders, at-the-
quote limit orders, and near-the-quote limit orders.\392\ The 
Commission proposed to modify this definition: (1) to remove the order 
type categories for inside-the-quote limit orders, at-the-quote-limit 
orders, and near-the-quote limit orders; (2) to add order type 
categories for marketable immediate-or-cancel orders, beyond-the-
midpoint limit orders, executable NMLOs (excluding beyond-the-midpoint 
limit orders and orders submitted with stop prices), and executable 
orders submitted with stop prices; and (3) to specify that the category 
for marketable limit orders will exclude immediate or cancel 
orders.\393\
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    \392\ See prior 17 CFR 242.600(b)(14).
    \393\ See Proposing Release, 88 FR 3786 at 3809-12 (Jan. 20, 
2023); proposed Rule 600(b)(20).
---------------------------------------------------------------------------

    The Commission received comments supporting the overall changes to 
order type categories being proposed.\394\ Additionally, and as 
discussed in relevant subsections below, many commenters discussed 
specific aspects of the proposed changes to the order type categories. 
The Commission is adopting the amendments to the order type categories, 
with a few adjustments from the proposal. First, in connection with the 
proposed order type categories for NMLOs, the Commission is making 
certain modifications to the proposed definition of executable, as 
discussed in section III.B.2.a) below. Second, the Commission is 
retaining a separate order type category for executable beyond-the-
midpoint limit orders largely as proposed, with a small expansion in 
scope and corresponding change to the name of the relevant defined term 
to refer to them as ``midpoint-or-better limit orders,'' as discussed 
in section III.B.2.b) below. Finally, the Commission is adopting the 
proposed order type category for marketable IOCs, while also adding 
order type categories for two other types of IOCs, as discussed in 
section III.B.2.c) below.\395\
---------------------------------------------------------------------------

    \394\ See, e.g., Better Markets Letter at 6-7; Pritchard Letter; 
Abanes Letter. An individual investor stated that creation of new 
order type categories would help improve executions in the lit 
exchanges and ensure competition among broker-dealers. See Medina 
Letter.
    \395\ In addition, as discussed in section III.A.2 above, the 
Commission is subdividing the order type category for executable 
orders submitted with stop prices and modifying the definition of 
executable as it pertains to stop orders.
---------------------------------------------------------------------------

(a) NMLOs
(1) Proposed Approach
    The Commission proposed to eliminate the three separate order type 
categories pertaining to NMLOs (i.e. , inside-the-quote limit orders, 
at-the-quote limit orders, and near-the-quote limit orders) \396\ and 
to replace them with new categories for NMLOs that become executable 
(excluding orders submitted with stop prices and beyond-the-midpoint 
limit orders) and beyond-the-midpoint limit orders.\397\ The Commission 
recognized that more meaningful measures of execution quality for 
NMLOs, as well as orders submitted with stop prices, would assist 
investors in measuring execution quality, and stated that it was 
proposing to add the concept of ``executable'' to allow execution 
quality statistics to be measured from a point where an order could be 
executed.\398\ Specifically, the Commission proposed the following 
definition of ``executable'' for NMLOs (other than orders submitted 
with stop prices): for any non-marketable buy order (excluding orders 
submitted with stop prices), executable means that the limit price is 
equal to or greater than the national best bid during regular trading 
hours, and, for any non-marketable sell order (excluding orders 
submitted with stop prices), that the limit price is equal to or less 
than the national best offer during regular trading hours.\399\ The 
Commission stated that, as is the case for orders submitted with stop 
prices, incorporation of the ``executable'' concept would have two 
effects-NMLOs would only be reported as part of a Rule 605 report if 
they become executable during regular trading hours and the point that 
NMLOs first become executable would be used as an input for several 
execution quality metrics.\400\
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    \396\ 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 prior 
17 CFR 242.600(b)(37).
    \397\ See Proposing Release, 88 FR 3786 at 3809 (Jan. 20, 2023); 
proposed Rule 600(b)(20).
    \398\ See Proposing Release, 88 FR 3786 at 3810 (Jan. 20, 2023).
    \399\ See id.; proposed Rule 600(b)(42).
    \400\ See Proposing Release, 88 FR 3786 at 3810 (Jan. 20, 2023).
---------------------------------------------------------------------------

(2) Final Rule and Discussion
    An individual investor supported the proposed modifications to 
reporting requirements for NMLOs, stating they would capture more 
relevant execution

[[Page 26462]]

quality information for these orders.\401\ A broker-dealer supported 
replacing the current NMLO order categories with NMLOs that become 
executable and beyond-the-midpoint limit orders, and stated that 
``[a]dding these new categories should capture many more orders 
compared to current Rule 605 reports.'' \402\ A national securities 
exchange asked for clarification regarding whether market centers would 
be permitted to use their own view of the NBBO, data from the 
securities information processors (``SIPs''), or data from competing 
consolidators (in the future, pursuant to the MDI Rules) when 
determining order marketability.\403\ Another national securities 
exchange supported replacing the three current categories for NMLOs 
with NMLOs that become executable, beyond-the-midpoint limit orders, 
and executable orders submitted with stop prices and stated that these 
changes would enhance execution quality information within Rule 605 
reports and better group comparable orders.\404\ According to a group 
of academics, some broker-dealers convert their customers' order types 
and route most of them to the broker-dealer's ATS.\405\ These 
commenters recommended, to provide transparency on order types selected 
by customers, that Rule 605 statistics reflect the order type selected 
by customers rather than the routing broker-dealer.\406\
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    \401\ See Genco Letter.
    \402\ Rule 605 Citadel Letter at 11.
    \403\ See NYSE Letter at 8. Until the implementation of the MDI 
Rules, a reporting entity generally should use data from the 
exclusive SIPs to calculate its Rule 605 statistics, including the 
determination of whether a limit order is marketable. The MDI Rules 
include a phased transition plan to implement the decentralization 
consolidation model, including a parallel operation period followed 
by the cessation of operations of the exclusive SIPs, which will 
only cease operations if the Commission approves an amendment to the 
effective national market system plan(s) to effectuate such a 
cessation. See MDI Adopting Release, 86 FR 18596 at 18700-01 (Apr. 
9, 2021). The Commission will monitor the implementation of the 
decentralized consolidation model required under the MDI Rules.
    \404\ See Nasdaq Letter at 44.
    \405\ See Professor Schwarz et al. Letter at 5.
    \406\ See id. Each firm or market center generally should 
classify orders based on the order type when received. This 
generates execution quality statistics that are comparable among 
different types of reporting entities because many of the Rule's 
statistical measures are based on time of order receipt (or 
benchmarked to the NBBO when received, for marketable order types). 
In addition, some receiving market centers or broker-dealers may not 
have information about the order type when the originating customer 
entered the order and thus would not have the information needed to 
classify orders based on the order type selected by the customer.
---------------------------------------------------------------------------

    After reviewing the comments, the Commission is eliminating the 
definition of ``inside-the-quote limit order, at-the-quote limit order, 
and near-the-quote limit order,'' \407\ as proposed and is adopting the 
order type category for executable NMLOs largely as proposed for the 
reasons stated in the Proposing Release.\408\ As a result, Rule 605 
reports will capture more of those NMLOs that have an opportunity to 
execute, and execution quality statistics will be more useful for these 
types of NMLOs. However, as discussed above in section III.A.1.b), the 
Commission is modifying the definition of ``executable'' in response to 
a comment regarding the treatment of orders received during the interim 
opening period.\409\
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    \407\ These terms will no longer be used with the adopted 
changes to the order type categories, which focus on whether a NMLO 
becomes executable rather than on how a NMLO's limit price compares 
to the quote, as discussed further below. The Commission received 
one comment supporting the elimination of this definition. See 
Nasdaq Letter at 44.
    \408\ See Proposing Release, 88 FR 3786 at 3809-10 (Jan. 20, 
2023); final 17 CFR 242.600(b)(19). As discussed further below, the 
Commission is adopting a new order type category for executable 
NMLOs that are immediate-or-cancel and thus these orders will not be 
included within the scope of the order type category for executable 
NMLOs. See infra section III.B.2.c).
    \409\ See final 17 CFR 242.600(b)(39). See also supra notes 244-
246 and accompanying text.
---------------------------------------------------------------------------

    A national securities exchange stated that under the Limit-Up 
Limit-Down (``LULD'') Plan, certain NMLOs would not necessarily be 
``executable'' and requested that the Commission modify the definition 
of ``executable'' to conform to the provisions of the LULD Plan.\410\ 
The Commission agrees with the commenter that an order generally should 
not fall within the definition of ``executable'' when the underlying 
security is in a Straddle State. The market for a security in a 
Straddle State can substantially differ from the market for that 
security outside of a Straddle State, as reflected in the fact that the 
primary listing exchange may declare a trading pause for an NMS Stock 
in a Straddle State.\411\ Even if the primary listing exchange has not 
declared a trading pause for a security in a Straddle State, the 
decision to not consider an order executable based on a whether the 
national best bid or national best offer reaches a specific price at a 
time when the underlying security is in a Straddle State is consistent 
with the Commission's decision to include within the scope of Rule 605 
reports only those NMLOs that become executable during regular trading 
hours. The Commission stated that it was only including in Rule 605 
reports those NMLOs that become executable during regular trading hours 
in order to provide a basis for more comparable execution quality 
measures because there are substantial differences in the nature of the 
market between regular trading hours and after-hours.\412\ Accordingly, 
for purposes of determining when an order first became executable, an 
order generally should not become executable during a time when the 
underlying security is in a Straddle State.\413\
---------------------------------------------------------------------------

    \410\ See NYSE Letter at 8-9. This commenter stated that, under 
the LULD Plan, a security is in a ``Straddle State'' when the 
national best bid is below the LULD lower price band or the national 
best offer is above the LULD upper price band and an order is not 
executable when the underlying security is in a Straddle State. See 
id. at 9, n.12.
    \411\ See Section VII(A)(2) of 20th Amendment to the National 
Market System Plan to Address Extraordinary Market Volatility 
(``LULD Plan''). The LULD Plan defines a ``Straddle State'' as when 
the national best bid (offer) is below (above) the lower (upper) 
price band and the stock is not in a limit state, and ``trading in 
that NMS Stock deviates from normal trading characteristics such 
that declaring a Trading Pause would support the [LULD] Plan's goal 
to address extraordinary market volatility.'' Id. The primary 
listing exchange for a stock must have policies and procedures to 
determine when to declare a trading pause. See id.
    \412\ See Proposing Release, 88 FR 3786 at 3810 (Jan. 20, 2023). 
The Commission is further advancing this goal through the adopted 
definition of ``executable,'' which additionally specifies that 
NMLOs will be executable only after the primary listing market has 
disseminated its first firm, uncrossed quotations in the security. 
See final 17 CFR 242.600(b)(39).
    \413\ This guidance is based upon the current definition of 
Straddle State in the LULD Plan, as described above. If this 
definition changes due to an LULD Plan amendment and the change 
impacts the guidance provided here, this guidance may no longer be 
valid.
---------------------------------------------------------------------------

(b) Midpoint-or-Better Limit Orders
(1) Proposed Approach
    Inside-the-quote limit orders were a separate order type category 
under Rule 605 before the amendments,\414\ and Rule 605 did not require 
price improvement statistics to be calculated for these orders because 
they are not a marketable order type (i.e., they do not fully cross the 
spread).\415\ The Commission proposed to require execution quality 
statistics for limit orders priced more aggressively than the midpoint 
and to classify these types of orders as beyond-the-midpoint limit 
orders.\416\ Specifically, the Commission proposed to define a 
``beyond-the-midpoint limit order'' as follows: with respect to an 
order received at a time when a NBBO is being disseminated, (i) any 
non-marketable buy order with a limit price

[[Page 26463]]

that is higher than the midpoint of the national best bid and national 
best offer at the time of order receipt, or (ii) any non-marketable 
sell order with a limit price that is lower than the midpoint of the 
national best bid and national best offer at the time of order receipt; 
and, with respect to an order received at a time when a NBBO is not 
being disseminated, (i) any non-marketable buy order with a limit price 
that is higher than the midpoint of the national best bid and national 
best offer at the time that the national best bid and national best 
offer is first disseminated after the time of order receipt, or (ii) 
any non-marketable sell order with a limit price that is lower than the 
midpoint of the national best bid and national best offer at the time 
that the national best bid and national best offer is first 
disseminated after the time of order receipt.\417\
---------------------------------------------------------------------------

    \414\ See prior 17 CFR 242.600(b)(14).
    \415\ Prior Rule 605(a)(1)(i) specified execution quality 
statistics to be provided for all order types, and prior Rule 
605(a)(1)(ii) specified execution quality statistics to be provided 
for marketable order types. See prior 17 CFR 242.605(a)(1)(i) and 
(ii).
    \416\ See Proposing Release, 88 FR 3786 at 3811 (Jan. 20, 2023).
    \417\ See id.; proposed Rule 600(b)(16).
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    Additionally, the Commission proposed to require that the execution 
quality statistics for beyond-the-midpoint limit orders include the 
additional information required of both marketable and non-marketable 
order types.\418\ The Commission also proposed to modify the time-to-
execution statistics to state that, with respect to beyond-the-midpoint 
limit orders, these time-based statistics would have been measured from 
the time such orders become executable rather than from the time of 
order receipt.\419\
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    \418\ See Proposing Release, 88 FR 3786 at 3811 (Jan. 20, 2023); 
proposed Rule 605(a)(1)(i) through (iii).
    \419\ See Proposing Release, 88 FR 3786 at 3811 (Jan. 20, 2023); 
proposed Rule 600(b)(9) (definition of average effective order 
quoted spread), (10) (definition of average effective spread), (11) 
(definition of average percentage effective spread).
---------------------------------------------------------------------------

(2) Final Rule and Discussion
    A national securities exchange and a broker-dealer supported 
including beyond-the-midpoint orders among the new order type 
categories.\420\ The broker-dealer stated that adding beyond-the-
midpoint limit orders, along with NMLOs that become executable, should 
capture many more orders.\421\ On the other hand, an industry group 
questioned whether the proposed inclusion of beyond-the-midpoint limit 
orders would be worthwhile given their current sparse usage (2.9% of 
NMLOs), which the commenter predicts would decrease if the minimum 
pricing increments proposed in the pending Minimum Pricing Increments 
Proposing Release \422\ are adopted.\423\ In addition, this commenter 
suggested clarifying that an order that is a beyond-the-midpoint limit 
order would not also be a NMLO.\424\
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    \420\ See Nasdaq Letter at 44; Rule 605 Citadel Letter at 11.
    \421\ See Rule 605 Citadel Letter at 11.
    \422\ See Minimum Pricing Increments Proposing Release, 87 FR 
80266 (Dec. 29, 2023).
    \423\ See FIF Letter at 13.
    \424\ See id. at 12.
---------------------------------------------------------------------------

    After consideration of the comments, the Commission is adopting an 
order type for limit orders priced aggressively as compared to the 
midpoint, but with several modifications from the beyond-the-midpoint 
limit order that was proposed. The specific changes being made from the 
proposal are: (1) revising the definition of ``beyond-the-midpoint 
limit order'' to include limit orders priced at the midpoint and 
renaming this term ``midpoint-or-better limit order''; and (2) making a 
modification to this definition to account for the interim opening 
period, as suggested by a commenter.\425\ In addition, the Commission 
is adopting as proposed the requirements that for this order type: (1) 
the Rule 605 report will include the execution quality statistics 
specific to both marketable order types and non-marketable order types; 
\426\ and (2) time-based statistics will be measured from the time such 
orders become executable.\427\
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    \425\ See final 17 CFR 242.600(b)(57). See also supra section 
III.A.1.b) (discussing modifications to account for interim opening 
period).
    \426\ See final 17 CFR 242.605(a)(1)(i) through (iii). See also 
final 17 CFR 242.600(b)(19).
    \427\ See final 17 CFR 242.600(b)(8), (9), and (12). As 
discussed further below, the Commission is adopting a separate order 
type category for midpoint-or-better limit orders that are also 
IOCs. See infra section III.B.2.c). As such, the Commission is 
adopting separate order type categories for midpoint-or-better limit 
orders (excluding IOCs) and midpoint-or-better limit orders that are 
immediate-or-cancel. For purposes of this release, these two order 
types may be referred to collectively as ``midpoint-or-better order 
types.''
---------------------------------------------------------------------------

    The Commission is expanding the scope, as compared to the proposal, 
of the ``midpoint-or-better'' order types to include limit orders 
priced at the midpoint in response to a commenter's concern that a 
category for orders that are priced more aggressively than the midpoint 
may not be worthwhile because these types of NMLOs are sparsely 
used.\428\ The Commission conducted additional analysis of NMLOs priced 
in between the national best bid and national best offer and continues 
to believe that market participants would benefit from receiving 
execution quality information specific to NMLOs priced better than the 
midpoint, along with NMLOs priced at the midpoint, because they may 
have different execution quality statistics than other types of 
NMLOs.\429\ The Commission understands that some NMLOs priced inside 
the quote are submitted by traders with the intention of executing 
immediately against hidden or odd-lot liquidity that may be available. 
Scoping in limit orders priced at the midpoint will increase the size 
of this order type category, while including additional orders that 
have certain execution quality statistics that are similar to limit 
orders priced more aggressively than the midpoint.\430\ Midpoint-or-
better limit orders may be treated more like marketable limit orders in 
certain contexts, and the Commission continues to believe that market 
participants will benefit from receiving price improvement statistics 
and effective spread statistics for these order types.
---------------------------------------------------------------------------

    \428\ See supra note 423 and accompanying text. The Commission 
is still considering the proposed changes to minimum pricing 
increments discussed in the Minimum Pricing Increments Proposing 
Release.
    \429\ For example, Commission analysis demonstrates that 
midpoint-or-better limit orders executed by wholesalers tend to have 
somewhat higher fill rates and on-exchange midpoint-or-better limit 
orders tend to have a higher percentage of orders that execute in 
less than 1 millisecond. See infra note 1213; Table 4. See also 
Proposing Release, 88 FR 3786 at 3810-11 (Jan. 20, 2023).
    \430\ See infra Section IX.C.3.c)(3).
---------------------------------------------------------------------------

    In response to a commenter's request for clarification that an 
order that falls within this order type would not also be a NMLO,\431\ 
the Commission confirms that midpoint-or-better limit orders will not 
fall within the order type category for NMLOs that become executable. 
Although midpoint-or-better limit orders are technically a subset of 
NMLOs, the definition of ``categorized by order type'' expressly 
excludes midpoint-or-better limit orders from the order type category 
for executable NMLOs.\432\ Accordingly, execution quality data for 
midpoint-or-better limit orders will be included within the statistics 
for only the order type categories for midpoint-or-better limit orders 
(excluding IOCs) or midpoint-or-better limit orders with an immediate-
or-cancel instruction, and described in section III.B.2.c)(2) below.
---------------------------------------------------------------------------

    \431\ See supra note 424 and accompanying text.
    \432\ The Commission is modifying this exclusion in the 
definition of ``categorized by order type'' from the proposal to 
refer to the midpoint-or-better order types instead of beyond-the-
midpoint limit orders to conform with the modification to the 
defined term as discussed above. See final 17 CFR 242.600(b)(19).
---------------------------------------------------------------------------

(c) Marketable and Non-Marketable IOCs
(1) Proposed Approach
    Prior to the amendments, Rule 605 reports grouped marketable IOCs 
together with other marketable orders.

[[Page 26464]]

The Commission proposed to assign marketable IOCs their own separate 
order type category by adding a category for ``marketable immediate-or-
cancel orders'' and indicating that the category for ``marketable limit 
orders'' excludes IOC orders.\433\ The Commission also proposed to 
require the same execution quality information for marketable IOCs as 
is required for other marketable order types.\434\
---------------------------------------------------------------------------

    \433\ See Proposing Release, 88 FR 3786 at 3811 (Jan. 20, 2023); 
proposed Rule 600(b)(20).
    \434\ See Proposing Release, 88 FR 3786 at 3811 (Jan. 20, 2023); 
proposed Rule 605(a)(1)(i) and (ii).
---------------------------------------------------------------------------

(2) Final Rule and Discussion
    A national securities exchange supported establishing a new order 
type category for marketable IOC orders.\435\ An industry group stated 
that, for each order type, the execution profile differs based on 
whether the orders are IOC or time-in-force orders and therefore 
recommended requiring broker-dealers and market centers to break out 
reporting of all order types (not just marketable order types, as 
proposed by the Commission) to distinguish between IOC and time-in-
force orders.\436\
---------------------------------------------------------------------------

    \435\ See Nasdaq Letter at 44.
    \436\ See FIF Letter at 13. This commenter stated that an 
additional column in the Rule 605(a)(1) report could be used to 
indicate whether a particular row pertains to IOC or time-in-force 
orders. See id. See also FIF Letter III at 4.
---------------------------------------------------------------------------

    A broker-dealer stated that it supported assigning IOCs to a 
separate order category so that they would no longer be commingled with 
retail orders.\437\ According to this commenter, many wholesale broker-
dealers execute IOC orders for non-retail investors and currently 
``these IOC orders may be aggregated with retail orders for reporting 
purposes, even though the execution profile is very different and could 
negatively skew a wholesale broker-dealer's execution quality 
metrics.'' \438\ This commenter also stated that although the 
Commission proposed to assign marketable IOCs as a separate order type 
category, similar treatment was not proposed for non-marketable 
IOCs.\439\ Thus, this commenter suggested that the Commission ``include 
a flag for IOC orders that equally applies across both marketable and 
non-marketable orders'' because of the commenter's view that including 
non-marketable IOCs within the same order type category as regular 
NMLOs would significantly skew reported data.\440\
---------------------------------------------------------------------------

    \437\ See Rule 605 Citadel Letter at 7.
    \438\ Id.
    \439\ See id. at 10.
    \440\ See id.
---------------------------------------------------------------------------

    Following consideration of the comments, the Commission is adopting 
a separate order type category for marketable IOCs as propose \441\ 
Moreover, to address commenters' suggestions that there also be 
separate order type categories for non-marketable IOCs,\442\ the 
Commission is adopting, in addition to the categories that were 
proposed, order type categories for NMLOs that are immediate-or-cancel 
(``NMLO IOCs'') and midpoint-or-better limit orders that are immediate-
or-cancel (``midpoint-or-better IOCs''). As is the case with other non-
marketable order types, NMLO IOCs will be included in Rule 605 reports 
if they become executable.\443\ Additional Commission analysis 
demonstrates that IOCs represent a significant component of order flow 
for both marketable orders and non-marketable orders.\444\ Moreover, 
the Commission agrees with the commenter that commingling NMLO IOCs 
with NMLOs that are not immediate-or-cancel or midpoint-or-better IOCs 
with midpoint-or-better limit orders that are not immediate-or-cancel 
could distort execution quality statistics \445\ because the 
Commission's analysis demonstrates that IOCs tend to have shorter 
execution times and, with respect to orders received by wholesalers, 
lower fill rates.\446\
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    \441\ See final 17 CFR 242.600(b)(19).
    \442\ See supra notes 436, 440, and accompanying text.
    \443\ To implement this change from the proposed amendments, the 
Commission is modifying the proposed amendments to the definition of 
``categorized by order type'' to add midpoint-or-better limit orders 
that are immediate-or-cancel and executable non-marketable limit 
orders that are immediate-or-cancel, as well as to exclude IOCs from 
the order types for midpoint-or-better limit orders and executable 
NMLOs. See final 17 CFR 242.600(b)(19). Consistent with this change, 
the Commission is also modifying Rule 605 to refer to midpoint-or-
better limit orders and midpoint-or-better IOCs in Rule 605(a)(1)(i) 
(setting forth execution quality statistics required of all order 
types), (ii) (setting forth execution quality statistics required of 
marketable order types), and (iii) (setting forth execution quality 
statistics required of non-marketable order types); and to refer to 
executable NMLOs and executable NMLO IOCs in Rule 605(a)(1)(i) and 
(iii).
    \444\ See infra Table 5. With respect to orders that would fall 
within the adopted NMLO IOC category, this analysis demonstrates 
that for orders received by exchanges and ATSs, IOCs represent 4.7% 
of orders priced below the midpoint and 13.3% of orders priced at 
the quote, and for orders received by wholesalers, IOCs represent 
65.3% of orders priced below the midpoint and 67.0% of orders priced 
at the quote. And with respect to orders that would fall within the 
adopted midpoint-or-better IOC category, this analysis demonstrates 
that for orders received by exchanges and ATSs, IOCs represent 35.8% 
of orders priced above the midpoint and 37.9% of orders priced at 
the midpoint, and for orders received by wholesalers, IOCs represent 
90.8% of orders priced above the midpoint and 84.2% of orders priced 
at the midpoint. See id.
    \445\ See supra notes 437-440 and accompanying text.
    \446\ See infra Table 5.
---------------------------------------------------------------------------

    However, the Commission is not fully adopting commenters' 
suggestion that the Commission differentiate between IOCs and orders 
that are not immediate-or-cancel for every order type category used in 
Rule 605.\447\ While the adopted amendments will add order type 
categories for marketable IOCs, executable NMLO IOCs, and midpoint-or-
better IOCs, the adopted amendments will not include separate order 
type categories for IOCs that have characteristics of the other order 
types (e.g., market order with an immediate or cancel instruction, 
executable stop marketable limit order with an immediate or cancel 
instruction). An order submitter placing a market order likely has an 
expectation of receiving an immediate execution because there is no 
limit price. IOC limit orders are also submitted with an expectation of 
executing immediately. Moreover, an order submitter placing a market 
order with an immediate or cancel instruction or a limit order with an 
immediate or cancel instruction can reasonably expect that, if the 
order receives an execution, it will be at the prevailing market price 
at the time of order receipt. Therefore, the Commission does not 
believe that the execution profile for market orders with an immediate 
or cancel instruction will vary significantly enough from other 
marketable IOCs to warrant an order type category for market orders 
with an immediate or cancel instruction that separates these orders 
from other marketable IOCs.\448\ In addition, as discussed above, the 
execution profiles for an order type category or categories for limit 
orders with a stop condition and an IOC instruction are not likely to 
have significantly different execution profiles than other stop orders 
that fall within the same order type categories based upon 
marketability, and thus the Commission is not requiring order type 
categories that would further sub-divide the categories for orders 
submitted with stop prices.\449\
---------------------------------------------------------------------------

    \447\ See supra notes 436, 440, and accompanying text.
    \448\ See infra Table 5.
    \449\ See supra section III.A.2.b). It is unlikely that many 
market participants will submit a market order with both a stop 
condition and an IOC instruction. However, even if such orders are 
submitted, they will either: (1) trigger immediately and execute at 
market prices, or (2) not trigger and cancel immediately because of 
the IOC instruction. In the case of (1), such orders are not likely 
to have different execution profiles than other market orders 
submitted with a stop price. In the case of (2), such orders will be 
cancelled before they become executable and will therefore not be in 
reported as part of Rule 605 reports because orders submitted with 
stop prices must be triggered to become executable and be included 
in a Rule 605 report.

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[[Page 26465]]

3. Timestamp Conventions and Time-to-Execution Statistics
(a) Proposed Approach
    Prior to the amendments, Rule 605 required the reporting of 
information on the number of shares of covered orders executed within 
certain timeframes, as measured in seconds after the time of order 
receipt.\450\ Rule 605 also required the reporting of information on 
the average time to execution for marketable order types.\451\ In 
addition, the definitions ``time of order execution'' and ``time of 
order receipt'' in preexisting Rule 600 specified that time must be 
measured ``to the second.'' \452\
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    \450\ See prior 17 CFR 242.605(a)(1)(i)(F) through (J) 
(requiring for all orders the reporting of the cumulative number of 
shares of covered orders executed within 5 specified time intervals 
after the time of order receipt). The preexisting time-to-execution 
bucket intervals were: (1) 0 to 9 seconds; (2) 10 to 29 seconds; (3) 
30 to 59 seconds; (4) 60 to 299 seconds; and (5) 5 to 30 minutes.
    \451\ See prior 17 CFR 242.605(a)(1)(ii)(D), (F), and (I) 
(requiring for market and marketable limit orders the reporting of 
average time to execution for shares executed with price 
improvement, shares executed at the quote, and shares executed 
outside the quote, respectively). See infra section III.B.4.g) for 
additional information about Rule 605 statistics based on whether 
orders executed with price improvement, at the quote, or outside the 
quote.
    \452\ See prior 17 CFR 242.600(b)(91) and (92).
---------------------------------------------------------------------------

    The Commission proposed to update the timestamp conventions in the 
definitions of ``time of order receipt'' and ``time of order 
execution'' so that these definitions require that such times be 
measured in increments of a millisecond or finer.\453\ The Commission 
also proposed to specify that the average time-to-execution statistics 
that Rule 605 required for marketable order types should be expressed 
in increments of a millisecond or finer.\454\ Further, the Commission 
proposed to require that the share-weighted average time to execution 
be provided for non-marketable order types, as calculated from the time 
such orders become executable, and the proposed definition of 
``executable'' provided that the time an order becomes executable shall 
be measured in increments of a millisecond or finer.\455\ Finally, the 
Commission proposed to eliminate the existing time-to-execution buckets 
and require the reporting of share-weighted median and 99th percentile 
time to execution for all order types.\456\
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    \453\ See Proposing Release, 88 FR 3786 at 3812 (Jan. 20, 2023); 
proposed Rule 600(b)(108) and (109).
    \454\ See Proposing Release, 88 FR 3786 at 3812 (Jan. 20, 2023); 
proposed Rule 605(a)(1)(ii)(C), (G), and (L). Prior to the 
amendments, Rule 605 did not specify a level of granularity for the 
existing time-to-execution statistics. However, the Rule 605 NMS 
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).
    \455\ See Proposing Release, 88 FR 3786 at 3812-13 (Jan. 20, 
2023); proposed Rule 600(b)(42); proposed Rule 605(a)(1)(iii)(C).
    \456\ See Proposing Release, 88 FR 3786 at 3812-13 (Jan. 20, 
2023); proposed Rule 605(a)(1)(ii)(D), (E), (H), (I), (M), and (N); 
proposed Rule 605(a)(1)(iii)(D) and (E). Specifically, the 
Commission stated that while the distribution of execution speeds in 
addition to the average would still be useful, the then-existing 
time-to-execution buckets are of limited utility because the 
smallest time-to-execution bucket encompasses all orders executed 
between zero and nine seconds. See Proposing Release, 88 FR 3786 at 
3813 (Jan. 20, 2023). The Commission further stated that, rather 
than adding additional buckets to provide distribution information 
for execution speeds of less than one second, the Commission was 
proposing to require both share-weighted median and 99th percentile 
time-to-execution statistics to allow users of the data to assess 
how quickly a market center or broker-dealer is able to execute 
incoming orders and understand the extent to which the time to 
execution for a particular category is affected by outlier values. 
See id.
---------------------------------------------------------------------------

(b) Final Rule and Discussion
    As discussed below, after consideration of the comments, the 
Commission is adopting the use of timestamp conventions of a 
millisecond or finer for time-based execution quality statistics as 
proposed. The Commission is also requiring average time-to-execution 
statistics for all order types and specifying that for NMLOs these 
statistics will be measured from when the order becomes executable as 
proposed. However, the Commission is not adopting the proposed median 
and 99th percentile execution quality statistics for all order types. 
Instead, the Commission is retaining the time-to-execution buckets from 
Rule 605 prior to these amendments, which apply to all order types, but 
is modifying the associated time ranges to account for the overall 
increase in trading speeds since Rule 605 was adopted and as supported 
by certain commenters.
    Several individual investors supported the proposal to require 
reporting of average time to execution, median time to execution, and 
99th percentile time to execution in increments of a millisecond or 
finer.\457\ Another individual investor stated that measuring in 
milliseconds would be a ``huge step forward'' in understanding order 
execution.\458\ A national securities exchange supported eliminating 
time-to-execution categories in favor of average time to execution, 
median time to execution, and 99th percentile time to execution, each 
as measured in increments of a millisecond or finer and calculated on a 
share-weighted basis.\459\ This commenter stated that requiring average 
time to execution for all order types, as well as statistics regarding 
the distribution of execution times within each order type, ``would 
offer more consequential information.'' \460\ According to this 
commenter, ``[t]hese statistics could be used to judge and compare the 
average time to execution for a particular order type and still provide 
information about the extent to which outlier values may skew the 
average.'' \461\
---------------------------------------------------------------------------

    \457\ See, e.g., Pritchard Letter, Macarthur Letter, and Cesar 
Letter.
    \458\ See Bledsoe Letter. In addition, several commenters stated 
that ``broker-dealers are able and should be required to measure 
order executions in seconds or milliseconds, rather than 2 days.'' 
Letter Type C at https://www.sec.gov/comments/s7-29-22/s72922.htm.
    \459\ See Nasdaq Letter at 44.
    \460\ See id. at 45.
    \461\ Id.
---------------------------------------------------------------------------

    One industry group stated that the use of milliseconds is the best 
approach at this time.\462\ This commenter suggested that the 
Commission should engage in discussions with market centers to consider 
whether a requirement for market centers to report with increased 
granularity for CAT, Rule 605, and other required reporting would be 
appropriate.\463\ An investor advocacy group stated that requiring 
timestamp information in millisecond increments would allow for 
meaningful points of comparison between market centers and/or broker-
dealers for data that uses timestamp information and time-to-execution 
statistics.\464\ Another investor advocacy group recommended that the 
Commission modify the required time-to-execution buckets for all order 
types to time buckets that can be adjusted over time, starting with the 
following buckets: less than 500 microseconds; 500 microseconds to 1 
millisecond; 1 to 10 milliseconds; 10 to 100 milliseconds; 100 
milliseconds to 1 second; 1 to 10 seconds; and greater than 10 
seconds.\465\ This commenter stated that ``[b]y creating buckets for 
timestamp, rather than average time to execution, the reports would 
provide much greater granularity while still allowing a user of the 
data to recreate average time to execution.'' \466\ A broker-dealer 
supported the new statistics reporting times in increments of a 
millisecond or finer and stated that this will better reflect the speed 
at which orders are executed today.\467\
---------------------------------------------------------------------------

    \462\ See FIF Letter at 17.
    \463\ See id.
    \464\ See Better Markets Letter at 8.
    \465\ See Healthy Markets Letter at 17 (recommending that the 
Commission adopt these time buckets pursuant to an attachment to the 
Rule, rather than the Rule itself, to facilitate the easy updating 
of these buckets).
    \466\ Id.
    \467\ See Robinhood Letter at 46.

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[[Page 26466]]

    The Commission is adopting the updates to the timestamp conventions 
to measure time-based statistics in increments of a millisecond or 
finer as proposed for the reasons discussed in the Proposing 
Release.\468\ Requiring that Rule 605 reports include timestamp 
information in millisecond increments will allow for meaningful points 
of comparison among market centers or broker-dealers.\469\
---------------------------------------------------------------------------

    \468\ See Proposing Release, 88 FR 3786 at 3812 (Jan. 20, 2023).
    \469\ See id. Reporting entities that choose to utilize a 
timestamp convention finer than a millisecond generally should 
utilize that same convention throughout their detailed report 
required by Rule 605(a)(1) for a particular month.
---------------------------------------------------------------------------

    A broker-dealer stated that although it supports transitioning 
time-to-execution metrics to smaller increments of time, it is 
concerned that more granular timestamps may lead to greater variation 
across firms because firms may have different practices around when to 
mark the same event, quotation information may vary materially due to 
geographic latency, and SIP data are likely to vary from proprietary 
feeds.\470\ This commenter stated that the Commission should address 
these potential issues with timestamps to ensure that execution quality 
statistics for brokers are not misleading, biased, or 
inconsistent.\471\ However, evidence suggests that geographic 
latencies, which may account for the majority of latency differences 
experienced by the SIP, are currently below a millisecond.\472\ 
Therefore, any distortions related to latencies are likely to be 
smaller than the timestamp granularity. Further, it is likely that 
distortions may be reduced by using finer timestamp conventions that 
more closely align to existing market practice, as the NBBO that is 
matched to a particular order is likely to be closer to the NBBO at the 
time of order receipt.\473\ Reporting firms generally should record the 
time of order receipt at the time that the firm first receives the 
order and the time of order execution at the time of execution as 
included on the trade confirmation.
---------------------------------------------------------------------------

    \470\ See Robinhood Letter at 47-48.
    \471\ See id. at 48.
    \472\ See infra note 1461 and accompanying text.
    \473\ See id.
---------------------------------------------------------------------------

    One individual investor, who expressed concern related to the 
proposal, stated that focusing on the speed of execution only benefits 
high-frequency traders who can take advantage of small price 
discrepancies to make quick profits.\474\ This commenter stated that he 
is more concerned with getting a fair price for his trades than the 
speed of execution.\475\ The Commission is retaining time-to-execution 
statistics in Rule 605 reports for the reasons discussed herein. 
Different investors benefit from faster execution times for different 
reasons. With respect to individual investors in particular, delays in 
execution can lead to worse prices for market orders in an increasing 
(for buy orders) or decreasing (for sell orders) market and lower 
probabilities of execution for IOCs.\476\ However, amended Rule 605 
does not focus on speed to the exclusion of other important aspects of 
execution quality, including fill rates and price improvement.
---------------------------------------------------------------------------

    \474\ See Gillmore Letter.
    \475\ See id.
    \476\ See infra notes 1476-1477 and accompanying text.
---------------------------------------------------------------------------

    The Commission is adopting, as proposed, the requirement that 
average time-to-execution statistics be calculated for all order types, 
including non-marketable order types.\477\ The Commission is also 
adopting, as proposed, the requirement that average time to execution 
for non-marketable order types be measured from the point in time that 
orders become executable because this will provide a control for 
prevailing market conditions and benchmark orders from a point when 
such orders can reasonably be expected to execute.
---------------------------------------------------------------------------

    \477\ See final 17 CFR 242.605(a)(1)(ii)(G), (I), and (L); final 
17 CFR 242.605(a)(1)(iii)(D). See also Proposing Release, 88 FR 3786 
at 3813 (Jan. 20, 2023).
---------------------------------------------------------------------------

    An industry group raised concerns with reporting time to execution 
when the size of the customer's order exceeds the size of the opposite-
side bid or offer and suggested that time-to-execution statistics for 
marketable orders should only consider the time to execution for shares 
executed by a reporting firm during the time period prior to the order 
first becoming unmarketable.\478\ This commenter stated that firms that 
receive marketable orders that are larger relative to the opposite-side 
displayed NBBO quantity would show a longer time to execution as 
compared with firms that receive marketable orders that are smaller 
relative to the opposite-side displayed NBBO quantity, and in this way 
reported performance would be impacted by factors that do not reflect a 
true comparison of the execution performance across firms.\479\ In 
addition, a broker-dealer stated that execution time statistics should 
be required only for market orders because marketable limit orders 
(including NMLOs that become marketable) may be partially executed or 
may exceed the consolidated quote size and it would be difficult to 
interpret this data without more context and information.\480\ Another 
commenter stated that the execution speed metric for marketable limit 
orders should be limited to size available at the best protected quote 
at the far touch because this will ensure that orders larger than the 
quoted size that take out the best price and are posted for the balance 
do not skew the statistics.\481\
---------------------------------------------------------------------------

    \478\ See FIF Letter II at 3-4. In an earlier comment letter, 
this commenter had suggested that the time-to-execution period 
should only consider the portion of an order that is marketable at 
the time of order receipt or, alternatively, only count towards the 
time of execution the period during which the order is marketable. 
See FIF Letter at 18. See also FIF Letter II at 3 (amending its 
suggestion after further discussions).
    \479\ See FIF Letter at 17-18; FIF Letter II at 3. This 
commenter also requested confirmation that time to execution should 
not be reported for unfilled shares and that unfilled shares would 
be reflected through the reporting of the number of shares of 
covered orders and the number of shares cancelled prior to 
execution. See FIF Letter at 18. The Commission agrees that, as is 
currently the case, the time to execution for unfilled shares will 
not be required to be reported as part of the time-to-execution 
statistics because their inclusion could distort the statistics. 
See, e.g., final 17 CFR 242.605(a)(1)(i)(G) (requiring disclosure of 
``the cumulative number of shares of covered orders'' executed in 
less than 100 microseconds) (emphasis added).
    \480\ See Rule 605 Citadel Letter at 10.
    \481\ See Schwab Letter II at 32.
---------------------------------------------------------------------------

    The Commission is not adopting these commenters' suggestions to 
limit the application of time-to-execution statistics to take into 
account concerns about marketable limit orders that exceed the 
available quantity at the opposite side bid or offer. The Commission 
disagrees with restricting time-to-execution statistics so that they 
apply to market orders only because time-to-execution statistics will 
provide meaningful information for all marketable and non-marketable 
order types and the time it takes to execute an initially marketable 
limit order that becomes non-marketable is still relevant.\482\ The 
Commission also disagrees with the suggestion that it is necessary to 
limit time-to-execution statistics to the time it takes to execute the 
size available at the opposite side quote or the time it takes to first 
exhaust available liquidity to avoid skewed statistics. If a covered 
order receives a partial execution, the share-weighted time-to-
execution statistics will consider the execution time of each subset of 
shares that received an execution and will not consider any subset of 
shares that does not receive an execution, and this will help mitigate 
against partial executions distorting

[[Page 26467]]

time-to-execution statistics.\483\ Similarly, if some shares of a 
covered order execute more quickly than others due to the availability 
of liquidity, the share-weighted time-to-execution statistics will take 
into account the time to execution for each subset of shares. Other 
available information will allow users of Rule 605 reports to control 
for these types of factors and facilitate their ability to interpret 
time-to-execution statistics for marketable limit orders. In 
particular, Rule 605 statistics will be categorized by order type and 
size and this categorization will provide useful context to understand 
time-to-execution statistics. For example, larger-sized orders may be 
more likely to exceed the consolidated quote size and the time-to-
execution statistics for covered orders that fall within different size 
ranges will appear in separate rows.
---------------------------------------------------------------------------

    \482\ See supra note 480 and accompanying text.
    \483\ Requiring that average time-to-execution statistics be 
calculated for non-marketable order types from the point in time 
that they become executable will realize the benefits of including 
those orders in the statistics while, at the same time, minimizing 
the distortions that could occur if time-to-execution statistics 
included the time during which such orders were non-marketable.
---------------------------------------------------------------------------

    Individual investors and a national securities exchange supported 
the proposed addition of median and 99th percentile time-to-execution 
statistics for all order types.\484\ However, an industry group 
recommended an alternative to the reporting of the median and 99th 
percentile statistics because of its view that market participants and 
other firms analyzing Rule 605 data would not be able to aggregate 
these statistics across symbols and order types.\485\ The commenter 
stated that ``it is important that users of the report have the ability 
to aggregate this data . . . across different sub-categories of 
orders.'' \486\ Specifically, this commenter recommended that firms 
report share-weighted average time to execution without adjusting for 
outliers and separately report share-weighted average time to execution 
with an adjustment for outliers.\487\ In addition, an investor advocacy 
group suggested that the Commission modify the required time-to-
execution buckets for all order types to time buckets that can be 
adjusted over time rather than requiring average time-to-execution 
statistics.\488\
---------------------------------------------------------------------------

    \484\ See supra notes 457, 459-461, and accompanying text.
    \485\ See FIF Letter at 21-22; FIF Letter II at 7-9; FIF Letter 
III at 3.
    \486\ FIF Letter III at 3.
    \487\ See FIF Letter at 21-22. This commenter suggested that, 
for example, the share-weighted average time to execution that is 
adjusted for outliers could exclude the one percent of orders with 
the longest time to execution. See id.
    \488\ See supra notes 465-466 and accompanying text.
---------------------------------------------------------------------------

    The Commission agrees with the commenter that it would not be 
possible to aggregate median or 99th percentile time-to-execution 
statistics across symbols or order types.\489\ Although median or 99th 
percentile time-to-execution statistics may have provided useful 
information in each individual row (i.e., representing a particular 
symbol, order type, and order size), users of the reports would have 
been unable to aggregate these statistics across multiple rows without 
the full underlying dataset because the median and 99th percentile 
values cannot be aggregated across different stocks or order types. The 
inability to aggregate these statistics would have made them less 
useful because the final rule amendments will result in more rows of 
information, and the median and 99th percentile time-to-execution 
statistics would only have provided information to compare more 
discrete subsets of Rule 605 data. Therefore, the Commission is not 
adopting its proposal to require the reporting of median and 99th 
percentile time-to-execution statistics for all order types.
---------------------------------------------------------------------------

    \489\ See supra note 485 and accompanying text.
---------------------------------------------------------------------------

    The Commission is not adopting the commenter's suggestion that, 
instead of requiring median and 99th percentile time-to-execution 
statistics, the Commission should require the separate reporting of 
average time to execution with outliers and without outliers.\490\ The 
Commission does not agree that these alternative metrics would solve 
the identified problem because the method of identifying outliers, such 
as the longest 1% of orders, would also prevent aggregation across 
multiple rows. As is the case with median and 99th percentile 
statistics, any cut-off selected as the means to identify outliers 
would not be constant across different stocks or order types and thus 
interfere with aggregation.
---------------------------------------------------------------------------

    \490\ See supra note 487 and accompanying text.
---------------------------------------------------------------------------

    As another means of providing such distribution information, and 
consistent with the alternative that the Commission considered in the 
Proposing Release \491\ and a commenter's suggestion,\492\ the 
Commission is retaining the time-to-execution buckets in place prior to 
the amendments and modifying these buckets to incorporate additional 
granularity. The Commission continues to believe that information about 
the distribution of order execution speeds is useful because orders may 
execute near instantaneously or over the course of several minutes and 
thus average time-to-execution statistics in some instances could be 
skewed by outlier values. The amended time-to-execution buckets that 
the Commission is adopting will provide information about the 
distribution of execution times at a more granular level. This 
information will allow market participants and other users of the data 
to assess how quickly a market center or broker-dealer is able to 
execute incoming orders and better understand whether and to what 
extent the average time to execution within a particular category may 
be affected by outlier values.
---------------------------------------------------------------------------

    \491\ See Proposing Release, 88 FR 3786 at 3892 (Jan. 20, 2023).
    \492\ See supra notes 465-466 and accompanying text.
---------------------------------------------------------------------------

    The adopted time-to-execution buckets differ from the time-to-
execution buckets that existed in Rule 605 prior to the amendments in 
two respects. First, the Commission is utilizing new time ranges for 
the time-to-execution buckets to make the buckets more granular in 
recognition of increased execution speeds and consistent with comment. 
As adopted, the time-to-execution bucket ranges are: (1) less than 100 
microseconds; (2) 100 microseconds to less than 1 millisecond; (3) 1 
millisecond to less than 10 milliseconds; (4) 10 milliseconds to less 
than 1 second; (5) 1 second to less than 10 seconds; (6) 10 seconds to 
less than 30 seconds; (7) 30 seconds to less than 5 minutes; and (8) 5 
minutes or more.\493\ The Commission is selecting these amended time-
to-execution bucket ranges based on its analysis of the distribution of 
shares across various time-to-execution buckets.\494\ The Commission's 
analysis demonstrates that most market and marketable limit orders have 
execution times clustered in the faster buckets and most at-the-quote 
NMLOs have execution times in the slower buckets.\495\ The time-to-
execution buckets that the Commission is adopting are designed to best 
capture variations in execution times across different order types.
---------------------------------------------------------------------------

    \493\ See final 17 CFR 242.605(a)(1)(i)(G) through (N). The 
Commission is not specifying time ranges for the time-to-execution 
bucket in a separate attachment as suggested by a commenter (see 
supra note 465) and is instead adopting set time buckets.
    \494\ See infra Figure 20 and Figure 21.
    \495\ See infra note 1466; Figure 21.
---------------------------------------------------------------------------

    Specifically, the Commission is including a time-to-execution 
bucket of less than 100 microseconds in order to provide visibility 
into differences in execution times for IOCs. Most IOCs execute in less 
than 100 microseconds and the distribution of some IOCs across slower 
time-to-execution buckets will

[[Page 26468]]

allow market participants to use Rule 605 reports to identify IOCs that 
are outliers with respect to execution time.\496\ The Commission is 
also adopting a time-to-execution bucket of 100 microseconds to less-
than-one millisecond that will capture an additional set of sub-
millisecond orders. The inclusion of sub-millisecond orders in distinct 
time-to-execution buckets is consistent with the commenter's suggestion 
to utilize more granular time buckets for orders executed in less than 
500 microseconds and for orders executed in between 500 microseconds 
and 1 millisecond.\497\ The two adopted time-to-execution buckets for 
orders executed from 1 millisecond to less than 1 second are similar to 
the commenter's recommendation for sub-second time buckets,\498\ but 
utilize two time-to-execution buckets instead of the suggested three 
based on the Commission's analysis of order distribution.\499\ The 
time-to-execution buckets for orders executed from 1 second to less 
than 10 seconds and from 10 seconds to less than 30 seconds are 
comparable to the two shortest time-to-execution buckets in the 
preexisting rule.\500\ The longest time-to-execution buckets being 
adopted are comparable to the longest time-to-execution buckets in the 
preexisting rule, but combine the second- and third-longest buckets 
based on the Commission's analysis of order distribution.\501\
---------------------------------------------------------------------------

    \496\ See infra note 1465; Figure 20.
    \497\ See supra notes 465-466 and accompanying text.
    \498\ See supra note 465 and accompanying text.
    \499\ See supra notes 494-495 and accompanying text.
    \500\ See prior 17 CFR 242.605(a)(1)(i)(F) (for covered orders 
executed from 0 to 9 seconds after the time of order receipt) and 
(G) (for covered orders executed from 10 to 29 seconds after the 
time of order receipt).
    \501\ See prior 17 CFR 242.605(a)(1)(i)(I) (for covered orders 
executed from 60 seconds to 299 seconds after the time of order 
receipt) and (J) (for covered orders executed from 5 minutes to 30 
minutes after the time of order receipt).
---------------------------------------------------------------------------

    Under the amended rule, the Commission is adopting time-to-
execution buckets at the sub-millisecond level while also adopting a 
timestamp convention that will not require the use of reporting 
increments finer than a millisecond. These two aspects of Rule 605 are 
not inconsistent because the time-to-execution buckets will not require 
reporting entities to record time in microseconds. Instead, reporting 
entities that record time at the millisecond-level only generally 
should bucket orders based on the difference between the recorded time 
of order receipt (or executability in the case of NMLOs) and the 
recorded time of execution.\502\ Accordingly, a reporting entity that 
records time in milliseconds generally should report in milliseconds 
and will not be able to identify orders as being completed in less than 
100 microseconds; therefore, this time-to-execution bucket will remain 
empty.\503\
---------------------------------------------------------------------------

    \502\ See, e.g., final 17 CFR 242.605(a)(1)(i)(G) (requiring 
reporting of ``[t]he cumulative number of shares of covered orders 
executed less than 100 microseconds after the time of order receipt; 
or, for non-marketable limit orders, after the time the order 
becomes executable'').
    \503\ See note 496 and accompanying text (stating that most IOCs 
execute in less than 100 microseconds).
---------------------------------------------------------------------------

    Second, when calculating where an NMLO falls within a time-to-
execution bucket, time to execution will be calculated from the time 
the order becomes executable.\504\ Prior to the amendments, Rule 605 
reporting requirements included only those NMLOs that fell within 
limited order type categories (i.e., inside-the-quote limit orders, at-
the-quote limit orders, and near-the-quote limit orders) and the 
preexisting time-to-execution buckets contemplated that, for all 
orders, the relevant time period to be measured was from the time of 
order receipt to the time of order execution.\505\ Calculating where 
NMLOs fall within the time-to-execution buckets utilizing the time the 
order becomes executable rather than the time of order receipt is 
consistent with how the Commission proposed, and is adopting, to 
measure other time-based execution quality statistics for NMLOs.\506\
---------------------------------------------------------------------------

    \504\ See, e.g., final 17 CFR 242.605(a)(1)(i)(G).
    \505\ See, e.g., prior 17 CFR 242.605(a)(1)(i)(F).
    \506\ See supra note 455 and accompanying text.
---------------------------------------------------------------------------

4. Execution Quality Statistics
    Preexisting Rule 605(a)(1) required market centers to include in 
their monthly reports columns of detailed execution quality 
information. For all order types, the required statistics included 
information on the number of orders; cumulative number of shares; 
cumulative number of shares cancelled prior to execution; cumulative 
number of shares executed at the receiving market center and at any 
other venue; and average realized spread.\507\ In addition, for market 
orders and marketable limit orders, the required statistics included 
information on the average effective spread; cumulative number of 
shares executed with price improvement, at the quote, and outside the 
quote; for shares executed with price improvement, the share-weighted 
average amount per share that prices were improved; and for shares 
executed outside the quote, the share-weighted average amount per share 
that prices were outside the quote.\508\
---------------------------------------------------------------------------

    \507\ See prior 17 CFR 242.605(a)(1)(i).
    \508\ See prior 17 CFR 242.605(a)(1)(ii). For a discussion of 
the time-to-execution statistics in the current rule, see supra 
section III.B.3.
---------------------------------------------------------------------------

    As described further herein, the Commission proposed to modify the 
execution quality statistics required for all order types and 
marketable order types, and to add execution quality statistics 
specific to non-marketable order types. As proposed, the required 
statistics for all order types would have included information on the 
number of orders; cumulative number of shares; cumulative number of 
shares cancelled prior to execution; cumulative number of shares 
executed at the receiving market center, broker, or dealer, and at any 
other venue; cumulative number of shares of the full displayed size of 
the protected bid or offer at the time of execution; average realized 
spread and average percentage realized spread at two time intervals; 
average effective spread; average percentage effective spread; and 
average effective over quoted spread.\509\ In addition, the required 
statistics for marketable order types and beyond-the-midpoint limit 
orders would have included the cumulative number of shares for shares 
executed with price improvement, at the quote, and outside the quote; 
share-weighted average amount per share that prices were improved; 
share-weighted average amount per share that prices were outside the 
quote; and price improvement statistics relative to the best available 
displayed price.\510\ Finally, for non-marketable order types the 
required statistics would have included the number of orders that 
received a complete or partial fill, and cumulative number of shares 
executed regular way at prices that could have filled the order while 
the order was in force.\511\
---------------------------------------------------------------------------

    \509\ See Proposing Release, 88 FR 3786 at 3903-04 (Jan. 20, 
2023).
    \510\ See id. at 3904.
    \511\ See id. at 3904-05. For a discussion of the proposed 
modifications to time-to-execution statistics as discussed in the 
Proposing Release, see supra section III.B.3.
---------------------------------------------------------------------------

    Several individual investors generally supported the proposal to 
add new execution quality statistics.\512\ One of these individual 
investors stated that the proposed enhancements to the required 
statistical measures of execution quality will provide valuable 
insights for investors.\513\ Another individual investor stated that 
the proposed modification to reporting requirements for NMLOs would 
capture more relevant execution quality

[[Page 26469]]

information for these orders.\514\ However, an individual investor that 
expressed concerns about the proposal stated that the proposed 
amendments to execution quality statistics ``do not address the 
fundamental of market fragmentation, where orders are routed to 
different venues depending on their likelihood of being executed 
quickly and cheaply.'' \515\
---------------------------------------------------------------------------

    \512\ See, e.g., Prichard Letter; Varghese Letter; Welch Letter.
    \513\ See Varghese Letter.
    \514\ See Genco Letter.
    \515\ See Gillmore Letter. The proposed changes to Rule 605's 
execution quality metrics are not intended to reduce market 
fragmentation. Instead, the Commission expects that these changes 
will ameliorate the potentially adverse effects of market 
fragmentation on efficiency, price transparency, best execution of 
investor orders, and order interaction.
---------------------------------------------------------------------------

    An industry group stated that the Commission does not appear to 
have considered the impact of variable tick sizes for securities, as 
contemplated by the proposed harmonization of quoting and trading 
increments discussed in the Minimum Price Increments Proposing Release, 
on market participants' ability to compare execution quality over 
several months.\516\ This commenter suggested that there should be some 
mechanism by which investors are informed of how to interpret Rule 605 
reports in situations where the tick size is recalibrated and it 
impacts reported execution quality.\517\
---------------------------------------------------------------------------

    \516\ See SIFMA Letter II at 20.
    \517\ See id. at 21. The Commission is still considering the 
proposal to change tick sizes discussed in the Minimum Pricing 
Increments Proposing Release.
---------------------------------------------------------------------------

    A group of academics stated that although some of the new 
disclosure requirements may be helpful for a subset of trades, they 
suggest limiting changes to the Rule 605 statistics to the new order 
size categories, including new categories for fractional shares and 
odd-lots, and E/Q statistics.\518\ These commenters stated that these 
adjustments would reduce implementation costs and speed up 
adoption.\519\ However, although limiting the changes to order size 
categories and E/Q statistics could potentially reduce costs and speed 
implementation, the other adopted modifications to the execution 
quality statistics described herein are designed to enhance the 
disclosures required by prior Rule 605. Even if the Commission were to 
limit the amendments to order sizes and E/Q statistics, preexisting 
market centers would still need to adjust their systems and processes 
to capture new information and new reporting entities would need to 
develop their systems and processes to capture the required execution 
quality statistics.
---------------------------------------------------------------------------

    \518\ See Professor Schwarz et al. Letter at 5.
    \519\ See id.
---------------------------------------------------------------------------

    The Commission received many comments concerning specific execution 
quality statistics and discusses these comments below. Further, with 
respect to the proposed execution quality statistics in general, an 
academic suggested adding median data in addition to average data 
because, according to this commenter, ``fat tails'' can make average 
numbers ``highly misleading.'' \520\ This commenter also generally 
suggested that percentages should be included along with dollar 
amounts.\521\
---------------------------------------------------------------------------

    \520\ See Angel Letter at 4.
    \521\ See id.
---------------------------------------------------------------------------

    The Commission is adopting the proposed detailed execution quality 
statistics with several adjustments. In the subsections below, the 
Commission discusses the comments received and the execution quality 
statistics being adopted as they pertain to: (1) realized spread, (2) 
average effective spread, (3) percentage-based effective and realized 
spread, (4) effective over quoted spread, (5) size improvement, (6) 
riskless principal, (7) price improvement, and (8) relative fill 
rate.\522\ In response to the commenter's suggestion to add median data 
and percentages, as described herein, the Commission is adopting 
additional statistics that will provide modified time-to-execution 
buckets, percentage-based statistics that will complement certain 
dollar-based statistics, and an average midpoint statistic that will 
make it possible to calculate percentages relevant to other statistics.
---------------------------------------------------------------------------

    \522\ For a discussion of the time-to-execution statistics that 
the Commission is adopting and the changes made to those statistics 
as compared to what was proposed, see supra section III.B.3. For a 
discussion of the cumulative notional value of covered orders 
statistic that the Commission is adopting, see supra notes 376-378 
and accompanying text.
---------------------------------------------------------------------------

(a) Realized Spread
(1) Proposed Approach
    Prior to these amendments, Rule 605 required calculation of average 
realized spread for executions of all covered orders and this metric 
was calculated by comparing the execution price of an order and the 
midpoint of the NBBO as it stands 5 minutes after the time of order 
execution.\523\ The Commission proposed to shorten this time horizon 
and require that average realized spread be calculated 15 seconds and 1 
minute after the time of execution in recognition of the increased 
speed of the contemporary market environment.\524\ The Commission 
proposed to require realized spreads to be calculated at both intervals 
in order to provide relevant information for symbols with different 
liquidity characteristics.
---------------------------------------------------------------------------

    \523\ See Proposing Release, 88 FR 3786 at 3814 (Jan. 20, 2023). 
For buy orders, realized spread was calculated as double the amount 
of difference between the execution price and the midpoint of the 
NBBO 5 minutes after the time of order execution. For sell orders, 
realized spread was calculated as double the amount of difference 
between the midpoint of the NBBO 5 minutes after the time of order 
execution and the execution price. See id.
    \524\ See id. at 3815.
---------------------------------------------------------------------------

(2) Final Rule and Discussion
    The Commission is adopting the proposed realized spread time 
horizons of 15 seconds and 1 minute for the realized spread statistics 
required for all order types. After considering comments received, the 
Commission is also adding shorter time horizons of 50 milliseconds and 
1 second, and additionally retaining preexisting Rule 605's requirement 
to calculate realized spread 5 minutes after the time of order 
execution. In total, there will be five realized spread time horizons: 
50 milliseconds, 1 second, 15 seconds, 1 minute, and 5 minutes.
    A national securities exchange, an investor advocacy group, and an 
individual investor supported the proposed changes to realized 
spread.\525\ However, an industry group and two broker-dealers opposed 
the continued inclusion of realized spread statistics and recommended 
that the Commission remove these statistics from Rule 605's reporting 
requirements.\526\ The industry group stated that it was concerned that 
this data element is being misused as a proxy for certain firm 
profits.\527\ One of the broker-dealers stated that ``the Commission's 
assertion that realized spread can serve as a proxy for liquidity 
provider profitability has been thoroughly discredited, including by 
academic research.'' \528\ The other broker-dealer stated that realized 
spread statistics are not a measure of profitability because they 
ignore inputs that impact profitability, including inventory holding 
costs, fixed costs, and transaction rebates and fees.\529\ This 
commenter further stated that ``there is

[[Page 26470]]

a risk that such measurements are improperly used . . . as a proxy for 
liquidity providers' profitability.'' \530\
---------------------------------------------------------------------------

    \525\ See Better Markets Letter at 8; Nasdaq Letter at 44; 
Pritchard Letter. See also Schwab Letter III at 3 (supporting the 
inclusion of realized spread statistics in the summary report to 
provide ``better transparency regarding the distinct characteristics 
of order flow among brokers'').
    \526\ See SIFMA Letter II at 31; Rule 605 Citadel Letter at 8; 
Virtu Letter II at 11.
    \527\ See SIFMA Letter II at 31.
    \528\ Rule 605 Citadel Letter at 8-9 (stating that realized 
spread does not consider the actual exit trade, does not account for 
fixed or variable costs, and cannot compare a large ``parent'' order 
with smaller ``child'' orders).
    \529\ See Virtu Letter II at 11-12.
    \530\ Id. at 12.
---------------------------------------------------------------------------

    The Commission observes that commenters to the original Rule 11Ac1-
5 proposal also questioned the usefulness of a realized spread 
statistic and recommended that it be eliminated.\531\ When adopting 
Rule 11Ac1-5, the Commission stated that average realized spread is an 
essential measure for evaluating a market center's order execution 
practices.\532\ Average realized spread remains an essential measure 
for evaluating execution quality because it measures the portion of the 
spread that liquidity providers earn in excess of adverse 
selection.\533\ Liquidity providers' adverse selection risk represents 
the risk that market prices will move against them before they can 
unwind their accumulated positions. A lower average realized spread can 
indicate that prices have moved in a direction more adverse to the 
liquidity provider after the order was executed. Thus, a low average 
realized spread can indicate that a liquidity provider was providing 
liquidity at a time when prices were moving against it. In addition, 
average realized spread can provide useful information about the type 
of order flow a larger broker-dealer receives because smaller (or even 
negative) realized spreads reflect that liquidity providers are earning 
less of the spread from their liquidity provisions, which is usually a 
reflection of order flow with greater adverse selection risk. 
Therefore, the Commission is retaining the metric, and is adopting the 
15 second and 1 minute time horizons as proposed along with additional 
time horizons as discussed below, to make the metric more useful in 
relation to current market speeds.
---------------------------------------------------------------------------

    \531\ See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75424 
(Dec. 1, 2000).
    \532\ See id.
    \533\ See infra note 1230 and accompanying text.
---------------------------------------------------------------------------

    The Commission stated in the Proposing Release that to the extent 
realized spreads capture adverse selection costs faced by liquidity 
providers, they provide a measure of the potential profitability of 
trading for liquidity providers.\534\ The Commission does not maintain 
that realized spread is a measure of a firm's overall 
profitability.\535\ Instead, realized spread statistics allow market 
participants to identify those market centers willing to supply 
liquidity during stressed markets or when prices are moving quickly, 
and to evaluate larger broker-dealers' order execution or routing 
practices, as well as to understand the type of order flow a particular 
broker-dealer may be handling. One commenter, in the context of summary 
reports, stated that realized spread can be used to calculate price 
impact (when combined with effective spread statistics), which ``would 
provide better transparency regarding the distinct characteristics of 
order flow among brokers.'' \536\ For both market centers and larger 
broker-dealers, realized spread can allow market participants to 
control for the extent to which orders submitted by persons with better 
information than is generally available in the market are routed to 
different market centers or received by different broker-dealers, as 
compared to orders submitted by persons without an information 
advantage. Orders submitted by persons with such an information 
advantage represent a substantial risk to liquidity providers that take 
the other side of the position.
---------------------------------------------------------------------------

    \534\ See Proposing Release, 88 FR 3786 at 3814 (Jan. 20, 2023).
    \535\ See infra note 1232 and accompanying text.
    \536\ Schwab Letter III at 3. Similarly, an industry group 
advocated including realized spread statistics in the summary report 
in order to provide a means of assessing the impact of order flow 
that market participants may classify as more or less informed as 
well the size of an order relative to the average daily value of the 
stock. See FIF Letter at 31-32. Because realized spreads will be 
measured using the price at the time of order execution, and 
effective spreads will be measured using the price at the time of 
order receipt (or order executability, in the case of NMLOs and 
midpoint-or-better limit orders), the decomposition of realized 
spreads into effective spreads and price impact will not be exact. 
See infra note 1484 for further discussion.
---------------------------------------------------------------------------

    Several commenters discussed the proposed time horizons for 
measuring realized spread. An investor advocacy group stated the 15 
second and 1 minute time horizons ``better capture the reality of 
today's fast-paced market transactions and align well with the 
available academic literature.'' \537\ An industry group stated that 
the Commission has not provided a rational basis for its method of 
calibrating the realized spread timeframes and, in particular, has not 
appropriately analyzed inventory turnover, thereby making the proposed 
15 second and 1 minute timeframes arbitrary with respect to inventory 
turnover.\538\ A broker-dealer stated that ``[r]ealized spread assumes 
that liquidity providers exit each position in a costless manner at the 
end of a fixed period and is highly dependent on the time horizon used 
to make the calculation'' and questioned the Commission's choice of 15 
seconds and 1 minute.\539\ This commenter stated that ``[w]hile mark-
out metrics like realized spread might have limited use in comparing 
samples of otherwise substantially similar order flow, these metrics 
become largely useless when attempting to compare different types of 
order flow or market centers.'' \540\ Another broker-dealer stated that 
it is unclear what the Commission's basis is for ``bluntly'' measuring 
realized spreads at 15 seconds and 1 minute.\541\ Another investor 
advocacy group recommended that to best identify adverse selection, 
realized spread should be calculated on even shorter time horizons, 
including 50 milliseconds and 100 milliseconds.\542\
---------------------------------------------------------------------------

    \537\ Better Markets Letter at 8.
    \538\ See SIFMA Letter II at 31-32. This commenter further 
stated that it does not believe a one-size-fits-all metric can work 
because market participants have different views regarding the 
appropriate time periods for measuring realized spread and the 
appropriate period can vary based on the specific symbol or type of 
order flow involved. See id. at 32.
    \539\ See Rule 605 Citadel Letter at 8.
    \540\ Id.
    \541\ See Virtu Letter II at 12.
    \542\ See Healthy Markets Letter at 17.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, requiring realized spread 
information at different time horizons will provide investors with 
relevant information for more liquid stocks and more thinly traded 
stocks.\543\ The Commission selected the 15 second and 1 minute time 
horizons for calculating realized spread based on its own analysis, 
which was supported by several commenters and aligned with existing 
academic literature.\544\ However, several commenters questioned the 
Commission's basis for measuring realized spreads at 15 seconds and 1 
minute.\545\ In the Proposing Release, the Commission acknowledged that 
both shorter (50 millisecond, 100 millisecond) and longer (3 minute, 5 
minute) time horizons would provide useful information for certain 
groups of stocks, but stated that each additional time horizon adds 
computational burden and increases the size and complexity of

[[Page 26471]]

reports.\546\ Further, in the Proposing Release, the Commission 
analyzed the decline in realized spreads of increasing time horizons in 
order to determine when a significant percentage of the decline in 
realized spread had been captured.
---------------------------------------------------------------------------

    \543\ See Proposing Release, 88 FR 3786 at 3815-16 (Jan. 20, 
2023).
    \544\ See id. at 3814, n.367 (citing Jennifer S. Conrad & Sunil 
Wahal, The Term Structure of Liquidity Provision, 136(1) J. Fin. 
Econ. 239-259 (2020)) and at 3815. In response to the commenter's 
statement that the Commission has not appropriately analyzed 
inventory turnover (see supra note 538 and accompanying text), the 
Commission observes that although an ideal measurement horizon would 
align with the amount of time that an average liquidity provider 
holds only inventory positions established from providing liquidity, 
these data are not easily observable. See infra note 1489 and 
accompanying text. Instead, the Commission's analysis of realized 
spreads in the Proposing Release was based on the theoretically 
motivated and empirically observed decline in realized spreads over 
increasing time horizons, similar to the academic literature. See 
infra notes 1490-1491 and accompanying text.
    \545\ See supra notes 537-541 and accompanying text.
    \546\ See Proposing Release, 88 FR 3786 at 3816 (Jan. 20, 2023).
---------------------------------------------------------------------------

    The Commission replicated its realized spread analysis from the 
Proposing Release, using data from Q1 2023, and in both analyses the 
cumulative decline in realized spread captured at different time 
horizons varies by market capitalization.\547\ These results indicate 
that, consistent with the Commission's statement in the Proposing 
Release,\548\ both shorter and longer time horizons than those proposed 
will provide useful information for certain subsets of stocks.
---------------------------------------------------------------------------

    \547\ See id.; infra Table 7. In the Proposing Release, the 
analysis showed that most of the difference in realized spread was 
captured for the largest stocks at 15 seconds, and more than half of 
the difference was captured for smaller cap stocks at one minute. 
See Proposing Release, 88 FR 3786 at 3815 (Table 1) (Jan. 20, 2023). 
Similarly, the analysis using Q1 2023 data shows approximately 90% 
of the cumulative decline in realized spread is captured by the 15-
second horizon for the largest market capitalization group, compared 
to only about 50% for the smaller market capitalization groups. At 
the one-minute horizon, approximately 75% of the realized spread is 
captured for the smaller market capitalization groups. See infra 
Table 7.
    \548\ See Proposing Release, 88 FR 3786 at 3816 (Jan. 20, 2023).
---------------------------------------------------------------------------

    After consideration of the comments and the Commission's original 
and updated analysis, the Commission is adopting two shorter time 
horizons (50 milliseconds and 1 second) and one longer time horizon (5 
minutes, consistent with prior Rule 605) in addition to the two time 
horizons that were proposed (15 seconds and 1 minute).\549\ The time 
horizons of 50 milliseconds and 1 second are in line with the 
commenter's suggestion that the Commission include shorter time 
horizons to better capture adverse selection.\550\ Further, as 
discussed below, the 50 millisecond time horizon is appropriate for 
large capitalization stocks. The 1 second time horizon offers another 
point of comparison along the range of time horizons and aligns with a 
realized spread measure that industry analysts often use.\551\ The 
Commission is also adopting the requirements to calculate realized 
spread at 15 seconds and 1 minute, which were the time horizons 
proposed. Finally, the Commission is retaining the requirement in place 
prior to the amendments to calculate realized spread at 5 minutes. The 
results of the Commission's replicated realized spread analysis 
continue to show that a 5 minute time horizon is informative for 
illiquid stocks.\552\ Thus, requiring realized spread at five time 
horizons will better capture variation \553\ among different 
capitalization stocks with different liquidity profiles than the two 
proposed thresholds alone.
---------------------------------------------------------------------------

    \549\ See also infra notes 833-838 and accompanying text for 
discussion of the addition of average realized spread to the summary 
report.
    \550\ See supra note 542 and accompanying text (suggesting that 
realized spread should be calculated on even shorter time horizons, 
including 50 milliseconds and 100 milliseconds). The Commission 
considered 50 and 100 millisecond time horizons as part of its 
updated analysis, consistent with the commenter's suggestion to add 
50 and 100 millisecond time horizons (see infra note 1492), but, 
based on this analysis, determined that one very fast time horizon, 
such as 50 milliseconds, among a wider range of time horizons will 
be beneficial, for the reasons described below.
    \551\ See, e.g., Bringing the Power of Signal V6 to D-Limit, IEX 
(Oct. 31, 2023), available at https://www.iex.io/article/bringing-the-power-of-signal-v6-to-d-limit; Mackintosh, Phil, What Markouts 
Are and Why They Don't Always Matter, Nasdaq (July 2020) available 
at https://www.nasdaq.com/articles/what-markouts-are-and-why-they-dont-always-matter-2020-07-23; and Mackintosh, Phil, All-in 
Economics to Trade Are What Matters Most, available at https://www.nasdaq.com/articles/all-in-economics-to-trade-are-what-matters-most.
    \552\ See infra Table 7.
    \553\ Offering a range of realized spread time horizons is also 
consistent with industry practice, in which a range of time horizons 
is used to compare adverse selection with so-called ``mark-out 
curves.'' See, e.g., supra note 551.
---------------------------------------------------------------------------

    In response to commenters critical of the Commission's basis for 
its selection of realized spread time horizons,\554\ the Commission 
performed additional empirical analyses of optimal realized spread time 
horizons for robustness. The Commission examined the amount of noise in 
price impact measures to analyze the time horizon that incorporates the 
lowest amount of noise into measurements of price impact.\555\ For the 
largest stocks, the signal-to-noise ratio begins to decline 
immediately, even at very fast time horizons.\556\ This latter result 
supports including a very fast time horizon, such as 50 milliseconds, 
consistent with a comment received.\557\ However, the ratio starts to 
flatten out after the 1 minute horizon for smaller stocks and for 
medium to large stocks after 15 seconds.\558\ Further, for the two 
smaller stock groups, the results show a small but steady increase in 
the signal-to-noise ratio as the time horizon increases, implying that 
realized spread measures are becoming more informative as the noise in 
the price impact component decreases. This result supports including a 
longer time horizon, i.e., 5 minutes, which maximizes the signal-to-
noise ratio for these stocks.\559\ These additional empirical analyses 
also support a range of realized spread time horizons, consistent with 
the amended time horizons.
---------------------------------------------------------------------------

    \554\ See supra notes 538 and 541.
    \555\ See infra Figure 22 and Figure 23.
    \556\ See infra Figure 23.
    \557\ See supra note 542.
    \558\ See infra Figure 23.
    \559\ See id.
---------------------------------------------------------------------------

(b) Average Effective Spread
(1) Proposed Approach
    Prior to these amendments, Rule 605 required firms to calculate 
average effective spread for market and marketable limit order types 
only.\560\ Preexisting Rule 600(b)(8) defined ``average effective 
spread'' as the share-weighted average of effective spreads for order 
executions calculated, for buy orders, as double the amount of 
difference between the execution price and the midpoint of the national 
best bid and national best offer at the time of order receipt and, for 
sell orders, as double the amount of difference between the midpoint of 
the national best bid and national best offer at the time of order 
receipt and the execution price.\561\
---------------------------------------------------------------------------

    \560\ See prior 17 CFR 242.605(a)(1)(ii)(A).
    \561\ See prior 17 CFR 242.600(b)(8).
---------------------------------------------------------------------------

    The Commission proposed to expand effective spread reporting 
requirements to require that firms report average effective spread 
statistics for all covered orders, and to modify the methodology for 
calculating this metric for executable NMLOs, beyond-the-midpoint limit 
orders, and executable stop orders.\562\ Specifically, the Commission 
proposed to revise the definition of ``average effective spread'' to 
provide that, for order executions of NMLOs \563\ and orders submitted 
with stop prices, average effective spread be calculated from the time 
the order becomes executable.\564\
---------------------------------------------------------------------------

    \562\ See Proposing Release, 88 FR 3786 at 3816 (Jan. 20, 2023).
    \563\ See proposed Rule 600(b)(10). As proposed, beyond-the-
midpoint limit orders would have been a type of NMLO. See Proposing 
Release, 88 FR 3786 at 3816, n.385 (Jan. 20, 2023).
    \564\ See proposed Rule 600(b)(10). See also Proposing Release, 
88 FR 3786 at 3816 (Jan. 20, 2023).
---------------------------------------------------------------------------

(2) Final Rule and Discussion
    The Commission is adopting a requirement to report effective spread 
statistics for marketable order types (i.e., market orders, marketable 
limit orders, and marketable IOCs), marketable stop order types, and 
midpoint-or-better order types, but is not adopting the proposal to 
expand the effective spread reporting requirement to other non-
marketable order types. For marketable

[[Page 26472]]

stop order types and midpoint-or-better order types, average effective 
spread will be measured from the time that the order becomes 
executable.
    One broker-dealer suggested that the Commission should reconsider 
whether to require firms to report effective spread statistics for 
NMLOs because ``effective spread is not widely accepted as a meaningful 
measure of execution quality for NMLOs.'' \565\ This commenter stated 
that the proposed effective spread metric for NMLOs does not measure a 
dimension of execution quality that is likely to differ across market 
centers or be affected much by where an order is routed.\566\ This 
commenter further stated that ``[f]or orders submitted outside the 
NBBO, [effective spread] essentially amounts to negative one times the 
quoted spread at the moment the order becomes executable'' and ``shows 
better execution when the quoted spread is wider.'' \567\
---------------------------------------------------------------------------

    \565\ Virtu Letter II at 12. See also infra notes 609-611 and 
accompanying text (describing a commenter's suggestion that the 
Commission remove reporting of E/Q for all orders and not add price 
improvement statistics for non-marketable group orders).
    \566\ See Virtu Letter II at 12.
    \567\ Id.
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    After consideration of the comments, the Commission is adopting a 
modified version of the proposed amendments. The Commission is adopting 
amendments that will expand effective spread reporting requirements to 
include marketable stop order types and midpoint-or-better order types, 
in addition to market and marketable limit order types as required by 
the preexisting rule. However, the Commission is not adopting the 
proposed requirement to require average effective spread statistics for 
all covered orders, and thus is not requiring reporting for other non-
marketable order types. The Commission is also revising the proposed 
definition of ``average effective spread'' to specify that, for order 
executions of marketable stop order and midpoint-or-better limit 
orders, average effective spread is calculated from the time the order 
becomes executable. In effect, the adopted amendments require average 
effective spread for all marketable order types (i.e., market orders, 
marketable limit orders, and marketable IOCs), marketable stop orders, 
and midpoint-or-better order types.
    The Commission acknowledged in the Proposing Release that average 
effective spread for NMLOs and orders submitted with stop prices would 
measure something different than the average effective spread for 
marketable order types.\568\ Generally, because these orders are less 
aggressively priced, average effective spread would not measure the 
price paid for immediacy of execution as it would for marketable order 
types.\569\ Instead it would provide a measure of the amount a 
liquidity provider could expect to earn for providing liquidity.\570\ 
As the commenter states, this amount would generally vary based on the 
width of spread, which is outside the control of the reporting entities 
that are receiving orders for execution. Therefore, average effective 
spread for NMLOs and stop NMLO orders may not provide a useful measure 
to distinguish between market centers or larger broker-dealers and thus 
the Commission has determined not to adopt this proposed metric. The 
exception is with respect to midpoint-or-better limit orders, which in 
some cases behave more like marketable orders.\571\ Similar to market 
and marketable limit orders, some inside-the-quote limit orders are 
submitted by traders with the intention of executing immediately, in 
this case against hidden or odd-lot inside-the-quote liquidity. Because 
midpoint-or-better order types are more aggressively priced, the 
average effective spread metric will also measure the price these 
orders could expect to pay for immediacy. Further, requiring average 
effective spread for midpoint-or-better order types is consistent with 
requiring the same statistics for this order type as are required for 
marketable order types (for example, price improvement statistics).
---------------------------------------------------------------------------

    \568\ See Proposing Release, 88 FR 3786 at 3816 (Jan. 20, 2023).
    \569\ See id.
    \570\ See id.
    \571\ See infra note 1209 and accompanying text.
---------------------------------------------------------------------------

    Finally, because marketable stop orders will be either market 
orders or marketable limit orders at the time they are triggered (i.e., 
at the time they are executable), measuring effective spread from the 
point of executability will also measure the price these orders pay for 
immediacy once triggered. Therefore, as described in section III.A.2.b) 
above, the Commission is requiring the same statistics for marketable 
stop orders as for other marketable order types, including average 
effective spread.
(c) Percentage Spreads (Effective and Realized)
(1) Proposed Approach
    Prior to these amendments, Rule 605 statistics included the average 
realized spread and average effective spread for executions of covered 
orders, and these statistics provide dollar-based spread data.\572\ The 
Commission proposed to add a requirement that effective spread and 
realized spread also be reported as percentages.\573\ The proposed 
definitions for ``average percentage effective spread'' and ``average 
percentage realized spread'' would have: (1) utilized the dollar-based 
effective and realized spread statistics for the numerator; (2) 
utilized the midpoint of the NBBO at either the time of order receipt 
(for marketable order types) or the time an order first becomes 
executable (for non-marketable order types) as the denominator; and (3) 
then the result would be averaged on a share-weighted basis for the 
month.\574\
---------------------------------------------------------------------------

    \572\ See prior 17 CFR 242.605(a)(1)(i)(K) and (a)(1)(ii)(A).
    \573\ See Proposing Release, 88 FR 3786 at 3816 (Jan. 20, 2023).
    \574\ See id. at 3816-17.
---------------------------------------------------------------------------

(2) Final Rule and Discussion
    The Commission is adopting the proposed requirement to disclose 
percentage-based spread statistics for average realized spread and 
average effective spread. However, the Commission is modifying the 
proposed definitions of ``average percentage effective spread'' and 
``average percentage realized spread'' to use a new defined term 
(``average midpoint'') in the denominator. Doing so will eliminate any 
ambiguity about how to calculate these statistics, as described in more 
detail below. In addition, the Commission is making the percentage 
effective spread statistic applicable to marketable order types, 
marketable stop order types, and midpoint-or-better limit order types 
only, rather than all order types as proposed. Further, the Commission 
is adding a requirement to include an average midpoint statistic, which 
serves as the denominator of percentage-based spread statistics, in the 
detailed reports required pursuant to Rule 605(a)(1).
    An investor advocacy group stated that a percentage-based spread 
measure would provide additional information where there is a 
significant price change in a security during the month.\575\ In 
addition, an industry group stated its agreement with the approach 
proposed by the Commission for calculating average percentage effective 
spread.\576\ Specifically, this commenter described share-weighted 
average percentage spread as the sum of effective spread per share 
times shares executed divided by the sum of the midpoint times shares 
executed.\577\
---------------------------------------------------------------------------

    \575\ See Better Markets Letter at 8.
    \576\ See FIF Letter at 29.
    \577\ See id.

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[[Page 26473]]

    The Commission continues to believe including percentage-based 
statistics for effective spread and realized spread, in addition to the 
dollar-based statistics in the existing report, will account for 
differing underlying stock prices and better facilitate comparisons of 
spread statistics across different time periods and securities.\578\ In 
order to simplify the definitions and eliminate ambiguity about how to 
calculate percentage-based spread statistics, and because the 
Commission is requiring the separate disclosure of an average midpoint 
statistic as described below, the Commission is modifying the adopted 
definitions of ``average percentage effective spread'' and ``average 
percentage realized spread'' to use defined terms. As proposed, both 
percentage-based spread statistics would have been share-weighted and 
used as their denominator the midpoint of the national best bid and 
national best offer at the time of order receipt or, for non-marketable 
limit orders, beyond-the-midpoint limit orders, and orders submitted 
with stop prices, at the time such orders first become executable.\579\
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    \578\ See Proposing Release, 88 FR 3786 at 3816-17 (Jan. 20, 
2023).
    \579\ See id. at 3817; proposed Rule 600(b)(11) (average 
percentage effective spread) and proposed Rule 600(b)(12) (average 
percentage realized spread).
---------------------------------------------------------------------------

    A commenter stated it interpreted the definition of share-weighted 
average percentage spread as the ratio of share-weighted effective 
spread divided by share-weighted midpoint.\580\ However, based on the 
commenter's interpretation, the Commission acknowledges that it is 
ambiguous whether the modifier ``share-weighted'' in the proposed 
amendment applied to: (1) the percentage calculation (i.e., calculating 
the percentage effective spread or percentage realized spread for each 
transaction and then share-weighting such percentage); \581\ or (2) 
each of the denominator and the numerator (i.e., calculating the share-
weighted average effective or realized spread and dividing that by the 
share-weighted midpoint).\582\ Therefore, in order to simplify these 
definitions and eliminate ambiguity as to how percentage-based spread 
statistics will be required to be calculated, and consistent with the 
commenter's interpretation of how to calculate this statistic, the 
Commission is modifying the definitions of ``average percentage 
effective spread'' and ``average percentage realized spread'' from the 
definitions proposed.
---------------------------------------------------------------------------

    \580\ See supra note 577.
    \581\ See Proposing Release, 88 FR 3786 at 3817, n.392 (Jan. 20, 
2023) and accompanying text (stating the percentage would be 
averaged on a share-weighted basis).
    \582\ See id. at 3816-17 (stating ``this [referring to the 
denominator] would then be averaged on a share-weighted basis for 
the month'').
---------------------------------------------------------------------------

    Specifically, ``average percentage effective spread'' will be 
defined as the average effective spread \583\ for order executions 
divided by the average midpoint for order executions.\584\ ``Average 
percentage realized spread'' will be defined as the average realized 
spread \585\ for order executions divided by the average midpoint for 
order executions.\586\ As proposed, the definitions of ``average 
percentage effective spread'' and ``average percentage realized 
spread'' used as their numerators the share-weighted effective spread 
and the share-weighted realized spread, respectively.\587\ However, 
because ``average effective spread'' and ``average realized spread'' 
are defined as share-weighted averages, the Commission is instead using 
the defined terms ``average effective spread'' and ``average realized 
spread'' as the numerator in order to simplify the adopted definitions 
of ``average percentage effective spread'' and ``average percentage 
realized spread.'' Instead of repeating the same definition of average 
midpoint in each of the percentage-based spread definitions as 
proposed, the Commission is adopting the defined term ``average 
midpoint'' and will use this term in the denominator (i.e., average 
midpoint for order executions). ``Average midpoint'' will be defined as 
the share-weighted average of the midpoint of the national best bid and 
national best offer at either the time of order receipt or, for non-
marketable limit orders, midpoint-or-better limit orders, and orders 
submitted with stop prices, at the time such orders first become 
executable.\588\ The term ``average midpoint'' as applied to order 
executions will be substantively the same as the proposed denominator 
for the percentage-based spread statistics.\589\ Further, the 
Commission is adding an average midpoint statistic to the detailed 
report required by Rule 605(a)(1) so that certain statistics in the 
summary report--namely, average midpoint and the percentage-based 
statistics--will be derivable from the detailed report,\590\ as 
suggested by commenters.\591\ With the detailed report containing the 
information necessary to calculate the statistics in the summary 
report, market participants and other users of the reports will be able 
to recalculate the statistics in the summary report with different 
subsets of data.
---------------------------------------------------------------------------

    \583\ See final 17 CFR 242.600(b)(8).
    \584\ See final 17 CFR 242.600(b)(10). See also 17 CFR 
242.600(b)(9) (defining average midpoint).
    \585\ See final 17 CFR 242.600(b)(13).
    \586\ See final 17 CFR 242.600(b)(11).
    \587\ See Proposing Release, 88 FR 3786 at 3816 (Jan. 20, 2023); 
proposed Rule 600(b)(11) (average percentage effective spread) and 
proposed Rule 600(b)(12) (average percentage realized spread).
    \588\ See final 17 CFR 242.600(b)(9). The Commission is 
modifying the order types listed in the definition of average 
midpoint from the definition that was proposed to be included in 
both percentage-based spread statistics in order to conform to the 
order types adopted herein. See supra section III.B.2.
    \589\ The definition includes ``share-weighted'' to make clear 
that average midpoint is also a share-weighted statistic. See final 
17 CFR 242.600(b)(9).
    \590\ See final 17 CFR 242.605(a)(1)(i)(Y); final 17 CFR 
242.605(a)(2)(vi), (vii), (viii), (x), and (xi).
    \591\ See infra note 769 and accompanying text.
---------------------------------------------------------------------------

    Finally, the Commission is requiring average percentage effective 
spread only for marketable order types, marketable stop order types, 
and midpoint-or-better order types for the same reasons that the 
Commission is requiring average effective spread only for these order 
types.\592\
---------------------------------------------------------------------------

    \592\ See supra notes 568-571 and accompanying text.
---------------------------------------------------------------------------

(d) Effective over Quoted Spread (E/Q)
(1) Proposed Approach
    Effective over quoted spread (``E/Q'') can be derived from Rule 605 
reports required prior to these amendments, but the prior Rule did not 
require the reporting of E/Q or quoted spread.\593\ The Commission 
proposed to require, for executions of all covered orders, that 
reporting entities report the average E/Q, expressed as a percentage, 
for all marketable and non-marketable order types.\594\ The proposed 
definition ``average effective over quoted spread'' would have required 
the computation of a share-weighted average E/Q by dividing effective 
spread by quoted spread for each transaction and then averaging that 
over the month (weighted by number of shares).\595\ The quoted spread 
would have been the difference between the national best bid and the 
national best offer at either the time of order receipt (for marketable 
order types) or the time an order first becomes executable (for non-
marketable order types).\596\
---------------------------------------------------------------------------

    \593\ See Proposing Release, 88 FR 3786 at 3817 (Jan. 20, 2023).
    \594\ See id. E/Q is generally expressed as a percentage that 
represents how much price improvement an order received. 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, and an E/Q of 0% 
means an order was executed at the midpoint of the NBBO. See id.
    \595\ See id.
    \596\ See id.
---------------------------------------------------------------------------

(2) Final Rule and Discussion
    The Commission is adopting a statistic for average E/Q, expressed 
as a percentage, but with a modified

[[Page 26474]]

weighting methodology to utilize spread-based weighting rather than the 
proposed weighting methodology of share-weighting the E/Q for each 
transaction. In addition, the Commission is making the average E/Q 
statistic applicable to marketable order types, marketable stop order 
types, and midpoint-or-limit order types only, instead of all order 
types. Further, the Commission is adding a requirement to include 
average quoted spread, which is the denominator of average E/Q, in the 
detailed reports required pursuant to Rule 605(a)(1).
    A financial services firm stated that E/Q is a ``very common metric 
used within the industry to judge execution quality'' and that it 
``does a good job of providing a normalized comparison of price 
improvement relative to the price improvement opportunity.'' 
\597\Another financial services firm stated that ``E/Q directly 
quantifies how much of the spread the broker secures for its investor-
client'' and ``[i]ncluding E/Q on Rule 605 reports will enable 
investors to make `apples to apples' comparisons of execution 
quality.'' \598\ In addition, an investor advocacy group stated that 
requiring a separate field in Rule 605 reports for E/Q allows market 
participants to compare price improvement statistics across securities 
and across market centers and broker-dealers.\599\
---------------------------------------------------------------------------

    \597\ Schwab Letter II at 31.
    \598\ Vanguard Letter at 4.
    \599\ See Better Markets Letter at 8.
---------------------------------------------------------------------------

    However, several commenters recommended that the Commission require 
spread-based weighting, rather than share-based weighting, for the 
calculation of average E/Q and indicated that the industry uses spread-
based weighting when calculating E/Q.\600\ One industry group stated 
that spread-based weighting ``results in the same amount of E/Q being 
reported for the same aggregate dollar amount of E/Q being provided.'' 
\601\ This commenter further stated that the method of weighting can 
influence the reported E/Q metrics and, using share-based or notional-
based weighting, a firm that provides a lower aggregate dollar amount 
of price improvement relative to a second firm could result in the 
first firm reporting a lower E/Q than the second firm, even though this 
lower E/Q would not reflect that customers received better 
executions.\602\ Another industry group stated that a share-weighting 
formula would tend to weigh sub-dollar stocks more heavily and could 
allow a firm to manipulate its average E/Q by adjusting the type of 
stocks for which it provides better price improvement.\603\ This 
commenter also stated that using a spread-weighting formula would 
preserve the relationship between price improvement in dollars and E/Q 
and therefore the firm's E/Q would remain the same regardless of how 
the firm distributes its price improvement among different stocks.\604\
---------------------------------------------------------------------------

    \600\ See FIF Letter at 23; SIFMA Letter II at 27; Schwab Letter 
II at 31; Schwab Letter III at 4; Rule 605 Citadel Letter at 5.
    \601\ FIF Letter at 23.
    \602\ See id. at 23-24.
    \603\ See SIFMA Letter II at 27.
    \604\ See id.
---------------------------------------------------------------------------

    Similarly, a financial services firm stated share-weighting 
detaches E/Q from the ability to understand it in the context of the 
opportunity for price improvement and this ``opens the door for 
possible manipulation of results.'' \605\ This commenter also stated 
that wholesalers' discretionary price improvement dollars are fungible 
and that share-weighting of E/Q would result in an incentive to provide 
more price improvement on narrow spread securities and less price 
improvement on wide spread securities.\606\ A broker-dealer stated that 
a share-weighted methodology may incentivize market participants to 
allocate price improvement to lower priced securities with narrower 
quote spreads.\607\ This commenter recommended the use of a spread-
weighted average because a spread-weighted average would be tied to the 
total price improvement delivered in dollars and unaffected by how that 
price improvement is allocated among different symbols.\608\
---------------------------------------------------------------------------

    \605\ Schwab Letter III at 4.
    \606\ See Schwab Letter II at 31; Schwab Letter III at 4.
    \607\ See Rule 605 Citadel Letter at 5.
    \608\ See id. This commenter provided examples of how the same 
amount of price improvement in dollars can generate different share-
weighted average E/Q statistics depending on the symbols to which it 
is allocated, whereas spread-weighting yields the same E/Q in each 
scenario. See id. at 5, 13.
---------------------------------------------------------------------------

    An industry group and a financial services firm suggested that Rule 
605 reports not include E/Q and leave it to users of the report to 
calculate E/Q from other statistics that are currently included in the 
reports.\609\ The industry group further stated that the Commission was 
inconsistent when it proposed requiring the reporting of E/Q for non-
marketable order types but not requiring the reporting of price 
improvement statistics for such order types.\610\ This commenter 
provided four alternative approaches to address this perceived 
inconsistency, but did not recommend two of the alternatives because 
they required the reporting of E/Q and did not recommend a third 
alternative because, according to the commenter, price improvement is 
only a relevant statistic for marketable orders.\611\
---------------------------------------------------------------------------

    \609\ See FIF Letter at 20-21 (stating that for marketable order 
types, it is not necessary to include E/Q in the detailed reports 
required by Rule 605(a)(1) because E/Q can be derived from other 
data that is already included and this data, specifically, is found 
in the price improvement, price dis-improvement, and effective 
spread statistics); Schwab Letter II at 31 (suggesting that the 
reports include effective spread and quoted spread and then allow 
individuals to compute E/Q).
    \610\ See FIF Letter at 21. As described in supra section 
III.B.4.b)(2), the Commission is requiring effective spread 
statistics only for marketable order types, marketable stop order 
types, and midpoint-or-better order types, rather than all order 
types as proposed. As described in more detail below, the Commission 
is requiring E/Q only for these same order types. Further, the 
required statistics for each of these order types also include price 
improvement statistics. See final 17 CFR 605(a)(1)(ii)(E) through 
(L). Therefore, there are no order types for which Rule 605 will 
require the reporting of E/Q but not price improvement statistics.
    \611\ See FIF Letter at 21.
---------------------------------------------------------------------------

    After review of the comments, as stated above, the Commission is 
adopting a requirement that Rule 605 reports include a statistic for 
average E/Q, expressed as a percentage, but is adjusting the weighting 
methodology from the proposal. The Commission is adopting a spread-
weighted average E/Q statistic, consistent with commenters' 
suggestions.\612\ In addition, the Commission is requiring average E/Q 
only for marketable order types, marketable stop order types, and 
midpoint-or-better order types, rather than all order types as 
proposed. Because spread-weighted average E/Q is the same as average 
effective spread divided by average quoted spread, in lieu of creating 
a separate definition for ``average effective over quoted spread'' as 
proposed, Rule 605 as adopted specifies that the required statistics 
for marketable order types, marketable stop order types, and midpoint-
or-better order types include, for executions of covered orders, the 
average effective spread divided by the average quoted spread, 
expressed as a percentage.\613\ The Commission is also requiring that 
Rule 605 reports include a reported statistic for average quoted spread 
and is defining ``average quoted spread'' as the share-weighted average 
of the difference between the national best offer and the national best 
bid at the time of order receipt or, for order executions of non-
marketable limit orders,\614\ the difference between the

[[Page 26475]]

national best offer and the national best bid at the time such orders 
first become executable.\615\ Thus, Rule 605 as adopted also will 
specify that the required statistics for marketable order types, 
marketable stop order types, and midpoint-or-better order types 
include, for executions of covered orders, average quoted spread.\616\
---------------------------------------------------------------------------

    \612\ See supra notes 600-608 and accompanying text.
    \613\ See final 17 CFR 242.605(a)(1)(ii)(D).
    \614\ Because the requirement to report average quoted spread 
applies only to market orders, marketable limit orders, marketable 
IOCs, marketable stop order types, and the midpoint-or-better order 
types, the only non-marketable limit orders this will apply to are 
the midpoint-or-better order types and marketable stop order types 
(which are non-marketable until triggered). See final 17 CFR 
242.605(a)(1)(ii)(A).
    \615\ See final 17 CFR 242.600(b)(12); final 17 CFR 
242.605(a)(1)(ii)(A); final 17 CFR 242.605(a)(2)(viii). See also 
infra notes 817-827 and accompanying text for discussion of E/Q and 
quoted spread statistics in the summary report.
    \616\ See final 17 CFR 242.605(a)(1)(ii)(A).
---------------------------------------------------------------------------

    The Commission agrees with commenters that the use of a spread-
weighting methodology will provide a consistent measure of E/Q that 
will not vary based on the specific symbols to which price improvement 
is allocated.\617\The adopted methodology will avoid a potential 
incentive to allocate price improvement in a manner that would maximize 
the reported E/Q statistic without changing the total dollar value of 
the price improvement provided. Thus, the use of a spread-weighted 
average E/Q is consistent with the Commission's stated goal of 
facilitating the comparability price improvement statistics across 
symbols.\618\ In addition, the Commission acknowledges that the 
industry generally uses spread-weighting when calculating E/Q \619\ and 
thus, as stated by a commenter, will provide a ``normalized comparison 
of price improvement relative to the price improvement opportunity'' 
\620\ that is consistent with existing industry practice.
---------------------------------------------------------------------------

    \617\ See supra notes 600-608 and accompanying text.
    \618\ See Proposing Release, 88 FR 3786 at 3817 (Jan. 20, 2023).
    \619\ See supra note 600 and accompanying text.
    \620\ See supra note 597.
---------------------------------------------------------------------------

    The adopted definition of ``average quoted spread'' is the same as 
the description of ``total quoted spread'' that was embedded in the 
proposed definition of ``average effective over quoted spread,'' with 
two modifications from the embedded definition as proposed.\621\ First, 
the Commission is specifying that average quoted spread is a share-
weighted average. Second, the Commission is limiting the list of order 
types for which the average quoted spread will be required to be 
measured at the time the order first becomes executable to conform to 
the order types being adopted herein. The inclusion of an average 
quoted spread statistic in Rule 605 reports will provide an additional 
piece of information that market participants and other users of the 
reports can use to evaluate execution quality. Moreover, in response to 
the commenters who stated that E/Q could be calculated using the 
effective spread and quoted spread statistics and that the Commission 
should allow users to derive E/Q,\622\ as stated in the Proposing 
Release, E/Q is a relatively simple metric to capture contemporaneously 
with execution and requiring a separate field for E/Q will increase the 
ability of market participants to access and utilize E/Q to compare 
price improvement statistics across securities, and across market 
centers and broker-dealers.\623\
---------------------------------------------------------------------------

    \621\ See Proposing Release, 88 FR 3786 at 3817 (Jan. 20, 2023). 
The substantive difference between the two is that ``average quoted 
spread'' as adopted will reflect the share-weighted average of 
quoted spreads of all transactions for the month within a reporting 
category, whereas ``average effective over quoted spread'' would 
have divided effective spread by quoted spread for each transaction 
and then used a share-weighted average of that number over the 
month. See id.
    \622\ See supra note 609.
    \623\ See Proposing Release, 88 FR 3786 at 3817 (Jan. 20, 2023). 
See also infra notes 1534-1537 (discussing that the concern in the 
Proposing Release that extrapolating an average E/Q using average 
effective spread and average quoted spread may lead to a noisier 
level of E/Q is no longer relevant with the use of a spread-weighted 
average E/Q).
---------------------------------------------------------------------------

    In addition, because effective spread is a necessary input into E/
Q, the Commission is not adopting the application of E/Q to non-
marketable order types other than midpoint-or-better order types (and 
marketable stop order types, which are generally non-marketable orders 
upon receipt).\624\ Accordingly, the Commission will include E/Q within 
the statistics required for marketable order types, marketable stop 
order types, and midpoint-or-better order types only.\625\
---------------------------------------------------------------------------

    \624\ See supra section III.B.4.b)(2).
    \625\ See final 17 CFR.605(a)(1)(ii)(D).
---------------------------------------------------------------------------

(e) Size Improvement
(1) Proposed Approach
    Prior to the amendments, Rule 605 reports included price 
improvement metrics but did not include any statistics that directly 
measured whether orders received an execution of more than the 
displayed size at the quote.\626\ The Commission proposed adding a 
benchmark metric that would, in combination with information about 
shares executed, indicate the level of ``size improvement,'' i.e., the 
extent to which orders received an execution at prices at or better 
than the quote for share quantities greater than the displayed size at 
the quote.\627\ Specifically, the Commission proposed requiring the 
reporting of the cumulative number of shares of the full displayed size 
of the protected bid at the time of execution, in the case of a market 
or limit order to sell; and of the full displayed size of the protected 
offer at the time of execution, in the case of a market or limit order 
to buy.\628\ As proposed, for each order, the share count would have 
been capped at the order size if the full displayed size of the 
national best bid or national best offer is larger than the order.\629\ 
The Commission explained that the proposed size improvement benchmark 
metric could be combined with information about the number of shares 
executed at or above the quote to measure a market center or broker-
dealer's ability to offer customers execution at the quote (or better), 
even when there is no depth available at that price.\630\
---------------------------------------------------------------------------

    \626\ Although share-weighted effective spread metrics may 
provide information about size improvement because effective spread 
will be larger for orders that have to ``walk the book'' (i.e., 
consume available depth beyond the best-priced quotes), effective 
spread combines both price and size information. See Proposing 
Release, 88 FR 3786 at 3817 (Jan. 20, 2023).
    \627\ See id. at 3818.
    \628\ See id.; proposed Rule 605(a)(1)(i)(F).
    \629\ See Proposing Release, 88 FR 3786 at 3818 (Jan. 20, 2023); 
proposed Rule 605(a)(1)(i)(F).
    \630\ See Proposing Release, 88 FR 3786 at 3818 (Jan. 20, 2023).
---------------------------------------------------------------------------

(2) Final Rule and Discussion
    The Commission is adopting a modified version of the proposed size 
improvement benchmark metric that measures the displayed size at the 
time of order receipt (or the time the order becomes executable for 
midpoint-or-better order types) instead of measuring the displayed size 
at the time of order execution as proposed. The Commission is also 
modifying the proposed size improvement benchmark metric by having it 
apply only to marketable order types, marketable stop order types, and 
midpoint-or-better order types rather than all order types, as 
proposed. Finally, based on comments received, the Commission is 
adopting an additional size improvement metric (as discussed below, 
``size improved outsized shares'') that was not part of the proposal 
and indicates the amount of size improvement in those instances in 
which an order could have received size improvement.
    Several commenters supported adding a requirement that Rule 605 
reports include the proposed size improvement benchmark metric.\631\ A 
broker-dealer

[[Page 26476]]

stated that the proposed size improvement metric would provide market 
participants with important information about an additional dimension 
of execution quality that is not captured by current Rule 605 
statistics.\632\ According to this commenter, this metric will be 
particularly beneficial for retail investors seeking to accurately 
assess execution quality delivered by wholesale broker-dealers.\633\ 
Another broker-dealer stated that size improvement is a ``substantial 
benefit'' offered by broker-dealers and market makers to retail orders 
and ``its absence in Current Rule 605 reports means that execution 
quality is significantly undercounted.'' \634\ This commenter requested 
an explanation of how fractional share orders should be addressed in 
certain statistics, for example size improvement statistics.\635\ 
Another commenter stated that it supported the addition of a size 
improvement metric because of its significant impact on transaction 
costs for retail investors.\636\
---------------------------------------------------------------------------

    \631\ See Pritchard Letter; SIFMA Letter II at 25; SIFMA AMG 
Letter at 6; Rule 605 Citadel Letter at 11; CCMR Letter at 13. See 
also Nasdaq Letter at 44 (stating that size improvement 
opportunities are significant and relevant to best execution 
decisions).
    \632\ See Rule 605 Citadel Letter at 11.
    \633\ See id. (stating that, according to a recent study, 
factoring in size improvement more than doubled the dollar amount of 
price improvement reported by wholesale broker-dealers).
    \634\ Robinhood Letter at 46-47. This commenter opposed the 
proposed changes to Rule 605 but suggested expanding Rule 606 
reports to add a column for size improvement, among other execution 
quality metrics. See id. at 42-43.
    \635\ See id. at 48 (asking how the displayed size and the time 
of execution of fractional share orders would be counted for 
purposes of the size improvement benchmark).
    \636\ See CCMR Letter at 13.
---------------------------------------------------------------------------

    An industry group stated that it agreed with the Commission on the 
value of including size improvement statistics, but opposed measuring 
size improvement based on the number of shares available at the time of 
execution.\637\ Instead, this commenter recommended measuring size 
improvement against the full displayed size at the opposite side of the 
NBBO as of the time of order receipt (for marketable group orders) or 
as of the time an order becomes executable (for non-marketable group 
orders).\638\ This commenter presented three scenarios to illustrate 
why it supports measuring size improvement against the full displayed 
size at the time of order receipt rather than at the time of 
execution.\639\ This commenter also stated that it assumes that where 
an order has multiple executions, the Commission would require adding 
the displayed size to the benchmark metric at the time of each 
execution, rather than counting the displayed size for only one 
execution.\640\
---------------------------------------------------------------------------

    \637\ See FIF Letter at 20.
    \638\ See id. This commenter stated that this method is how 
other statistics in the report, such as effective spreads, are 
measured. See id.
    \639\ See FIF Letter II at 4-7. In the first scenario, the 
customer's order size is larger than the displayed size, and the 
commenter states its suggested approach would reflect this 
oversizing and provide for a more accurate comparison across brokers 
that receive customer orders that, on average, oversize the NBBO by 
different percentages. See id. at 4-5. In the second scenario, the 
customer's order size is larger than the displayed size and results 
in price dis-improvement, and the commenter states that its 
suggested approach would require the broker-dealer to report price 
dis-improvement but would also include data to reflect that the 
broker-dealer received an order that oversized the opposite-side 
NBBO. See id. at 5-6. In the third scenario, a broker-dealer is 
delayed in executing the customer's order due to a systems issue and 
the executed size is the same as the displayed size at the time of 
order receipt but larger than the displayed size at the time of 
order execution, and the commenter states that its suggested 
approach would correctly reflect that the broker-dealer did not 
provide size improvement. See id. at 6-7.
    \640\ See id. at 5, n.10, and 6, n.11.
---------------------------------------------------------------------------

    Further, this commenter stated that a market could have protected 
bids and offers that are not represented in the NBBO but are at the 
same price as the NBBO, and these bids and offers are included in Level 
1 market data.\641\ This commenter also stated that it understands that 
when the Commission refers to the cumulative number of shares of the 
full displayed size of the protected bid or offer, the Commission is 
including in this number shares of protected bids and offers that are 
not represented in the NBBO but are at the same price as the NBBO.\642\
---------------------------------------------------------------------------

    \641\ See FIF Letter at 20.
    \642\ See id.
---------------------------------------------------------------------------

    A broker-dealer stated that the proposal ``falls well short of 
including the necessary statistics to reflect the benefits of size 
improvement.'' \643\ This commenter stated that the proposed size 
improvement metric would be inadequate because it would include all 
orders in the calculation, even when there is no opportunity to provide 
size improvement, and thereby would dilute the amount and obfuscate the 
value of size improvement provided when the need for size improvement 
actually exists.\644\ This commenter suggested the following 
alternative metrics that, in its view, would more accurately reflect 
size improvement benefits obtained by each broker for its retail 
investor customers: (1) the number of orders for which the order size 
exceeded the available shares displayed on the relevant side of the 
NBBO (``outsized orders''); (2) the total number of shares executed as 
part of these outsized orders; and (3) the number (or percentage) of 
shares within the outsized orders that received size improvement (i.e., 
were executed at or better than the NBBO price, in excess of the amount 
of aggregate displayed liquidity at the NBBO).\645\
---------------------------------------------------------------------------

    \643\ Virtu Letter II at 5.
    \644\ See id. at 10.
    \645\ See id. According to this commenter, these metrics would 
be more informative because they would not include orders in which 
there was no need to provide size improvement. See id.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, this commenter also 
suggested in a petition for rulemaking to the Commission that Rule 605 
should include an alternative metric, referred to as ``real price 
improvement'' (``RPI''), that combines price improvement with size 
improvement by using as its benchmark a price that reflects the 
equivalent size of shares-including depth of book quotes and odd-lot 
quotes.\646\ When the Commission described why it was not proposing to 
include an RPI benchmark or metric in the proposed rule, the Commission 
stated that although RPI may be a more informative measure of size 
improvement than a measure that can be calculated using the proposed 
size improvement benchmark metric, the RPI would require market centers 
and reporting broker-dealers to subscribe to all exchanges' proprietary 
depth-of-book data feeds and would entail a ``significant cost'' to 
reporting entities that did not already subscribe to these feeds.\647\ 
Therefore, the Commission preliminarily believed that the benefits to 
market participants of having an RPI metric were not justified by the 
potentially significant additional costs to reporting entities.\648\
---------------------------------------------------------------------------

    \646\ See Proposing Release, 88 FR 3786 at 3818 (Jan. 20, 2023) 
(citing Virtu Petition at 3).
    \647\ See id.
    \648\ See id. at 3818-19.
---------------------------------------------------------------------------

    In commenting on this rulemaking, this commenter again suggested 
that the Commission add an RPI benchmark or metric to Rule 605 and 
responded to the Commission's statement that such measure could be too 
costly for market participants who would need to subscribe to 
exchanges' depth-of-book data feeds.\649\ According to this

[[Page 26477]]

commenter, many brokers utilize vendors to produce Rule 605 reports and 
these vendors are capable of handling depth-of-book data.\650\ This 
commenter also stated that ``if the Commission's proposed tick size 
reductions are adopted, there would be less liquidity at the NBBO, and 
investors who currently use SIP data would have less visibility into 
market liquidity and would need to access the exchanges' depth-of-book 
data feeds anyway.'' \651\ Another commenter suggested that the 
Commission undertake a more detailed analysis of the costs and benefits 
of requiring RPI statistics in Rule 605 reports and that the Commission 
should require the reporting of RPI information if this analysis 
``indicates that the benefits . . . outweigh the costs.'' \652\ 
According to this commenter, the Commission did not quantify either the 
costs of requiring reporting entities to have access to a full set of 
consolidated depth information or the benefits of providing this 
additional information about size improvement to market 
participants.\653\ Finally, one commenter stated that ``[p]rice 
improvement should be measured relative to the displayed book, not the 
NBBO. Odd lots are ignored in the calculation of the NBBO.'' \654\
---------------------------------------------------------------------------

    \649\ See Virtu Letter II at 7 (``To truly and accurately 
measure execution quality, Rule 605 disclosures should be updated to 
compare fill prices for all orders to the average price in the 
market to fill the same number of shares considering all displayed 
quotes--including NBBO, depth of book, and odd lots.''), 10 (``To 
properly reflect the value of size improvement benefits that brokers 
obtain for retail investors, Rule 605 should measure an order's 
execution price that is the volume-weighted average price (`VWAP') 
for an equivalent quantity of shares based on the shares available 
across exchanges.'').
    \650\ See id. at 10.
    \651\ Id. The Commission is still considering the proposed 
changes discussed in the Minimum Pricing Increments Proposing 
Release, including changes to tick sizes. See Minimum Pricing 
Increments Proposing Release, 87 FR 80266 (Dec. 29, 2023). The 
Commission will consider comments regarding whether changes to tick 
sizes would lead to changes in the use of depth-of-book feeds in the 
context of that proposal.
    \652\ See CCMR Letter at 16. See also id. at 15 (stating that 
current Rule 605 disclosures fail to consider that there is a 
limited size available at the NBBO on exchanges, thus failing to 
account for size improvement, and price improvement should be 
measured with reference to the average price obtainable for the full 
order on the exchange, not just with reference to the NBBO).
    \653\ See id. at 16 (citing Proposing Release, 88 FR 3786 at 
3894 (Jan. 20, 2023)).
    \654\ Angel Letter at 3.
---------------------------------------------------------------------------

    An investor advocacy group recommended eliminating the proposed 
size improvement metric until such a time when the public data feed 
contains more information regarding the depth of quotations.\655\ 
According to this commenter, accurately identifying size improvement 
would require proprietary depth of book feeds, and if the size 
improvement statistic relied solely on the SIP it would be misleading 
because it would not reflect the top of book across public quotes or 
hidden or mid-point priced orders.\656\ A group of academics stated 
that some of the proposed disclosure requirements, such as size 
improvement, may be helpful for a subset of trades, but recommended 
limiting changes to Rule 605 to a more limited set of statistics to 
reduce implementation costs and speed up adoption.\657\
---------------------------------------------------------------------------

    \655\ See Healthy Markets Letter at 18.
    \656\ See id.
    \657\ See Professor Schwarz et al. Letter at 5.
---------------------------------------------------------------------------

    The Commission considered the comments and, in response to 
commenter feedback, is modifying the proposed size improvement 
benchmark metric and adding an additional size improvement metric. 
Further, the Commission is requiring the disclosure of both size 
improvement metrics only for marketable order types, marketable stop 
order types, and midpoint-or-better order types, rather than for all 
order types as proposed. To implement these changes, the Commission is 
adopting a defined term for the size improvement benchmark metric--the 
``order size benchmark.'' As adopted, ``order size benchmark'' means 
the number of shares of the full displayed size of all protected bids 
at the same price as the national best bid at the time of order 
receipt, in the case of a market or limit order to sell, or the full 
displayed size of all protected offers at the same price as the 
national best offer at the time of order receipt, in the case of a 
market or limit order to buy.\658\ For marketable stop order types and 
midpoint-or-better order types, the full displayed size is measured at 
the time the order becomes executable rather than the time of order 
receipt.\659\ For each order, the share count is capped at the order 
size.\660\ The Commission is also modifying the proposed Rule 605(a)(1) 
metrics to require the reporting of, for executions of covered orders, 
the cumulative number of shares of the order size benchmark.\661\ The 
term ``order size benchmark'' is the same as the proposed size 
improvement benchmark metric, except in the following two respects.
---------------------------------------------------------------------------

    \658\ See final 17 CFR 242.600(b)(72).
    \659\ See id.
    \660\ See id.
    \661\ See final 17 CFR 242.605(a)(1)(ii)(R).
---------------------------------------------------------------------------

    First, in response to the commenter who recommended the size 
improvement benchmark be captured at the time of order receipt,\662\ 
the Commission is modifying the time at which the order size benchmark 
measures the available displayed size on the opposite side of the NBBO. 
Instead of measuring the displayed size at the time of execution as 
proposed, the order size benchmark in the final rule measures displayed 
size at the time of order receipt, for market and marketable limit 
orders, and at the time an order becomes executable, for marketable 
stop order types and midpoint-or-better order types. Capturing the 
displayed size of the opposite side quote at the time of order receipt 
(or the time of executability for marketable stop order types and 
midpoint-or-better order types) provides a view of the available size 
at the time an order could first reasonably be expected to execute and 
therefore provides users of the Rule 605 data information relating to 
which market centers and broker-dealers are more likely to be able to 
fill orders in a size larger than what may be readily available. Using 
the time of order receipt (or time the order becomes executable) as in 
the final rule will simplify calculation of the order size benchmark 
because there will be one relevant time for each order, even if that 
order results in multiple executions. In contrast, if the Commission 
required calculation of the order size benchmark at the time of 
execution as proposed, an order with multiple executions would have 
different times of execution for different portions of the order. The 
Commission also agrees with the commenter that measuring the displayed 
size at the time of execution could result in a less accurate picture 
of size improvement in some instances,\663\ particularly if some shares 
priced at the opposite side of the NBBO are displayed at the time of 
order receipt and then lifted before the time of execution.\664\
---------------------------------------------------------------------------

    \662\ See supra notes 637-639 and accompanying text.
    \663\ See supra note 637. This commenter also provided several 
scenarios presenting how the presentation of size improvement 
statistics would differ if size improvement is measured against the 
full displayed size at the time of order receipt (as suggested by 
the commenter) or the time of execution (as proposed). See supra 
note 639 and accompanying text. As described, final Rule 605 
measures size improvement at the time of order execution.
    \664\ See supra note 639. In response to the commenter's request 
for clarification about how to calculate size improvement for 
fractional shares (see supra note 635 and accompanying text), the 
order size benchmark is capped at the size of the order and 
therefore in the case of a fractional share order where the 
displayed size exceeds the order size, the order size benchmark will 
reflect the fractional size of the order. See final 17 CFR 
242.600(b)(72). The commenter's question about how to calculate time 
of execution is moot because the adopted rule will measure the size 
improvement statistics at the time of order receipt rather than the 
time of execution.
---------------------------------------------------------------------------

    Second, the Commission is adopting a modification to make clear 
that the order size benchmark measures the full displayed size of all 
shares at the same price as the protected bid or offer (as 
applicable).\665\ The Commission agrees with the commenter that the 
share count should be required to include not just those shares that 
are represented in the NBBO but also shares of protected bids

[[Page 26478]]

and offers that are not represented in the NBBO but are at the same 
price as the NBBO.\666\ Reporting entities will be able to capture 
information about these shares without relying on proprietary depth-of-
book feeds because the SIP includes all protected bids and offers.
---------------------------------------------------------------------------

    \665\ See final 17 CFR 242.600(b)(72).
    \666\ See supra notes 641-642 and accompanying text.
---------------------------------------------------------------------------

    The Commission considered commenter's suggestions for alternative 
size improvement metrics.\667\ In response to the commenter's 
recommendation to include the number of shares executed as part of 
outsized orders, the Commission observes that, using the Rule 605 
statistics as adopted, it is possible to calculate the number of shares 
eligible for size improvement (``outsized share count'') for any row of 
Rule 605 data by taking the cumulative number of shares of covered 
orders received and subtracting the cumulative number of shares of the 
order size benchmark.\668\ Although the outsized share count that can 
be calculated using Rule 605 statistics as adopted differs slightly 
from the commenter's recommended metric, it similarly addresses 
commenter's criticism that the order size benchmark includes orders in 
which the reporting entity does not have the opportunity to provide 
size improvement because the order size is equal to or less than the 
available shares at the NBBO.\669\ The Commission is not adopting the 
commenter's suggestion to include the number of outsized orders in the 
Rule 605 statistics because the number of outsized orders alone is less 
meaningful when this information is aggregated across orders.\670\ 
Instead, the outsized share count, which will be derivable from the 
Rule 605 statistics as adopted, will provide a metric that is more 
useful for comparison purposes when aggregated.
---------------------------------------------------------------------------

    \667\ See supra notes 645-653 and accompanying text.
    \668\ See final 17 CFR 242.605(a)(1)(i)(C); final 17 CFR 
242.605(a)(1)(ii)(R).
    \669\ See Virtu Letter II at 10.
    \670\ For further discussion of the Commission's consideration 
of alternative size improvement measures, see infra section 
IX.E.3.d)(3).
---------------------------------------------------------------------------

    The Commission agrees with the commenter that it would provide 
useful information to add a size improvement metric that will measure 
the level of size improvement in those instances in which the order 
presents an opportunity for size improvement.\671\ Therefore, the 
Commission is adopting an additional Rule 605 statistic that will 
require reporting of the sum of, for each execution of a covered order, 
the greater of: the total number of shares executed with price 
improvement plus the total number of shares executed at the quote minus 
the order size benchmark; or zero (the ``size improved outsized 
shares'').\672\ For each execution of a covered order, the total number 
of shares executed with price improvement plus the total number of 
shares executed at the quote represents the number of shares executed 
at or better than the opposite side of the NBBO at the time of order 
receipt (or executability). Subtracting the order size benchmark from 
that sum represents the extent to which the reporting entity provided 
such executions at a size greater than the displayed size at the quote. 
The resulting number can be negative if a reporting entity does not 
provide an execution at or better than the NBBO for the full number of 
displayed shares at the opposite side of the NBBO (i.e., there is 
``size dis-improvement''). However, the size improved outsized shares 
metric is designed to capture the extent to which the reporting entity 
achieves size improvement when an order presents an opportunity for 
size improvement and as such will never be negative. Instead, for each 
execution of a covered order, the size improved outsized shares metric 
will be the greater of the described calculation and zero. As an 
example, assume the protected NBBO for a security is $5.00-$5.05. If a 
market center receives a 400-share market order to sell and executes 
all 400 shares at $5.00, and there were 300 shares displayed at the 
national best bid at the time of order receipt, the order size 
benchmark will be 300 shares. To continue this example, the size 
improved outsized shares will be the greater of 100 shares (i.e., 400 
shares minus 300 shares) and zero shares, and thus the size improved 
outsized shares will be 100 shares.\673\ As a second example, assume 
the protected NBBO for a security is $10.00-$10.10. If a market center 
receives a 300-share market order to buy but only executes 100 shares 
at $10.10 and there were 200 shares displayed at the national best 
offer for $10.10 at the time of order receipt, the order size benchmark 
will be 200 shares. To continue this example, the size improved 
outsized shares will be the greater of -100 shares (i.e., 100 shares 
minus 200 shares) and zero shares, and thus the size improved outsized 
shares will be zero shares.
---------------------------------------------------------------------------

    \671\ See supra note 645 and accompanying text.
    \672\ See final 17 CFR 242.605(a)(1)(ii)(S).
    \673\ The Commission is not adopting a metric that would reflect 
the percentage of shares within outsized orders that received size 
improvement because it will be possible to calculate this percentage 
using the outsized share count and the size improved outsized 
shares.
---------------------------------------------------------------------------

    Where the size improved outsized shares will differ from 
information derivable from other execution quality statistics in final 
Rule 605 is in cases where there is size dis-improvement, which may 
occur when some shares execute at prices worse than the quote or do not 
execute even though a sufficient number of shares are displayed at the 
quote. With respect to the information that can be derived from other 
Rule 605 statistics, as discussed in the Proposing Release, the order 
size benchmark can be compared to the number of shares executed at or 
better than the quote to calculate whether the reporting entity filled 
any portion of the customer order at the opposite side of the NBBO (or 
better), even when insufficient depth was available at that price 
(``net size improvement'').\674\ Unlike the size improved outsized 
shares, the net size improvement will take into account instances of 
size dis-improvement and, in such instances, will take into account 
negative values.\675\ To continue the second example above, where the 
market center is able to fill 100 shares at $10.10 but the depth 
available at the protected offer is 200 shares, the net size 
improvement will be -100 shares (i.e., 100 shares minus 200 shares).
---------------------------------------------------------------------------

    \674\ See Proposing Release, 88 FR 3786 at 3818 (Jan. 20, 2023) 
(discussing the ``size improvement share count''). To better 
distinguish this term from size improved outsized shares, the 
Commission is using the term ``net size improvement'' herein instead 
of ``size improvement share count.''
    \675\ In cases where the best displayed quote equals or exceeds 
the order size (i.e., where there is no opportunity to provide size 
improvement), the size improved outsized shares will always be zero. 
In contrast, the net size improvement will not be negative in 
instances in which the depth at the best displayed quote exceeds the 
customer-requested order size because the share count used to 
calculate the order size benchmark will be capped at the order size. 
The Commission's analysis of the correlation between the proposed 
measure of size improvement and this additional measure of size 
improvement indicates that including information about size improved 
outsized shares will likely provide information that is not 
available from the net size improvement. See infra note 1548 and 
accompanying text; Table 8. This analysis also indicates that these 
size improvement metrics convey different information about 
execution quality than the price improvement metrics contained in 
Rule 605 reports prior to these amendments, particularly for orders 
received by off-exchange market centers. See infra note 1548 and 
accompanying text; Table 8.
---------------------------------------------------------------------------

    The ability to compare size improved outsized shares and net size 
improvement will contain useful information for market participants as 
well. For example, market participants will be able to use this 
variable to tell the difference between a market center that has a net 
size improvement value

[[Page 26479]]

of zero because it does not offer size improvement, or because it 
offers a mix of size improvement and size dis-improvement. This will be 
informative for market participants that are concerned about the risk 
of receiving size dis-improvement. Market participants and other users 
of Rule 605 reports will be able to divide the size improved outsized 
shares by the net size improvement to obtain a ratio that informs about 
the extent to which a reporting entity is executing orders with size 
dis-improvement. The higher the ratio (i.e., the higher it is above 1), 
the more size dis-improvement occurred. For example, assume a market 
participant compares two market centers for a particular order type, 
size, and security and calculates that Market Center 1 has net size 
improvement of 2,500 and size improved outsized shares of 4,000; and 
Market Center 2 has net size improvement of 5,000 and size improved 
outsized shares of 6,000. To continue this example, Market Center 1 
would have a ratio of 8/5 (i.e., 4,000/2,500) and Market Center 2 would 
have a ratio of 6/5 (i.e., 6,000/5,000), indicating that orders 
received size dis-improvement more frequently on Market Center 1 than 
on Market Center 2.\676\ In addition, market participants can 
standardize the size improved outsized shares by dividing this metric 
by the outsized share count.\677\
---------------------------------------------------------------------------

    \676\ In this simplified example, it is possible to compare the 
overall size improvement percentage (calculated by dividing the net 
size improvement by the outsized share count) to the size 
improvement outsized shares percentage (calculated by dividing the 
size improved outsized shares by the outsized share count) to see 
the difference between these two metrics. To continue the above 
example, assume that Market Center 1 has an outsized share count of 
10,000 and Market Center 2 has an outsized share count of 20,000. 
Market Center 1 and Market Center 2 would each have 25% overall size 
improvement, indicating that Market Center 1 and Market Center 2 
achieved similar amounts of overall size improvement. Market Center 
1 would have 40% size improved outsized shares and Market Center 2 
would have 30% size improved outsized shares. Market Center 1's 
higher size improved outsized shares percentage, combined with the 
fact that it has the same overall size improvement percentage as 
Market Center 2, indicates that orders received size dis-improvement 
more frequently on Market Center 1 than Market Center 2.
    \677\ See infra note 1547 and accompanying text.
---------------------------------------------------------------------------

    Finally, the Commission is limiting the application of the size 
improvement metrics to marketable order types, marketable stop order 
types, and midpoint-or-better order types, rather than to all order 
types as proposed. The order size benchmark is more useful in 
conjunction with information about the number of shares executed at, 
better than, or worse than the NBBO,\678\ and these statistics are 
available only for marketable order types, marketable stop order types, 
and midpoint-or-better order types in Rule 605 as amended. Further, the 
size improved outsized shares metric is more informative when it can be 
compared to net size improvement and providing information about size 
improved outsized shares without a view of net size improvement could 
be misleading. In addition, NMLOs generally do not have an expectation 
of execution at the price of the protected quote at the time of order 
receipt and therefore providing information about the size available at 
that price is less informative.\679\ Therefore, the Commission is not 
requiring the order size benchmark or the size improved outsized shares 
metric for non-marketable order types other than midpoint-or-better 
order types.
---------------------------------------------------------------------------

    \678\ See final 17 CFR 242.605(a)(1)(ii)(E), (H), and (I). For 
example, the count of shares executed at or better than the NBBO is 
necessary to calculate net size improvement.
    \679\ Information about the size available at the protected 
quote may be more informative for midpoint-or-better order types 
because the Commission understands that some traders submit inside-
the-quote limit orders with the intention of executing immediately.
---------------------------------------------------------------------------

    The Commission is not adopting a metric based on RPI.\680\ As the 
Commission stated in the Proposing Release, RPI would require market 
centers and reporting broker-dealers to subscribe to all exchanges' 
proprietary depth-of-book feeds and these subscriptions would entail a 
significant cost for those reporting entities that do not already 
subscribe to the feeds.\681\ Although a commenter states that many 
broker-dealers use vendors to prepare Rule 605 reports that can handle 
depth-of-book data,\682\ Rule 605 does not require use of a vendor and 
the Commission does not assume that all reporting entities will choose 
to use a vendor. Moreover, if vendors need to subscribe to all 
exchanges' proprietary depth-of-book feeds for purposes of preparing 
Rule 605 reports, these vendors may pass on these costs to the 
reporting entities.
---------------------------------------------------------------------------

    \680\ For further discussion of the RPI metric, see infra 
section IX.E.3.d)(1).
    \681\ See Proposing Release, 88 FR 3786 at 3818 (Jan. 20, 2023).
    \682\ See supra note 650 and accompanying text.
---------------------------------------------------------------------------

    In response to the commenter's suggestion that the Commission 
should not adopt Rule 605 metrics concerning size improvement, among 
others, because of concerns about implementation costs and adoption 
speed,\683\ reporting entities will have the underlying raw data 
necessary to calculate the order size benchmark and the new size 
improved outsized shares metric because they are already capturing this 
information for trade confirmations or internal purposes or will be 
easily able to obtain this information from publicly available data 
sources. Therefore, the inclusion of these metrics in Rule 605 reports 
will not make a significant difference in the costs or amount of time 
needed to implement the changes to Rule 605 being adopted.
---------------------------------------------------------------------------

    \683\ See supra note 657 and accompanying text.
---------------------------------------------------------------------------

(f) Riskless Principal
(1) Proposed Approach
    In effecting riskless principal transactions, a market center or 
broker-dealer submits a principal order to an away market center in 
order to fulfill a customer order. Upon execution at the away market 
center, the market center or broker-dealer that initially received the 
customer order (i.e., the receiving market center or broker-dealer) 
executes the customer transaction on the same terms as the principal 
execution. Prior to these amendments, a market center that executed the 
riskless principal leg of the trade (i.e., the receiving market 
center's execution of the customer order on the same terms as the 
principal transaction) generally should have reported those orders in 
its Rule 605 statistics as part of the cumulative number of shares of 
covered orders that were executed at the receiving market center under 
Rule 605(a)(1)(i)(D), rather than as a part of the cumulative number of 
shares of covered orders executed at any other venue under Rule 
605(a)(1)(i)(E).\684\ The Commission proposed to carve riskless 
principal orders out from Rule 605(a)(1)(i)(D) by providing that the 
number of shares of covered orders executed at the receiving market 
center, broker, or dealer excludes shares that the market center, 
broker, or dealer executes on a riskless principal basis.\685\ As a 
result, the market center that executes the riskless principal order 
would have included these shares as part of the cumulative number of 
shares executed away from that venue under Rule 605(a)(1)(i)(E), and 
only the market center that executes the corresponding principal order 
would have included those shares as part of the cumulative number of 
shares

[[Page 26480]]

executed at the receiving market center under proposed Rule 
605(a)(1)(i)(D).
---------------------------------------------------------------------------

    \684\ See Proposing Release, 88 FR 3786 at 3819 (Jan. 20, 2023). 
In the Proposing Release, the Commission stated 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 id. (citing Staff Legal Bulletin No. 12R, ``Frequently Asked 
Questions About Rule 11Ac1-5'' (June 22, 2001)).
    \685\ See id.; proposed Rule 605(a)(1)(i)(D).
---------------------------------------------------------------------------

(2) Final Rule and Discussion
    The Commission is adopting the requirement that the calculation of 
the number of shares of covered orders executed at the receiving market 
center, broker, or dealer will exclude shares executed on a riskless 
principal basis as proposed, for the reasons described in the Proposing 
Release.\686\ Therefore, a receiving market center, broker, or dealer 
will reflect the execution of the principal order as executed at any 
other venue.\687\ For example, Market Center 1 receives a customer 
order for 100 shares that it executes on a riskless principal basis. 
Market Center 1 sends a corresponding principal order of 100 shares to 
Market Center 2, where it executes in full. Prior to these amendments, 
Market Center 1 generally would have counted 100 shares as executed at 
the market center (rather than away). Because Market Center 2 was the 
execution venue for the corresponding principal order, it also would 
have counted 100 shares executed at the market center (i.e., at Market 
Center 2). Under the amendments, Market Center 1 will instead count 100 
shares executed away and Market Center 2 will count 100 shares executed 
at the market center.
---------------------------------------------------------------------------

    \686\ See Proposing Release, 88 FR 3786 at 3819 (Jan. 20, 2023); 
final 17 CFR 242.605(a)(1)(i)(E).
    \687\ Final 17 CFR 242.605(a)(1)(i)(F) (cumulative number of 
shares executed at any other venue).
---------------------------------------------------------------------------

    A broker-dealer requested clarification regarding the Commission's 
proposed changes to the treatment of riskless principal orders.\688\ 
This commenter stated that the ``Proposal's suggestion'' that the 
proposed change would make execution statistics more informative to 
market participants ``is misleading.'' \689\ According to this 
commenter, execution quality metrics reported under current Rule 605 
``correctly take into account all orders routed to a wholesale broker-
dealer (irrespective of where execution occurs) in order to provide a 
comprehensive view of the market center's overall execution quality'' 
and ``[t]his would not change under the Proposal.'' \690\
---------------------------------------------------------------------------

    \688\ See Rule 605 Citadel Letter at 10.
    \689\ See id. (citing Proposing Release, 88 FR 3786 at 3819 
(Jan. 20, 2023)).
    \690\ Id.
---------------------------------------------------------------------------

    The Commission agrees with the commenter that the execution quality 
statistics for these shares are already reported as part of Rule 605 
reports (i.e., regardless of whether such shares are executed at a 
market center or away, market centers must include the statistics for 
such orders). However, modifying whether riskless principal orders are 
required to be classified as shares executed at a market center, 
broker, or dealer will make the Rule 605 statistics more informative. 
If both the market center that executes the riskless principal order 
and the away market center that executes the corresponding principal 
order count their legs of the transaction as part of their shares 
executed at the receiving market center, it could obscure information 
about how often a market center internalizes an order. As applied to 
wholesalers, it will be useful for investors to be able to observe what 
percentage of orders a wholesaler internalizes because internalized 
orders are not exposed to competition on an order-by-order basis, 
whereas the principal order associated with a riskless principal 
transaction may be exposed to trading interest from other market 
participants. In response to the commenter's request for clarification, 
the Commission observes that it was referring to only proposed Rule 
605(a)(1)(i)(D) and (E) (i.e., the statistics concerning the cumulative 
number of shares of covered orders executed at the receiving market 
center, broker, or dealer and executed at any other venue) when it 
stated in the Proposing Release that Rule 605's execution quality 
statistics would be more informative if riskless principal orders were 
reported as executed at another venue.\691\
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    \691\ See Proposing Release, 88 FR 3786 at 3819 (Jan. 20, 2023).
---------------------------------------------------------------------------

(g) Price Improvement
(1) Proposed Approach
    Preexisting Rule 605 required the reporting, for marketable order 
types, of: (1) the cumulative number of shares of covered orders (a) 
executed with price improvement, (b) executed at the quote, and (c) 
executed outside the quote; (2) for shares executed with price 
improvement, the share-weighted average amount per share that prices 
were improved; and (3) for shares executed outside the quote, the 
share-weighted average amount per share that prices were outside the 
quote.\692\ Under these preexisting requirements, an order executed at 
a price better than the NBBO would have been an order executed with 
price improvement. The MDI Rules expanded the data that will be made 
available for dissemination within the national market system (``NMS 
data'') and included certain odd-lot information in NMS data.\693\ 
While this odd-lot information will include pricing information for 
odd-lots priced inside the NBBO,\694\ using the Rule 605's price 
improvement statistics prior to the amendments, there is no way for 
market participants to evaluate the performance of broker-dealers and 
market centers relative to such better-priced orders.
---------------------------------------------------------------------------

    \692\ See prior 17 CFR 242.605(a)(1)(ii)(B) through (I). 
``Executed with price improvement'' means, for buy orders, execution 
at a price lower than the national best offer at the time of order 
receipt and, for sell orders, execution at a price higher than the 
national best bid at the time of order receipt. See final 17 CFR 
242.600(b)(45). ``Executed at the quote'' means, for buy orders, 
execution at a price equal to the national best offer at the time of 
order receipt and, for sell orders, execution at a price equal to 
the national best bid at the time of order receipt. See final 17 CFR 
242.600(b)(42). ``Executed outside the quote'' means, for buy 
orders, execution at a price higher than the national best offer at 
the time of order receipt and, for sell orders, execution at a price 
equal to the national best bid at the time of order receipt. See 
final 17 CFR 242.600(b)(44).
    \693\ See final 17 CFR 242.600(b)(69); MDI Adopting Release, 86 
FR 18596 at 18613 (Apr. 9, 2021).
    \694\ ``Odd-lot information'' means (i) odd-lot transaction data 
disseminated pursuant to the effective national market system plan 
or plans required under 17 CFR 242.603(b) as of Apr. 9, 2021; and 
(ii) 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. See final 17 CFR 242.600(b)(69). 
Contemporaneously with the Proposing Release, the Commission 
separately proposed 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, and 
accelerate the implementation of the round lot and the odd-lot 
information definitions. See Minimum Pricing Increments Proposing 
Release, 87 FR 80266 at 80293-302 (Dec. 29, 2022).
---------------------------------------------------------------------------

    The Commission proposed to add a definition for ``best available 
displayed price,'' which would include the best priced odd-lot if that 
price is inside the NBBO and to provide additional price improvement 
statistics related to the best available displayed price.\695\ 
Specifically, the Commission proposed to define ``best available 
displayed price'' as, with respect to an order to buy, the lower of (i) 
the national best offer at the time of order receipt or (ii) the price 
of the best odd-lot order to sell at the time of order receipt as 
disseminated pursuant to an effective transaction reporting plan or 
effective national market system plan; and, with respect to an order to 
sell, the higher of (i) the national best bid at the time of order 
receipt or (ii) the price of the best odd-lot order to buy at the time 
of order receipt as disseminated pursuant to an effective transaction 
reporting plan or effective national market system plan.\696\ The 
Commission also proposed

[[Page 26481]]

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.\697\
---------------------------------------------------------------------------

    \695\ See Proposing Release, 88 FR 3786 at 3820 (Jan. 20, 2023).
    \696\ See proposed Rule 600(b)(14); Proposing Release, 88 FR 
3786 at 3820 (Jan. 20, 2023). 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. See id. at 3820, n.427.
    \697\ See proposed Rule 600(b)(14); Proposing Release, 88 FR 
3786 at 3820 (Jan. 20, 2023).
---------------------------------------------------------------------------

    The Commission further proposed to add two defined terms--
''executed outside the best available displayed price'' and ``executed 
with price improvement relative to the best available displayed 
price''--to classify order executions based on their execution price 
relative to the best available displayed price.\698\ Finally, the 
Commission proposed to require the reporting, for marketable order 
types, of (1) the cumulative number of shares of covered orders (a) 
executed with price improvement relative to the best available 
displayed price, (b) executed at the best available displayed price, 
and (c) executed outside the best available displayed price; (2) for 
shares executed with price improvement relative to the best available 
displayed price, the share-weighted average amount per share that 
prices were improved as compared to the best available displayed price; 
and (3) for shares executed outside the best available displayed price, 
the share-weighted average amount per share that prices were outside 
the best available displayed price.\699\
---------------------------------------------------------------------------

    \698\ See Proposing Release, 88 FR 3786 at 3820 (Jan. 20, 2023). 
The Commission proposed to define ``executed outside the best 
available displayed price'' as, 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. See id.; proposed Rule 600(b)(44). Similarly, the Commission 
proposed to define ``executed with price improvement relative to the 
best available displayed price'' as, 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. See Proposing Release, 88 FR 3786 at 3820 (Jan. 20, 
2023); proposed Rule 600(b)(47).
    \699\ See Proposing Release, 88 FR 3786 at 3820 (Jan. 20, 2023); 
proposed Rule 605(a)(1)(ii)(O) through (S).
---------------------------------------------------------------------------

(2) Final Rule and Discussion
    The Commission is adopting the definition of ``best available 
displayed price'' as proposed. Further, the Commission is requiring 
price improvement statistics relative to the best available displayed 
price, in addition to price improvement statistics relative to the 
NBBO, for marketable order types and midpoint-or-better order types as 
proposed.
    An investor advocacy group agreed with the Commission that 
additional price improvement statistics specifically related to the 
best available displayed price would allow market participants to 
evaluate how well market centers and broker-dealers perform in 
executing covered orders relative to the best available displayed 
price.\700\ In addition, an academic stated in support of the proposal 
that it ``is ludicrous to measure price improvement while ignoring 
visible odd lot liquidity'' and that price improvement should be 
measured relative to the effective best bid or offer for the dollar 
amount of the order.\701\
---------------------------------------------------------------------------

    \700\ See Better Markets Letter at 8.
    \701\ See Angel Letter at 3.
---------------------------------------------------------------------------

    However, several commenters disagreed with the proposed price 
improvement statistics based on the best available displayed price 
because, according to these commenters, these statistics could be 
``misleading.'' \702\ An industry group stated that metrics that 
measure price improvement utilizing a comparison to the best odd-lot 
price would ``yield misleading information because it ignores the size 
of the order as compared to the size available at the odd-lot price.'' 
\703\ A financial services firm suggested that the detailed report 
should exclude best available displayed price because this metric is 
only relevant in the commenter's view in a small number of occasions 
and would add ``misleading'' information to the report.\704\ This 
commenter stated that while the Commission cited a recent academic 
working paper showing that odd-lots offer better prices than the NBBO 
16-18% of the time, the percent of the time that the best available 
price differs from the NBBO will be smaller when the MDI Rule's new 
round lot definitions take effect.\705\ According to this commenter, if 
the best available displayed price is relevant only for a small part of 
the time and absent context regarding how many shares are included in 
the price or how many shares the order was for, the best available 
displayed price metrics would ``border on meaningless and add 
unnecessary complexity to the report.'' \706\
---------------------------------------------------------------------------

    \702\ See SIFMA Letter II at 32; Schwab Letter III at 6; 
Robinhood Letter at 47; Rule 605 Citadel Letter at 6.
    \703\ SIFMA Letter II at 32.
    \704\ See Schwab Letter III at 6.
    \705\ See Schwab Letter II at 34; Schwab Letter III at 6. See 
also Proposing Release, 88 FR 3786 at 3821 (Jan. 20, 2023) (citing 
Bartlett et al. (2022)).
    \706\ See Schwab Letter II at 34; Schwab Letter III at 6.
---------------------------------------------------------------------------

    Another broker-dealer suggested that the Commission reconsider the 
use of execution quality statistics based on best available displayed 
price because the use of two sets of execution quality statistics with 
differing reference points would be ``confusing to retail investors.'' 
\707\ This commenter also stated that using the best displayed odd-lot 
price as a reference point presents a number of difficulties or 
opportunities to be misleading because, for example, these quotes could 
``be flickering quotes that are generally not accessible'' or for a 
``size substantially smaller than the order size.'' \708\ Another 
broker-dealer stated that measuring price improvement against odd-lot 
prices would ``yield unhelpful and misleading information'' because the 
size associated with odd-lot prices ``will vary greatly.'' \709\ One 
commenter added that ``{c{time} ompilation of protected quotes is 
complicated. An odd-lot NBBO creates ambiguity.'' \710\ An industry 
group and a financial services firm stated that any data related to the 
best available displayed price should not be included in the report 
format until the best odd-lot order to buy and best odd-lot order to 
sell have been included in the SIP.\711\
---------------------------------------------------------------------------

    \707\ See Robinhood Letter at 47.
    \708\ Id. This commenter also stated that the best displayed 
odd-lot price might be a reasonable reference point for very small 
sized orders, such as fractional shares orders, but is not 
reasonable for any order of a round lot or greater. See id. at 47, 
n.115.
    \709\ See Rule 605 Citadel Letter at 6.
    \710\ Data Boiler Letter at 28.
    \711\ See Schwab Letter III at 6; FIF Letter at 33.
---------------------------------------------------------------------------

    After consideration of the comments, the Commission is adopting the 
definition of ``best available displayed price'' and the addition of 
price improvement statistics based on this price for marketable order 
types and midpoint-or-better order types as proposed. As discussed in 
the Proposing Release, requiring price improvement statistics relative 
to the best available displayed price in the market, whether that is 
the NBBO or the best odd-lot order to buy or sell, will enhance the 
ability of market participants to evaluate the performance of market 
centers and broker-dealers.\712\ The Commission continues to hold this 
view. Odd-lots often reflect pricing that is superior to the NBBO.\713\ 
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.\714\ Although the round lot

[[Page 26482]]

definition in the MDI Rules will result in fewer odd-lot orders in 
stocks with prices greater than $250, most stocks will not be affected 
by the new round lot definition.\715\ In addition, a substantial amount 
of odd-lot transaction volume in stocks greater than $250 will not be 
included in the MDI round lot definition.\716\ The changes in the MDI 
Rules may also result in a higher number of odd-lot trades, as the 
inclusion of odd-lot quotes that may be priced better than the current 
NBBO in consolidated market data may attract more trading interest from 
market participants that did not have access to this information prior 
to the MDI Rules.\717\ Therefore, even though implementation of MDI 
Rules may result in changes to the number of odd-lot orders, price 
improvement statistics relative to the best available displayed price 
will continue to enhance the ability of market participants to evaluate 
order performance after implementation of the MDI Rules' round lot 
definition.
---------------------------------------------------------------------------

    \712\ See Proposing Release, 88 FR 3786 at 3820 (Jan. 20, 2023).
    \713\ See MDI Adopting Release, 86 FR 18596 at 18729 (Apr. 9, 
2021) (describing analysis that found, among other things, that in 
May 2020, ``40% of {odd-lot{time}  transactions (representing 
approximately 35% of all odd-lot volume) occurred at a price better 
than the NBBO'').
    \714\ 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.
    \715\ See MDI Adopting Release, 86 FR 18596 at 18753, n.1960 
(Apr. 9, 2021) and accompanying text (estimating ``approximately 
98.5% of NMS stocks will have a round lot size of 100 shares'').
    \716\ See id. at 18753.
    \717\ See id. at 18754. See also infra notes 1032-1034 and 
accompanying text.
---------------------------------------------------------------------------

    Under the MDI Rules, odd-lot information will include pricing 
information about odd-lots priced better than the NBBO and competing 
consolidators will be able to offer a product that contains information 
on the best priced odd-lot on each exchange.\718\ Once this odd-lot 
information is available, reporting entities will be able to calculate 
the best available displayed price by using the information to identify 
the best-priced odd-lot order to buy (order to sell) available in the 
market and comparing it to the national best bid (offer). The MDI Rules 
have been approved but have not yet been implemented. As discussed 
further in section VII below, Rule 605's price improvement statistics 
that are relative to the best available displayed price will not be 
required to be reported until six months after odd-lot order 
information needed to calculate the best available displayed price is 
made available pursuant to an effective national market system 
plan.\719\
---------------------------------------------------------------------------

    \718\ See MDI Adopting Release, 86 FR 18596 at 18753 (Apr. 9, 
2021).
    \719\ The Commission is still considering the proposed changes 
discussed in the Minimum Pricing Increments Proposing Release, which 
included proposals to accelerate the implementation of the round lot 
and odd-lot information definitions contained in the MDI Release and 
amend the definition of odd-lot information to include a new data 
element for the best available odd-lot orders available in the 
market. See Minimum Pricing Increments Proposing Release, 87 FR 
80266 at 80294-95 (Dec. 29, 2022). If, in the future, the Commission 
determined to adopt an amendment to the definition of odd-lot 
information to include a data element that identifies the best odd-
lot orders available in the market, reporting entities would be 
required to use such information to determine the best available 
odd-lot price. However, when the MDI Rules are implemented, there 
will be sufficient odd-lot information for reporting entities to 
calculate the best available displayed price because odd-lot 
information will include better priced odd-lot orders.
---------------------------------------------------------------------------

    The Commission disagrees with commenters' concerns that price 
improvement statistics relative to the best available displayed price 
will be misleading or confusing.\720\ The price improvement statistics 
relative to the NBBO contained in preexisting Rule 605 will still be 
available to market participants and other users of Rule 605 reports 
and therefore the price improvement statistics relative to the best 
available displayed price will be a supplement to, rather than a 
replacement for, price improvement statistics relative to the NBBO. 
While an odd-lot price that is better than the NBBO may not reflect 
sufficient quantity to execute certain orders, particularly larger-
sized orders, the NBBO similarly may not reflect the best price at 
which certain orders can be filled using readily available liquidity. 
Statistics on price improvement relative to the best available 
displayed price will provide an additional data point for market 
participants to consider in the detailed Rule 605(a)(1) reports. 
Further, Rule 605's price improvement statistics will be presented 
within order size categories, including order size categories for 
orders of less than one share and odd-lot orders. Thus, to the extent 
that price improvement relative to the best available displayed price 
may be more informative for smaller-sized orders than larger-sized 
orders, the Rule 605 reports will present the price improvement 
statistics related to best available displayed price in a format that 
will make it possible to focus on those smaller-sized orders.
---------------------------------------------------------------------------

    \720\ See supra notes 702-710 and accompanying text.
---------------------------------------------------------------------------

(h) Relative Fill Rate
(1) Proposed Approach
    Prior to these amendments Rule 605 did not contain any execution 
quality metrics specific to non-marketable order types. Recognizing the 
need for more meaningful measures of execution quality for NMLOs and 
orders submitted with stop prices, the Commission proposed requiring 
additional information for executable NMLOs, executable stop orders, 
and beyond-the-midpoint limit orders. Specifically, the Commission 
proposed to require the reporting of the number of orders that received 
either a complete or partial fill.\721\ The Commission also proposed to 
require the reporting of the cumulative number of shares executed 
regular way at prices that could have filled the order while the order 
was in force, as reported pursuant to an effective transaction 
reporting plan or effective national market system plan.\722\ As 
proposed, the share count for each order would be capped at the order 
size.\723\
---------------------------------------------------------------------------

    \721\ See Proposing Release, 88 FR 3786 at 3821 (Jan. 20, 2023); 
proposed Rule 605(a)(1)(iii)(A).
    \722\ See Proposing Release, 88 FR 3786 at 3821 (Jan. 20, 2023); 
proposed Rule 605(a)(1)(iii)(B). 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 at 
37537, n.326 (June 29, 2005).
    \723\ See Proposing Release, 88 FR 3786 at 3821 (Jan. 20, 2023); 
proposed Rule 605(a)(1)(iii)(B).
---------------------------------------------------------------------------

(2) Final Rule and Discussion
    The Commission did not receive comment on the proposal to report 
the number of orders that received either a complete or partial fill. 
For the reasons discussed in the Proposing Release, the Commission is 
adopting Rule 605(a)(1)(iii)(A) as proposed, with one correction to the 
rule text.\724\ Specifically, the Commission is adding the word 
``covered'' to keep the language of Rule 605(a)(1)(iii)(A) consistent 
with other parts of Rule 605 \725\ as amended and avoid creating any 
ambiguity in the language of Rule 605.\726\ The Commission also is 
adopting the relative fill rate metric as proposed, and, in response to 
comments received, is adopting an additional relative fill rate metric 
that measures only on-exchange executions.
---------------------------------------------------------------------------

    \724\ See Proposing Release, 88 FR 3786 at 3821 (Jan. 20, 2023).
    \725\ For example, final 17 CFR 242.605(a)(1)(i)(A) requires 
disclosure of the number of ``covered orders.''
    \726\ See final 17 CFR 242.605(a)(1)(iii)(A). Rule 605 as 
amended applies only to covered orders, so this does not represent a 
substantive change to Rule 605(a)(1)(iii)(A) as proposed. Final 17 
CFR 242.605(a)(1) specifies that ``[lsqb]e[rsqb]very market center, 
broker, or dealer shall make available . . . : a report on the 
covered orders in NMS stocks that it received for execution.''
---------------------------------------------------------------------------

    With respect to the proposed metric based on the cumulative number 
of shares executed regular way at prices that could have filled the 
order while it was in force, an industry group stated that it would be 
fairer to measure a

[[Page 26483]]

firm's execution rate against on-exchange executions because exchanges 
are fair-access venues, while ATS and dealer trades may not represent 
liquidity accessible to all market participants.\727\ This commenter 
recommended that the Commission also require firms to report the 
cumulative number of shares executed ``regular way'' on any exchange at 
prices that could have filled the order while the order was in 
force.\728\ Further, a broker-dealer stated that it may be useful to 
receive data on the number of shares that traded on all market centers 
for NMLOs as compared to an individual market center because being able 
to compare relative fill rates would potentially allow market 
participants to choose venues they perceive as being more likely to 
execute their NMLOs or assess if changes to the venues they route these 
orders to produce better fill rates.\729\
---------------------------------------------------------------------------

    \727\ See FIF Letter at 22. See also 17 CFR 242.610(a) and (b) 
(addressing means of access to quotations); 15 U.S.C. 78f(b)(2) and 
15 U.S.C. 78o(b)(3) (providing for fair access to membership in 
SROs).
    \728\ See FIF Letter at 22.
    \729\ See Virtu Letter II at 12.
---------------------------------------------------------------------------

    After consideration of the comments, the Commission is adopting the 
requirement for reporting of the cumulative number of shares executed 
regular way at prices that could have filled the order while the order 
was in force as proposed, for the reasons discussed in the Proposing 
Release.\730\ In response to commenters' concerns about being able to 
compare the relative fill rate for orders executed on venues accessible 
to all market participants, the Commission is adopting an additional 
requirement for the reporting of the cumulative number of shares 
executed regular way on any national securities exchange at prices that 
could have filled the order while the order was in force, as reported 
pursuant to an effective transaction reporting plan or effective 
national market system plan.\731\ Similar to the other relative fill 
rate metric that the Commission is adopting as proposed, for each order 
the share count will be capped at order size to prevent relatively 
small orders from skewing the metric.\732\ The Commission agrees with 
commenters that the general metric that will measure the cumulative 
number of shares executed regular way anywhere in the market may 
include liquidity that was not accessible to the reporting firm.\733\ 
Under the Exchange Act, national securities exchanges must provide fair 
access to displayed quotations.\734\ Therefore, the additional metric 
concerning the relative fill rate on national securities exchanges will 
provide a comparative metric based on displayed quotations that all 
firms will have had the ability to access.
---------------------------------------------------------------------------

    \730\ See Proposing Release, 88 FR 3786 at 3821-22 (Jan. 20, 
2023); final 17 CFR 242.605(a)(1)(iii)(B).
    \731\ See final 17 CFR 242.605(a)(1)(iii)(C).
    \732\ See id.
    \733\ See supra note 727 and accompanying text.
    \734\ See 15 U.S.C. 78f(b)(2), (4), (5), and (8). See also 17 
CFR 242.610.
---------------------------------------------------------------------------

IV. Summary Execution Quality Report

    Prior to the amendments, Rule 605 required market centers to 
produce detailed execution quality statistics and make this data 
available via large electronic data files, as required by the Rule 605 
NMS Plan.\735\ This detailed report was in machine-readable, rather 
than human-readable, format. The required format made the detailed 
report more suitable for further processing and analysis than for ready 
use by market participants and other interested parties. The Commission 
proposed in Rule 605(a)(2) that all market centers and larger broker-
dealers required to produce the detailed report pursuant to Rule 
605(a)(1) must also produce a summary execution quality report. After 
consideration of the comments, the Commission is adopting Rule 
605(a)(2), with modifications from the proposal, as described further 
below.
---------------------------------------------------------------------------

    \735\ See prior 17 CFR 242.605(a)(1) and (2); Rule 605 NMS Plan, 
at sections V and VI.
---------------------------------------------------------------------------

A. Proposed Approach

    Proposed Rule 605(a)(2) would have required every market center, 
broker, or dealer \736\ to make publicly available for each calendar 
month a report providing summary statistics on all executions of 
covered orders that are market orders and marketable limit orders that 
it received for execution from any person.\737\ The proposed summary 
report included a section for NMS stocks that are included in the S&P 
500 Index as of the first day of the month and a section for other NMS 
stocks, and within each section, each symbol would have been equally 
weighted based on share volume.\738\ The Commission proposed that each 
section of the report required by Rule 605(a)(2) contain the following 
summary statistics: (i) the average order size; (ii) the percentage of 
shares executed at the quote or better; (iii) the percentage of shares 
that received price improvement; (iv) the average percentage price 
improvement per order; (v) the average percentage effective spread; 
(vi) the average effective over quoted spread, expressed as a 
percentage; and (vii) the average execution speed, in 
milliseconds.\739\
---------------------------------------------------------------------------

    \736\ As described in section II.A supra, a broker or dealer 
that is not a market center is not subject to the reporting 
requirements of Rule 605(a)(1) or (2) 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.
    \737\ See Proposing Release, 88 FR 3786 at 3823 (Jan. 20, 2023).
    \738\ See id.
    \739\ See id. at 3823-24.
---------------------------------------------------------------------------

    The Commission proposed that the summary report be made available 
using the most recent version of the XML schema and the associated PDF 
renderer published on the Commission's website.\740\ The proposed 
schema would have been a set of custom XML tags and XML restrictions 
designed by the Commission to reflect the disclosures in proposed Rule 
605(a)(2).
---------------------------------------------------------------------------

    \740\ See id. at 3824; proposed Rule 605(a)(2). XML enables data 
to be defined, or ``tagged,'' using standard definitions. 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.
---------------------------------------------------------------------------

B. Final Rule and Discussion

    The Commission is adopting Rule 605(a)(2), with modifications from 
the proposal, to require that every market center, broker, or dealer 
produce a summary execution quality report in addition to the more 
detailed report required by Rule 605(a)(1).\741\ The summary report 
will enable market participants and other interested parties to have 
ready access to focused aggregated data that will allow them to compare 
some of the more significant aspects of the execution quality provided 
by specific market centers and larger broker-dealers. Moreover, by 
requiring market centers, brokers, and dealers to produce a summary 
report in addition to, rather than instead of, the more voluminous data 
called for by Rule 605(a)(1), those market participants or other 
observers that would like to perform more comprehensive or specific 
analyses of execution quality remain able to download the more granular 
underlying data files and perform such analyses.
---------------------------------------------------------------------------

    \741\ See final 17 CFR 242.605(a)(2).
---------------------------------------------------------------------------

    Several commenters supported the proposal to produce a summary 
report on the basis that investors would benefit from the greater 
access to execution quality data.\742\ A financial services firm stated 
that although some broker-dealers voluntarily publish summary-level 
execution quality reports on their websites, ``these ad hoc disclosures 
are not universal, and, in any event, generally feature statistics 
brokers prefer to `showcase' that may not reflect the

[[Page 26484]]

most meaningful measures of execution quality.'' \743\ According to 
this commenter, the proposal would address this ``coverage gap'' by 
requiring larger broker-dealers to make Rule 605 disclosures and giving 
customers of these larger broker-dealers ``a direct line of sight into 
broker-dealer performance.'' \744\ This commenter added that a 
``standardized summary report will provide retail investors with a 
comprehensible overview of the thousands of rows and dozens of columns 
that appear on Rule 605 reports today.'' \745\ Another financial 
services firm stated that a summary report ``will help investors more 
effectively evaluate competing broker offerings'' \746\ and that 
compliance and technology costs associated with enhanced Rule 605 
reporting ``are outweighed by the significant benefits to retail 
investors,'' including ``greater competition among firms to provide 
customers with strong execution quality.'' \747\
---------------------------------------------------------------------------

    \742\ See, e.g., Beddo Letter; Genco Letter; Pritchard Letter; 
Macarthur Letter; Varghese Letter; letter from Ian Marshall (Mar. 6, 
2023).
    \743\ Vanguard Letter at 4.
    \744\ Id.
    \745\ Id.
    \746\ Fidelity Letter at 8.
    \747\ Id.
---------------------------------------------------------------------------

    In contrast, other commenters, including broker-dealers, stated 
that a summary report could mislead investors, especially if the 
metrics required by Rule 605(a)(2) do not adequately account for 
differences in broker-dealer business models and customer bases.\748\ 
One broker-dealer stated that using the summary report to compare 
execution quality across broker-dealers ``without normalizing for 
different order activity ignores differences in the flow of orders 
handled by these brokers and other aspects of the services that brokers 
provide or offer, including fees, interest rates, commissions, ease of 
use, customer service, accessibility, tools, and educational resources, 
and therefore could be potentially misleading to individual 
investors.'' \749\ A financial services firm stated that the summary 
report ``needs additional descriptive statistics showing order flow 
attributes that can affect the comparability of execution quality 
statistics to enable a more accurate and useful measure of execution 
quality.'' \750\ This commenter also stated that ``retail brokers have 
vastly different client bases reflected in vastly different order flow 
characteristics, which affects execution quality'' and ``[t]hese 
differences need to be reflected in the Summary Report so that the 
individual investor has sufficient data to make an educated assessment 
of execution quality performance between different brokers.'' \751\ To 
address these concerns, this commenter suggested that the Commission 
add several metrics to the summary report ``to enable investors to 
accurately compare execution quality between different brokers''--
specifically, average notional order size, percentage realized spread, 
and percentage quoted spread.\752\
---------------------------------------------------------------------------

    \748\ See, e.g., SIFMA Letter II at 30; Virtu Letter II at 11; 
Rule 605 Citadel Letter at 5; Schwab Letter II at 30-31; Schwab 
Letter III at 2; Data Boiler Letter at 17-18; letter from Kelvin To, 
Founder and President, Data Boiler Technologies, LLC (Apr. 12, 2023) 
(``Data Boiler Letter II'') at 1.
    \749\ Virtu Letter II at 11. Another broker-dealer stated more 
generally that the Commission should account for ``retail client 
personas that vary considerably among broker-dealers,'' and these 
``differences cause execution quality data to be difficult to 
compare on an apples-to-apples basis because, for example, trade and 
execution data generated from buy-and-hold investors' orders differs 
vastly from the same data generated from active traders' orders.'' 
Letter from Steven M. Greenbaum, Senior Vice President and General 
Counsel, TradeStation Securities, Inc. (Mar. 30, 2023) 
(``TradeStation Letter'') at 7.
    \750\ Schwab Letter III at 2.
    \751\ Id.
    \752\ See id. at 2-3.
---------------------------------------------------------------------------

    The Commission acknowledges that differences in execution quality 
can be driven by differences between reporting entities other than 
differences in their skills at handling and/or executing orders, such 
as differences in the characteristics of their order flow. Any 
particular market center or broker-dealer's order flow may be made up 
of a different mixture of securities, order types, and order sizes, 
which may impact that market center or broker-dealer's execution 
quality statistics \753\ The Commission recognizes that it is important 
to strike a balance between sufficient aggregation of orders to produce 
statistics that are meaningful and sufficient differentiation of orders 
to facilitate fair comparisons of execution quality across reporting 
entities. After reviewing the comments received, the Commission is 
modifying the calculation of several proposed metrics and is also 
adding several new metrics to the final summary report. For example, 
the Commission agrees with a commenter's suggestion \754\ to add 
certain metrics--average notional order size, percentage realized 
spread, and percentage quoted spread--to the final summary report.\755\
---------------------------------------------------------------------------

    \753\ See Proposing Release, 88 FR 3786 at 3831 (Jan. 20, 2023).
    \754\ See Schwab Letter III at 2-3.
    \755\ See infra section IV.B.1.b) for additional discussion of 
these specific metrics.
---------------------------------------------------------------------------

    Although a commenter suggested that the summary reports be 
``normalized across brokers'' in order to reflect differences in order 
flow that may impact a broker's execution quality, including ``the 
difficulty of order flow the broker is handling,'' \756\ the commenter 
did not explain how the summary reports should be normalized. The 
changes to the proposed summary report will provide more information 
about a broker-dealer's order flow characteristics than originally 
proposed \757\ and will therefore enable users of the summary reports 
to better compare the execution quality metrics of broker-dealer firms 
with similar order flow characteristics and identify when different 
order flow characteristics may be contributing to differences in 
execution quality. Further, while the Rule 605(a)(2) summary report 
presents only one particular set of metrics related to execution 
quality, customers and other interested parties may also take into 
consideration other aspects of broker-dealer service, including but not 
limited to, fees, commissions, and educational resources, when 
comparing broker-dealers. In section IV.B.1.b) below the Commission 
discusses the specific execution quality statistics in detail.
---------------------------------------------------------------------------

    \756\ Virtu Letter II at 4.
    \757\ See infra note 833 and accompanying text.
---------------------------------------------------------------------------

    Another broker-dealer stated that the detailed Rule 605 reports are 
often difficult for retail investors to analyze.\758\ However, this 
commenter stated that the proposed solution--creating a high-level 
summary report--``could lead to retail investor confusion if the 
summary report does not adequately capture or explain the differences 
in order flow that are present across different market centers and 
broker-dealers.'' \759\ This commenter stated that it may make sense 
for the Commission to first implement the revisions to Rule 605(a)(1) 
and evaluate the detailed reports before working with FINRA, retail 
brokers, and retail investors to determine how best to produce a 
summary report that contains ``digestible and accurate execution 
quality information.'' \760\ The Commission does not agree with the 
commenter's approach. The Commission described the proposed summary 
report in detail in the Proposing Release, has considered comments 
related to the summary report, and is making changes in response to 
comments. The adopted summary report will improve the ability of 
investors and the public to view some of the more significant aspects 
of the execution quality provided by specific market centers and larger 
broker-dealers. Denying investors the opportunity to view a summary 
report

[[Page 26485]]

until after the detailed reports are fully implemented would entail 
unnecessary delay of the benefits the summary report is designed to 
provide.
---------------------------------------------------------------------------

    \758\ See Rule 605 Citadel Letter at 5.
    \759\ Id.
    \760\ See id.
---------------------------------------------------------------------------

    Finally, according to an individual investor, the information 
contained in the proposed summary report is not useful to investors, 
and ``[m]ost retail investors lack the knowledge and expertise to 
interpret these reports and use them to make informed trading 
decisions.'' \761\ In contrast, an investor advocacy group states it 
``does not agree with those who would argue that the proposed changes 
to disclosure of order execution will not benefit retail investors, who 
are unlikely to read the Rule 605 reports.'' \762\ This commenter 
stated that ``even though a certain percentage of retail investors may 
not read the Rule 605 reports, they will still benefit indirectly as 
the enhanced disclosure will promote competition, improve regulatory 
oversight, and facilitate use by third-party researchers and academics, 
who in turn can extract information from the reports and use it to 
expose issues and problems with today's order routing and execution 
practices.'' \763\ The Commission agrees with the investor advocacy 
group commenter and continues to view the summary report as a useful 
means to provide individual investors and other market participants 
with an overview of execution quality data. The summary report will aid 
investors by providing information in a more easily digestible format 
than the detailed Rule 605(a)(1) reports.
---------------------------------------------------------------------------

    \761\ Gillmore Letter.
    \762\ Better Market Letter at 9.
    \763\ Id. at 9-10.
---------------------------------------------------------------------------

    Moreover, the changes that the Commission is making to the summary 
report in response to commenters, including breaking out the statistics 
into notional size categories and adding average percentage realized 
and quoted spreads, will provide more information about the type of 
order flow received by the reporting entity. The increased amount of 
data required by final Rule 605(a)(2) will add some complexity to the 
adopted summary report as compared to the proposed summary report, 
however, based on such information, users of the report will be able to 
identify reporting entities with more comparable order flow and have 
greater context to understand the differences in execution quality 
statistics across market centers or broker-dealers with less comparable 
order flow.
    The summary report contains a selection of execution quality 
metrics for interested parties to assess, rather than imposing a single 
metric that might require a subjective judgment or obscure meaningful 
differences in execution quality among broker-dealers or market 
centers. Despite being an abbreviated overview of the more detailed 
Rule 605(a)(1) report, as with the detailed report, independent 
analysts, consultants, broker-dealers, the financial press, and market 
centers likely will respond to the needs of investors by analyzing the 
disclosures and producing even more digestible information using data 
from the summary report, so that the broader public, including those 
that may not read the summary report, will benefit.\764\ As with the 
Rule 605(a)(1) detailed report, if a market center or broker-dealer 
believes that the statistics do not fully reflect its order flow and 
execution practices, it is encouraged to make any additional 
information publicly available, outside of the summary report, that it 
believes will be helpful to investors and other market 
participants.\765\
---------------------------------------------------------------------------

    \764\ See Proposing Release, 88 FR 3786 at 3796 (Jan. 20, 2023); 
Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75419 (Dec. 1, 2000).
    \765\ Any such statements will be subject to applicable 
securities laws and regulations.
---------------------------------------------------------------------------

1. Required Information
    The Commission received comments discussing the calculation and 
utility of individual proposed statistics in the proposed summary 
report, along with comments recommending the addition of new statistics 
or requesting clarification or confirmation of how proposed statistics 
should be calculated, as described further below.\766\
---------------------------------------------------------------------------

    \766\ See, e.g., Rule 605 Citadel Letter; FIF Letter; Schwab 
Letter II.
---------------------------------------------------------------------------

    After review of the comments, the Commission is adopting the 
statistics in Rule 605(a)(2) largely as proposed, with modifications to 
the computation of certain statistics. The Commission is also adding 
new execution quality statistics to the summary report.\767\ For the 
reasons described in section IV.B.1.a) below, the Commission is not 
requiring that the summary report be equally weighted by symbol based 
on share volume. Section IV.B.1.b) below discusses each of the 
execution quality statistics in the summary report, including, where 
appropriate, how these statistics will be weighted. As described in 
section IV.B.1.b), the summary report will divide each of market and 
marketable limit orders into separate categories based on eight 
notional order size buckets plus an aggregated category for all orders 
with a notional value of less than $200,000.
---------------------------------------------------------------------------

    \767\ The Commission is including in the summary report the 
following metrics that were not in the Proposing Release's rule 
text: (i) average notional order size; (ii) for executions of 
covered orders, the average midpoint; (iii) for executions of 
covered order, the average percentage quoted spread; (iv) for 
executions of covered orders, the average percentage realized spread 
as calculated 15 seconds after the time of execution; and (v) for 
executions of covered orders, the average percentage realized spread 
as calculated 1 minute after the time of execution. These metrics 
are discussed in greater detail infra at section IV.B.1.b).
---------------------------------------------------------------------------

    The Commission agrees with one industry group that stated it is 
``important to ensure that the summary report provides the necessary 
information to allow for a fair comparison across reporting firms.'' 
\768\ The final summary report will provide statistics that are 
relevant to evaluating what type of pricing orders received, how 
quickly orders were executed, and what type of order flow the market 
center or broker-dealer received. As discussed further in section 
IV.B.1.b) below, the Commission is including several execution quality 
statistics beyond those included in the proposal to help ensure that 
the summary report provides sufficient information for a meaningful 
comparison across firms.
---------------------------------------------------------------------------

    \768\ FIF Letter at 22.
---------------------------------------------------------------------------

    Some commenters stated that any statistic included in the summary 
report or necessary to calculate a statistic in the summary report 
should also be included in the Rule 605(a)(1) report, so that the 
statistics in the summary report may be derived from the detailed Rule 
605(a)(1) report.\769\ The Commission agrees and, as discussed further 
below, is making conforming changes so that the Rule 605(a)(1) detailed 
report will contain all information necessary to be able to reconstruct 
the Rule 605(a)(2) summary report. In addition, market participants 
will be able to use the data contained in the Rule 605(a)(1) reports to 
create their own summary-level report with any adjustments that they 
find useful for comparison with and evaluation of a reporting entity's 
published summary report.
---------------------------------------------------------------------------

    \769\ See id. at 29; FIF Letter II at 9; FIF Letter III at 3; 
Schwab Letter II at 32; Schwab Letter III at 4.
---------------------------------------------------------------------------

    A broker-dealer suggested that the summary report may be more 
informative if it differentiated between retail investors and 
professional customers because the nature of each order flow is 
different and segmentation would allow retail investors to obtain 
execution quality statistics for similar types of orders.\770\ A 
financial services firm stated that the Commission ``should distinguish 
Rule 605 data by [s]egmented [o]rder and non-[s]egmented [o]rder flow 
and display this information separately in both the

[[Page 26486]]

detailed Rule 605 reports and the proposed Summary Reports.'' \771\ The 
Commission has decided not to revise the summary report to divide the 
report between retail investors and professionals or between segmented 
and non-segmented orders, as suggested by the commenters, for the same 
reasons that the Commission is not making corresponding changes to the 
reports required by Rule 605(a)(1).\772\
---------------------------------------------------------------------------

    \770\ See Rule 605 Citadel Letter at 8.
    \771\ Fidelity Letter at 9.
    \772\ See supra notes 172-174 and accompanying text; note 194 
and accompanying text.
---------------------------------------------------------------------------

    Another commenter argued that the summary report should limit the 
orders in the report to those with a notional value of less than 
$200,000.\773\ This commenter argued that the Commission in its 
economic analysis of the Order Competition Rule Proposing Release \774\ 
and the Proposing Release \775\ had limited the scope of retail order 
flow to orders of less than $200,000, to ``normalize order flow 
variables for analysis in order to meaningfully compare broker-dealers' 
execution quality.'' \776\ The commenter stated its belief that the 
summary report should likewise limit the report to orders of a notional 
value less than $200,000, ``which is a natural breakpoint between size 
categories.'' \777\ In response to this commenter's suggestion, as 
described in more detail in section IV.B.1.b) below, while the 
Commission is not establishing such a limit for the summary report as a 
whole, the Commission is adding execution quality information as 
divided by notional order size buckets, along with a row of execution 
quality information that aggregates all orders in a particular 
category, excluding orders with a notional value of $200,000 or more. 
This aggregated information will provide users of the summary report a 
means to compare among market centers' or broker-dealers' execution 
quality for orders less than $200,000.
---------------------------------------------------------------------------

    \773\ See Schwab Letter III at 4.
    \774\ See Order Competition Rule Proposing Release, 88 FR 128 at 
199 (Jan. 3, 2023) (Table 15--Regression Analysis Showing 
Relationship Between Execution Quality and PFOF in NMS Common Stocks 
and ETFs).
    \775\ See Proposing Release, 88 FR 3786 at 3839 (Jan. 20, 2023) 
(Table 3--Average Wholesaler Execution Quality Received by Retail 
Broker Quintiles, January-March 2022).
    \776\ Schwab Letter III at 4.
    \777\ Id.
---------------------------------------------------------------------------

(a) Weighting Method
    The Commission proposed that within each section of the summary 
report, each symbol would have been equally weighted based on share 
volume. The Commission stated in the Proposing Release that equal 
weighting of each symbol would facilitate the comparability of 
execution quality statistics among market centers or broker-dealers 
that receive for execution different mixes of stocks and prevent the 
nature of the stocks traded from making it more difficult to determine 
how the reporting entity performed with respect to execution quality 
for the particular mix of orders that it received for execution.\778\
---------------------------------------------------------------------------

    \778\ See Proposing Release, 88 FR 3786 at 3823 (Jan. 20, 2023).
---------------------------------------------------------------------------

    One industry group, however, stated that the summary report 
statistics should not be equally weighted by symbol based on share 
volume because this approach would result in misleading data being 
provided to customers.\779\ This commenter agreed with the Commission 
that the mix of symbols traded by a firm could impact its reported 
execution quality statistics, but was concerned that symbol-based 
weighting would create distortions that ``would significantly outweigh 
any potential benefits.'' \780\ The commenter recommended as an 
alternative that the Commission require each market center and broker-
dealer producing a summary report to include its weighted average 
execution price as a separate reportable item on the summary 
report.\781\ The commenter stated that its recommended approach would 
avoid the ``misleading data that would result from symbol-based 
weighting'' and ``customers can take a broker's weighted average 
execution price into account when reviewing the summary report data.'' 
\782\ This commenter further recommended that the same approach be used 
for weighting within and across symbols and, as described further 
below, that the Commission require the use of spread-based weighting 
for E/Q and share-based weighting for certain other statistics.\783\
---------------------------------------------------------------------------

    \779\ See FIF Letter at 25-26, 28. This commenter stated that 
one interpretation of ``equal weighting by symbol based on share 
volume'' is to use share-based weighting within each symbol and then 
symbol-based weighting across symbols, but requested clarification. 
See id. at 25. The Commission confirms that this explanation is 
consistent with the weighting method as proposed.
    \780\ See id. at 27.
    \781\ See id. The commenter stated that weighted average 
execution price would be computed as follows: first, for each 
individual execution, multiply the number of shares executed by the 
execution price; next, sum the results; and last, divide the result 
by the total number of shares executed. See id.
    \782\ Id.
    \783\ See id. at 23, 27, 28-32.
---------------------------------------------------------------------------

    After considering the comments, the Commission is not requiring 
that the summary report be equally weighted by symbol based on share 
volume as proposed.\784\ The Commission is persuaded that symbol-based 
weighting could cause distortions in cases where a reporting entity 
receives a significantly different volume of orders in one symbol as 
compared to another symbol,\785\ and these distortions potentially 
might not justify any potential benefit of utilizing this weighting 
method. As discussed further below, the Commission is not adding the 
share-weighted notional average execution price to the summary report 
as recommended by the commenter,\786\ but the Commission is adding 
average midpoint for order executions. Similar to the commenter's 
recommendation, this metric will provide information about whether a 
reporting entity's order flow was more heavily weighted towards lower-
priced stocks or higher-priced stocks. The summary report statistics 
will also utilize share-based weighting, instead of equally weighting 
by symbol based on share volume, except as discussed specifically 
below.
---------------------------------------------------------------------------

    \784\ See supra section III.B.4.d for a more detailed discussion 
of comments with respect to weighting of statistics in the detailed 
reports required under Rule 605(a)(1).
    \785\ See FIF Letter at 25-26 (providing a comparison between 
two hypothetical firms of average effective over quoted spread with 
symbol-based weighting).
    \786\ See supra note 781 and accompanying text.
---------------------------------------------------------------------------

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

[[Page 26487]]

proposal, as described below: (i) average notional order size; (ii) 
average midpoint; (iii) average percentage quoted spread; (iv) average 
percentage realized spread as calculated 15 seconds after the time of 
execution; and (v) average percentage realized spread as calculated 1 
minute after the time of execution.
    Average order size. The Commission proposed to include in the 
summary report a metric for average order size.\787\ As described 
below, the Commission is adopting this metric largely as proposed and 
adding a break-out of execution quality metrics by notional size bucket 
and an additional order size metric in response to comments.
---------------------------------------------------------------------------

    \787\ See Proposing Release, 88 FR 3786 at 3823-24 (Jan. 20, 
2023); proposed Rule 605(a)(2)(i).
---------------------------------------------------------------------------

    One industry group recommended that ``average order size in shares 
for the summary report be calculated (for the covered orders that must 
be reported in the summary report) by dividing the aggregate number of 
shares of covered orders by the number of orders.'' \788\ This 
commenter further recommended adding ``average order size in notional 
value'' to the summary report, which ``can be calculated by a reporting 
firm (for the covered orders that must be reported in the summary 
report) by dividing the aggregate notional value of covered orders by 
the number of orders.'' \789\ A couple of financial services firms also 
recommended presenting order-size categories in the summary report by 
average notional order size instead of lot size.\790\ One of these 
commenters stated that order notional sizes provide investors a clearer 
view of the execution experience associated with their order, are more 
easily compared over time, are more representative of the cost to 
implement different types of trades, and are more consistent with 
increased market use of fractional/notional trading.\791\ Similarly, 
the other commenter stated its belief that including ``average notional 
order size'' \792\ in the summary report alongside average order size 
in shares would allow a user of the summary report to calculate another 
metric, ``average price per share,'' by dividing ``average notional 
order size'' by ``average share order size.'' \793\
---------------------------------------------------------------------------

    \788\ FIF Letter II at 11.
    \789\ Id. This commenter also stated that notional value should 
be obtained by multiplying the number of shares by the midpoint at 
the time of order receipt. See id.
    \790\ See Fidelity Letter at 9; Schwab Letter III at 3.
    \791\ See Fidelity Letter at 9.
    \792\ This commenter would calculate ``average notional order 
size'' by multiplying the number of shares by the midpoint at the 
time of order entry. See Schwab Letter III at 3.
    \793\ See id.
---------------------------------------------------------------------------

    After reviewing the comments, the Commission is retaining the 
``average order size'' metric in the summary report largely as proposed 
with a modification to state that average order size will be reported 
in number of shares because the proposed rule was ambiguous about 
whether average order size would have been measured in number of shares 
or notional value.\794\ The average order size in shares is relevant to 
understanding the relative size of the orders that the reporting market 
center, broker, or dealer received for execution.
---------------------------------------------------------------------------

    \794\ See final 17 CFR 242.605(a)(2)(i).
---------------------------------------------------------------------------

    However, the Commission also agrees with commenters that the 
average order size in notional value is relevant to understanding 
relative order size. For example, one broker-dealer stated that certain 
orders may be harder to execute, ``for example, when market liquidity 
is scarce or when the customers have difficult (e.g., large-sized) 
orders to execute.'' \795\ The Commission agrees with commenters that 
differences in a firm's execution quality metrics may correspond to 
differences in order flow. In particular, smaller orders may receive 
different execution quality than larger orders because, among other 
things, available liquidity in a particular security at a particular 
price is more likely to be sufficient to fill a smaller order. 
Therefore, the Commission is modifying the proposed summary report to: 
(1) add a metric for average notional order size; \796\ and (2) require 
categorization of the data by notional order size.\797\ Dividing 
execution quality statistics in the summary reports according to 
notional order size buckets provides investors with a more nuanced 
means to differentiate between firms and allows for comparison of 
execution quality statistics for more similar orders. Moreover, the 
average notional order size metric provides important context for where 
a firm's orders tend to fall within the range of a particular notional 
order size bucket.
---------------------------------------------------------------------------

    \795\ Virtu Letter II at 11.
    \796\ See final 17 CFR 242.605(a)(2)(ii). An industry group 
recommended that average order size in notional value be calculated 
``by dividing the aggregate notional value of covered orders by the 
number of orders.'' FIF Letter II at 11. Average order size in 
notional value will be calculated as the cumulative notional value 
of covered orders divided by the total number of orders, as 
recommended by the commenter. As discussed above, the Commission is 
adopting a requirement that the detailed reports required by Rule 
605(a)(1) include a cumulative notional value of covered orders 
metric so that average order size in notional value can be 
calculated from the summary report. See supra notes 376-378 and 
accompanying text.
    \797\ See final 17 CFR 242.605(a)(2).
---------------------------------------------------------------------------

    With respect to the categorization of the data by notional order 
size, the statistical information in the summary reports for market 
orders and marketable limit orders is divided into eight notional order 
size ranges: less than $250; $250 to less than $1,000; $1,000 to less 
than $5,000; $5,000 to less than $10,000; $10,000 to less than $20,000; 
$20,000 to less than $50,000; $50,000 to less than $200,000; and 
$200,000 or more. These notional order size ranges correspond with the 
notional order size ranges that are used in the detailed reports 
required pursuant to Rule 605(a)(1).\798\ As discussed in section 
III.B.1.b) above, the Commission selected these notional order size 
ranges based on its analysis of CAT data and comments received. 
Moreover, using the same notional order size ranges for the detailed 
reports and summary reports allows the statistics in the summary 
reports to be derived from the detailed reports as suggested by 
commenters.
---------------------------------------------------------------------------

    \798\ See supra section III.B.1.b). The Commission is not 
adopting commenters' suggestion that the notional value of an order 
should be based on the midpoint. See supra notes 789, 792. Instead, 
the notional value of a market or limit order will be calculated in 
the same manner for the summary report as it is for the detailed 
report. See supra note 361 and accompanying text.
---------------------------------------------------------------------------

    As an additional measure of categorization by notional order size, 
the summary report also includes overall statistics for non-block size 
market and marketable limit orders--i.e., the statistics in this row 
are not divided by notional order size range but only include orders 
smaller than $200,000 in notional value. Capping these overall 
statistics at $200,000 will prevent extremely large, block size orders 
from skewing the averages. It will also provide an accessible snapshot 
of information for investors. Providing overall execution quality 
statistics will balance providing more detailed execution quality data 
to market participants with providing an overview of a market center's 
or broker-dealer's execution quality in a more readily digestible form 
for investors, other market participants, or interested parties.
    Finally, because average order size in both shares and notional 
value are the average order size received rather than executed, the 
Commission is modifying the first sentence of Rule 605(a)(2) to remove 
the words ``executions of'' in the clause referring to summary report 
``providing summary statistics on all executions of covered orders that 
are

[[Page 26488]]

market and marketable limit orders.'' \799\ Instead, to avoid any 
ambiguity about how each of the statistics are calculated, the 
Commission is specifying where individual data elements apply to 
executions of covered orders, as described below.\800\
---------------------------------------------------------------------------

    \799\ See Proposing Release, 88 FR 3786 at 3823-24 (Jan. 20, 
2023); proposed Rule 605(a)(2).
    \800\ See final 17 CFR 242.605(a)(2).
---------------------------------------------------------------------------

    Percentage of shares executed at the quote or better and percentage 
of shares that received price improvement. The Commission proposed to 
include in the summary report metrics for the percentage of shares 
executed at the quote or better and percentage of shares that received 
price improvement and is adopting these metrics as proposed.\801\ One 
industry group stated that there is no need to reference ``equal 
weighting by share volume,'' or any other weighting methodology with 
respect to the ``percentage of shares executed at the quote or better'' 
or ``percentage of shares that received price improvement'' metrics, 
because the weighting is clearly understood from the data element 
itself.\802\ The Commission agrees that these metrics are weighted 
based on the number of shares executed and that reporting entities will 
understand this based on the metric as proposed. The Commission is 
adopting these statistics as proposed, while clarifying in the rule 
text that the statistics apply to executions of covered orders. These 
statistics will provide useful information for evaluating what type of 
pricing orders received.
---------------------------------------------------------------------------

    \801\ See Proposing Release, 88 FR 3786 at 3823-24 (Jan. 20, 
2023); proposed Rule 605(a)(2)(ii) and (iii); final 17 CFR 
242.605(a)(2)(iv) and (v).
    \802\ See FIF Letter at 31. This commenter stated that 
``percentage of shares executed at the quote or better'' would be 
calculated by dividing the total shares executed at the quote or 
better by the total shares executed, and ``percentage of shares that 
received price improvement'' would be calculated by dividing the 
total number of shares executed with price improvement by the total 
number of shares executed. See id.
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    Share-weighted average percentage price improvement. The Commission 
proposed to include a metric in the summary report for share-weighted 
average percentage price improvement per order.\803\ As described 
below, the Commission is adopting this metric largely as proposed and 
adding a related metric to the detailed report. One industry group 
stated that it will assume that the proposed metric ``average 
percentage price improvement per order'' is intended to report price 
improvement as a percentage of the midpoint (as of the time of order 
receipt) and further recommended that average price improvement be 
share-weighted.\804\ In addition, for clarity, this commenter 
recommended that the metric be labeled as ``share-weighted average 
percentage price improvement'' and the words ``per order'' be removed 
from the text of proposed Rule 605(a)(2)(iv).\805\
---------------------------------------------------------------------------

    \803\ See Proposing Release, 88 FR 3786 at 3823-24 (Jan. 20, 
2023); proposed Rule 605(a)(2)(iv).
    \804\ See FIF Letter at 28-29. See also FIF Letter III at 3 
(``FIF members understand [`share weighted average percentage price 
improvement'] to mean the share-weighted price improvement divided 
by the share-weighted midpoint.'').
    \805\ See FIF Letter at 29. This commenter also recommended that 
the Commission add a column to the detailed Rule 605(a)(1) report 
that would provide the share-weighted average midpoint for each row, 
so that the market center or broker-dealer could derive the 
denominator for the share-weighted average percentage price 
improvement calculation. See id. See also FIF Letter II at 10; FIF 
Letter III at 3.
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    Average percentage price improvement will be measured as a 
percentage of the midpoint of the national best bid and national best 
offer at the time of order receipt.\806\ In other words, average 
percentage price improvement is the share-weighted average price 
improvement for orders executed divided by the share-weighted average 
midpoint at the time of order receipt for those orders. The Commission 
agrees with the commenter that further clarity in this regard would be 
useful. Therefore the Commission is renaming this metric from the 
proposal to refer to the ``share-weighted average percentage price 
improvement,'' as suggested by the commenter, so that the use of share-
based weighting is explicit, clarifying in the rule text that the 
share-weighted average percentage price improvement applies to 
executions of covered orders, and specifying that this statistic is 
calculated as the cumulative amount that prices were improved less the 
cumulative amount that prices were executed outside the quote divided 
by sum of the average midpoint times the number of shares 
executed.\807\ In addition, as suggested by the commenter,\808\ the 
Commission is requiring that the Rule 605(a)(1) detailed report include 
an additional column setting forth the average midpoint for executions 
of covered orders.\809\ The new defined term for ``average midpoint'' 
refers to the share-weighted average of the midpoint of the NBB or NBO 
at the time of order receipt (or, for non-marketable limit orders, 
beyond-the midpoint limit orders, and orders submitted with stop 
prices, at the time such orders first become executable).\810\ The 
inclusion of average midpoint for executions of covered orders in the 
Rule 605(a)(1) detailed report will enable users to derive the share-
weighted average percentage price improvement.\811\
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    \806\ See final 17 CFR 242.605(a)(2)(vi).
    \807\ See final 17 CFR 242.605(a)(2)(vi) and final 17 CFR 
242.600(b)(9) (defining average midpoint). The cumulative amount 
that prices were improved is derivable from the Rule 605(a)(1) 
reports by multiplying, for each row, the cumulative number of 
shares of covered orders executed with price improvement (required 
by Rule 605(a)(1)(ii)(E)) by the share-weighted average amount per 
share that prices were improved (required by Rule 605(a)(1)(ii)(F)). 
Similarly, the cumulative amount that prices were executed outside 
the quote is derivable by multiplying, for each row, the cumulative 
number of shares of covered orders executed outside the quote 
(required by Rule 605(a)(1)(ii)(J)) by the share-weighted average 
amount per share that prices were outside the quote (required by 
Rule 605(a)(1)(ii)(K)). The numerator will be the total cumulative 
price improvement for every included row, less the total cumulative 
amount the prices were executed outside the quote for every included 
row. The denominator is derivable from the Rule 605(a)(1) reports by 
multiplying, for each row, the total number of shares executed 
(i.e., the sum of the share counts required by Rule 605(a)(1)(i)(E) 
and (F)) by the average midpoint (required by Rule 605(a)(1)(i)(Y)). 
The denominator will be the sum of the total for every included row.
    \808\ See supra note 805.
    \809\ See supra note 591 and accompanying text.
    \810\ See final 17 CFR 242.600(b)(9). The average midpoint for 
order executions represents the same calculation as the denominator 
for the percentage-based spread statistics as proposed. See supra 
notes 588-591 and accompanying text.
    \811\ See final 17 CFR 242.605(a)(1)(i)(Y).
---------------------------------------------------------------------------

    Average percentage effective spread. The Commission proposed to 
include in the summary report a metric for the average percentage 
effective spread.\812\ The Commission is adopting the metric largely as 
proposed. One industry group stated in connection with the summary 
report that it agrees with the approach proposed by the Commission for 
calculating average percentage effective spread.\813\ As discussed 
above, the Commission is modifying the definition of ``average 
percentage effective spread'' from the definition of such term in the 
proposal to make use of other defined terms.\814\ Although the adopted 
metric in the summary report utilizes the new definition of ``average 
percentage effective spread,'' the metric itself is unchanged and the 
Commission is clarifying in the rule text that the metric applies to 
executions of covered orders.\815\
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    \812\ See Proposing Release, 88 FR 3786 at 3823-24 (Jan. 20, 
2023); proposed Rule 605(a)(2)(v).
    \813\ See FIF Letter at 29. The commenter also recommended that 
for clarity the metric be retitled as ``share-weighted average 
percentage effective spread.'' See id. The Commission disagrees with 
the commenter that this additional language is needed because the 
adopted definition of ``average percentage effective spread'' 
includes the use of share-weighting. See final 17 CFR 
242.600(b)(10).
    \814\ See supra section III.B.4.b)(2). The ``average percentage 
effective spread'' is calculated as the average effective spread for 
order executions divided by the average midpoint for order 
executions. See final 17 CFR 242.600(b)(10).
    \815\ See final 17 CFR 242.605(a)(2)(vii). As discussed above, 
the Commission is adding a statistic for average midpoint for order 
executions to the detailed report so that the percentage-based 
spread statistics in the summary report can be derived from the 
detailed report. See supra notes 588-591 and accompanying text.

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[[Page 26489]]

    Average effective spread divided by average quoted spread (E/Q). 
The Commission proposed to include a metric in the summary report for 
average effective spread over average quoted spread, expressed as a 
percentage.\816\ As discussed below, the Commission is adopting this 
metric largely as proposed and adding a metric for average quoted 
spread. As discussed above, several commenters stated that the 
Commission should require firms to calculate average E/Q utilizing 
spread-based, rather than share-based, weighting.\817\ One industry 
group recommended that the summary report include the share-weighted 
average percentage quoted spread, in addition to the share-weighted 
average effective spread.\818\ This commenter stated that with these 
statistics any person could derive effective over quoted spread and so 
it would not be necessary to include E/Q in the summary report.\819\ A 
financial services firm also suggested that the summary report include 
``percentage quoted spread,'' to be calculated by dividing the quoted 
spread by the midpoint of the NBB and NBO at the time of order 
entry.\820\ This commenter stated that ``[i]n addition to providing 
transparency into the mix of each broker's order flow, including this 
metric will allow users to confirm the E/Q calculation on the Summary 
Report by dividing Percentage Effective Spread by Percentage Quoted 
Spread.'' \821\ This commenter also suggested that the summary report 
show effective spread and quoted spread and then allow individuals to 
compute their own E/Q from those two numbers.\822\
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    \816\ See Proposing Release, 88 FR 3786 at 3823-24 (Jan. 20, 
2023); proposed Rule 605(a)(2)(vi).
    \817\ See supra notes 600-608 and accompanying text.
    \818\ See FIF Letter at 29.
    \819\ See id. This commenter stated that if average percentage 
effective spread and quoted spread are reported then a person could 
derive the average percentage price improvement for the summary 
report. See id.
    \820\ See Schwab Letter III at 3.
    \821\ Id.
    \822\ See Schwab Letter II at 31.
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    After reviewing the comments, the Commission is: (1) adopting 
average E/Q as a metric on the summary report largely as proposed, 
while adjusting the weighting methodology from share-based weighting to 
spread-based weighting as suggested by commenters; \823\ and (2) adding 
average percentage quoted spread as a metric in the summary report, 
also as suggested by commenters.\824\ The Commission is also stating in 
the rule text for clarity that these metrics apply to executions of 
covered orders.\825\ As discussed above, requiring spread-based 
weighting for the E/Q statistics will provide a consistent measure of 
E/Q that will not vary based on the specific symbols to which price 
improvement is allocated and thereby will facilitate the comparability 
of price improvement statistics.\826\ Further, even though market 
participants and other interested parties could calculate E/Q on their 
own if the summary report includes average effective spread and average 
quoted spread, there is additional utility in having the average E/Q 
readily accessible on the summary report, particularly because market 
participants often use E/Q as a measure of execution quality.\827\ The 
inclusion of average quoted spread on the summary report will provide 
another metric that users of the summary report may use to understand 
the nature of the reporting firm's order flow.
---------------------------------------------------------------------------

    \823\ To implement the change in weighting methodology, the 
Commission is modifying the description of the average E/Q metric to 
specify that it is average effective spread divided by average 
quoted spread. As is the case with the average E/Q statistics in the 
detailed report required by Rule 605(a)(1), this description of the 
average E/Q statistic for the summary report makes use of adopted 
defined terms for ``average effective spread'' and ``average quoted 
spread.'' See supra notes 613-615 and accompanying text. See also 
final 17 CFR 242.605(a)(2)(ix); final 17 CFR 242.600(b)(8); final 17 
CFR 242.600(b)(12). In contrast, the Commission proposed to utilize 
a defined term for ``average effective over quoted spread,'' which 
would have required the calculation of the E/Q for each transaction 
that would have then been averaged over a month, as weighted by 
number of shares. See Proposing Release, 88 FR 3786 at 3817 (Jan. 
20, 2023).
    \824\ See final 17 CFR 242.605(a)(2)(viii) (requiring that 
average percentage quoted spread be included as a metric in the 
summary report and providing that average percentage quoted spread 
means the average quoted spread for order executions divided by the 
average midpoint for order executions).
    \825\ See final 17 CFR 242.605(a)(2)(viii) and (ix).
    \826\ See supra notes 617-620 and accompanying text.
    \827\ See Proposing Release, 88 FR 3786 at 3970 (Jan. 20, 2023).
---------------------------------------------------------------------------

    Average execution speed in milliseconds. The Commission proposed to 
include a metric in the summary report for average execution speed in 
milliseconds and is adopting this metric largely as proposed.\828\ An 
industry group stated its understanding that the calculation of 
``average execution speed in milliseconds'' would proceed as follows: 
first, for each individual execution multiply the shares executed by 
the time to execution; second, sum the results; and finally, divide 
that sum by the total shares executed.\829\ The Commission confirms 
that reporting entities will calculate the metric as stated by the 
commenter and to add clarity to the rule text is specifying that this 
metric applies to executions of covered orders and is a share-weighted 
average.\830\ The proposed metric is relevant to evaluating how quickly 
orders were executed, and the Commission therefore has decided to adopt 
the metric as proposed.\831\
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    \828\ See id. at 3823-24; proposed Rule 605(a)(2)(vii); final 17 
CFR 242.605(a)(2)(xii).
    \829\ See FIF Letter at 31.
    \830\ The time-to-execution statistics in the detailed report 
required by Rule 605(a)(1) similarly utilize a share-weighted 
average. See final 17 CFR 242.605(a)(1)(ii)(G), (I), (L); final 17 
CFR 242.605(a)(1)(iii)(D).
    \831\ A broker-dealer suggested that the Commission should only 
require execution-time statistics for market orders because 
marketable limit orders may be partly executed or may exceed the 
consolidated quote size. See Rule 605 Citadel Letter at 10. The 
summary report will include average execution speed for market and 
marketable limit orders. The Commission is retaining average 
execution speed for marketable limit orders in the summary report 
for the same reasons that the Commission is retaining execution-time 
statistics for marketable limit orders in the detailed report 
required by Rule 605(a)(1). See supra section III.B.3.b.
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    Additional statistics in the summary report. In the Proposing 
Release, the Commission solicited comment on whether any additional 
execution quality statistics required under proposed Rule 605(a)(1) 
should be included as an aggregated statistic in the summary 
report.\832\ As described below, in consideration of these comments, 
the Commission is adding to the summary report metrics for average 
realized spread as calculated at 15 seconds and 1 minute from time of 
execution, and a metric for the average midpoint.
---------------------------------------------------------------------------

    \832\ See Proposing Release, 88 FR 3786 at 3825. (Jan. 20, 
2023).
---------------------------------------------------------------------------

    An industry group stated that order flow characteristics such as 
the amount of ``informed'' order flow received by a broker-dealer and 
the size of an order relative to the average daily volume of a stock 
are factors outside of the control of order-handling parties but can 
impact the amount of price improvement received.\833\ This commenter 
further stated that the impact of these order flow characteristics 
could be measured in part through statistics such as realized spread 
and price impact and thus recommended that the Commission require firms 
to include in the summary report the weighted-average realized spread 
at 15 seconds and at 1 minute after the time of execution.\834\ A 
financial services firm also suggested that percentage realized spread 
be included in the summary report statistics and argued that this 
``simple addition would provide better transparency regarding the 
distinct

[[Page 26490]]

characteristics of order flow among brokers which, in turn, affects the 
average execution quality metrics on the reports.'' \835\ Both 
commenters stated that a person reviewing the summary report could 
calculate the price impact based on the realized spread and the 
effective spread.\836\
---------------------------------------------------------------------------

    \833\ See FIF Letter at 31.
    \834\ See id. at 32.
    \835\ Schwab Letter III at 3.
    \836\ See FIF Letter at 32; Schwab III Letter at 3.
---------------------------------------------------------------------------

    The Commission agrees with the commenters that viewing the average 
realized spread in the summary report will be useful to investors. The 
average realized spread metrics for 15 seconds and 1 minute after the 
time of execution were proposed for inclusion in the detailed report 
required pursuant to Rule 605(a)(1) and will similarly allow users of 
the summary report to differentiate between various types of order 
flow.\837\ Moreover, because the final Rule 605(a)(1) detailed report 
requires the calculation of average realized spread at multiple time 
horizons, including 15 seconds and 1 minute, adding these two time 
horizons for average realized spread to the summary report should 
impose a minimum burden on reporting entities. Therefore, the 
Commission is requiring that the summary report include, for executions 
of covered orders, both the average percentage realized spread as 
calculated 15 seconds after the time of execution and the average 
percentage realized spread as calculated 1 minute after the time of 
execution.\838\
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    \837\ See supra section III.B.4.a)(2) for a discussion of the 
utility of the realized spread statistic.
    \838\ See final 17 CFR 242.605(a)(2)(x) and (xi). As discussed 
above, the Commission is adding a statistic for average midpoint for 
order executions to the detailed report so that the percentage-based 
spread statistics in the summary report can be derived from the 
detailed report. See supra notes 589-592 and accompanying text.
---------------------------------------------------------------------------

    An industry group further suggested adding share-weighted average 
execution price as a metric to the summary report.\839\ Although the 
Commission agrees with the commenter that the share-weighted average 
execution price could provide useful information, average execution 
price is not a metric included in the detailed report required by Rule 
605(a)(1) and therefore if this statistic were included in the summary 
report it would not be derivable from the detailed report, contrary to 
commenters' suggestions that the metrics in the summary report should 
be derivable. Therefore, the Commission is adding to the summary report 
a metric for average midpoint for executions of covered orders because 
this metric will be included in the detailed report so that other 
summary report statistics will be derivable from the detailed report 
and, similar to share-weighted average execution price, average 
midpoint provides information about the mix of stocks represented in 
the reported statistics.\840\ Thus, the inclusion of the average 
midpoint will provide those using the summary report for comparison 
purposes with a means to assess whether differences in the price mix of 
stocks could be a factor affecting other execution quality statistics 
of reporting entities.
---------------------------------------------------------------------------

    \839\ See FIF Letter at 27.
    \840\ See final 17 CFR 242.605(a)(2)(iii). Pursuant to the 
definition of ``average midpoint,'' average midpoint for order 
executions is a share-weighted average. See final 17 CFR 
242.600(b)(9).
---------------------------------------------------------------------------

2. Required Format
    As discussed below, commenters supported the production of the 
summary report in a human-readable format. A financial services firm 
supported the proposal to require a standardized summary report in a 
``user-friendly format.'' \841\ A national securities exchange stated 
that the proposed format would make the data in the summary reports 
accessible to a wider audience in a standard format to facilitate 
comparisons.\842\ However, one academic believed that while the 
proposed summary reports ``are most important,'' the Commission's 
proposal ``did not clearly display what the summary reports would look 
like.'' \843\ Finally, one industry group recommended that CSV,\844\ or 
another format that could be copied into a spreadsheet software 
program, be used in place of XML for the summary report. According to 
the commenter, using CSV ``would allow investors to compare summary 
data across firms more readily.'' \845\
---------------------------------------------------------------------------

    \841\ See Vanguard Letter at 4.
    \842\ See Nasdaq Letter at 46.
    \843\ Angel Letter at 3. This commenter stated that additional 
efforts need to be made to make sure that the summary reports are 
``human-friendly'' and provide useful data for comparing brokers. 
See id.
    \844\ A CSV (comma-separated values) file is a text file in 
which commas separate the values in each row.
    \845\ FIF Letter at 5, 32.
---------------------------------------------------------------------------

    After review of the comments, the Commission is requiring the use 
of PDF format as proposed and modifying proposed Rule 605(a)(2) to 
require that market centers and broker-dealers also produce the summary 
report in CSV format instead of XML format as suggested by the 
commenter.\846\ Making the summary report available in these file 
formats will allow market centers and broker-dealers to efficiently 
prepare the summary reports. In addition, investors and other members 
of the public will benefit from being able to access the summary report 
in multiple formats. Presently, it is challenging for individual 
investors to decipher and analyze the detailed Rule 605(a)(1) report. 
These individual investors will be more readily able to use a summary 
report to make a more informed choice about selection of a broker-
dealer than they can now. Because the summary report is human-readable 
in PDF format, individual investors will be able to assess the data by 
reviewing and comparing summary reports without needing technical 
expertise or relying on an intermediary. Further, independent analysts, 
consultants, and the financial press may also analyze the summary 
reports to provide more information to individual investors, including 
those who do not themselves access the summary reports.
---------------------------------------------------------------------------

    \846\ See final 17 CFR 242.605(a)(2). Rule 605(a)(4) does not 
apply to the summary report required by Rule 605(a)(2). This is 
because final Rule 605(a)(2) requires the use of the Commission's 
schema for CSV format and associated PDF renderer, and therefore the 
Rule 605 NMS Plan does not establish the formats and fields for the 
summary report. Further the summary report is not included in Rule 
605(a)(4) because the procedures for preparation and posting of the 
summary report under Rule 605(a)(2) are contained in Rule 605(a)(2), 
which sets forth the necessary format for the summary report, and 
Rule 605(a)(5), which requires internet posting.
---------------------------------------------------------------------------

    The Commission further agrees with the industry group commenter 
that investors will benefit from the summary report being provided in 
CSV format and has modified proposed Rule 605(a)(2) to require that the 
summary report required therein be provided in CSV format, instead of 
XML, and also provided using the associated PDF renderer. As would have 
been the case using XML, the requirement to use the Commission's schema 
for CSV format will result in the summary report data being provided in 
a format that is structured and machine-readable, which allows users to 
more easily process and analyze the data, and provides consistency of 
format across reports. Requiring a CSV file format also provides market 
participants and other interested parties with a simple and versatile 
format that is viewable in many programs. Like XML (and PDF), CSV is 
``open standard,'' which is a term that is generally applied to 
technological specifications that are widely available to the public, 
royalty-free, at no cost. However, the Commission agrees with the 
commenter that a CSV file format may allow investors and other members 
of the public to compare summary data across firms more readily than 
XML. Investors and other members of the public may find a CSV file 
format preferable to an XML file format because the data can be more 
readily viewed and analyzed in widely used spreadsheet applications.

[[Page 26491]]

Because the Rule 605 summary report consists solely of a series of 
discrete numeric values in a fixed tabular layout, and does not contain 
elements in nested structures, the sophisticated validations that XML 
enables would not have provided significant benefits for the Rule 605 
summary report.\847\ Instead, the CSV format, which yields much smaller 
file sizes and therefore more efficient processing and storage of data 
than the XML format, is equally capable of handling the Rule 605 
summary report content. The increased usability of the CSV file format 
will be more relevant to investors and other members of the public 
viewing and analyzing the summary report than the broader technical 
coverage of XML. Therefore, the Commission is requiring the use of a 
schema for CSV format rather than an XML schema. Further, the 
requirement that the same data be provided through the use of a PDF 
renderer helps ensure that the summary report is also available in a 
human-readable format and consistently presented across operating 
systems and applications.
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    \847\ See also infra sections IX.D.1.b)(3) and IX.E.4.b).
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3. Investor Testing and Education
    An industry group and an association of securities regulators both 
strongly encouraged the Commission to provide investor education or 
testing to ensure that the summary report is useful.\848\ In addition, 
an academic stated that additional effort needs to be made to make sure 
the summary report is ``human-friendly and provide[s] useful data for 
comparing brokers.'' \849\ The industry group further stated that ``the 
industry has expended significant effort and resources to ensure that 
retail investors have access to educational materials and support 
necessary to best inform their use of broker-dealer services'' and 
stated that the Commission was in the best position to educate 
investors about the use of summary reports.\850\ This commenter 
suggested providing educational resources to retail investors that 
would help them understand the summary reports and how such information 
can be used to inform their investment decisions.\851\ This commenter 
also suggested that investors should understand how to interpret 
varying data in order to facilitate the most accurate cross-comparisons 
between broker-dealers' execution quality.\852\ The association of 
securities regulators suggested testing the summary report with 
investors prior to implementation, such as through focus groups, to 
confirm that the summary report provides useful information for retail 
investors.\853\ An individual supported investor testing and investor 
roundtables for all equity market system rules recently proposed by the 
Commission.\854\ Several individuals suggested that the Commission 
should provide clear guidance on how to read and interpret the amended 
Rule 605 reports.\855\
---------------------------------------------------------------------------

    \848\ See SIFMA Letter II at 30; NASAA Letter at 6.
    \849\ See Angel Letter at 3.
    \850\ See SIFMA Letter II at 30.
    \851\ See id. In particular, one commenter suggested educating 
investors on price impact (as defined in the Order Competition 
Proposal). See Schwab Letter II at 31.
    \852\ See SIFMA Letter II at 31.
    \853\ See NASAA Letter at 6.
    \854\ See letter from Andrew (Mar. 31, 2023).
    \855\ See Letter Type G at https://www.sec.gov/comments/s7-29-22/s72922.htm (suggesting this guidance ``especially for retail 
investors who may not have a deep understanding of the markets'').
---------------------------------------------------------------------------

    The Commission does not agree that prescribed testing or investor 
focus groups or roundtables are needed at this time. Rule 605 has been 
in existence for over two decades. Although larger broker-dealers will 
be required to produce the detailed report under Rule 605(a)(1) for the 
first time, and both market centers and larger broker-dealers will be 
required to create and post a summary report under Rule 605(a)(2) for 
the first time, investors should be broadly familiar with many of the 
execution quality metrics that the summary report is intended to 
highlight. Further, many commenters, including individuals, supported 
the proposed summary report as it provides greater access to execution 
quality data.\856\ Notwithstanding any potential insights into the Rule 
605 reports that could be gained from testing or focus groups, delay in 
the adoption of final Rule 605 would delay the benefits of the 
amendments from accruing.
---------------------------------------------------------------------------

    \856\ See supra note 742.
---------------------------------------------------------------------------

    Some commenters suggested that the Commission directly provide 
educational resources to individual investors related to the final Rule 
605 amendments. However, many market participants, in addition to the 
Commission,\857\ have undertaken efforts to educate retail investors 
about securities trading and how to compare broker-dealer execution 
quality, and the Commission expects that these initiatives will 
continue to inform retail investors about means to evaluate their 
broker-dealers' performance, including the utilization of summary 
report statistics. Individual broker-dealers may provide their own 
educational resources addressing Rule 605 directly to their customers 
and other market participants and customers of broker-dealers may ask 
their broker-dealers questions about the Rule 605 reports. Likewise, 
broker-dealers can provide information about their firms and the nature 
of their order flow on their websites or through other communications 
to customers. Further, as stated above, third parties, including 
analysts, researchers, and the financial press, may also use the 
summary reports to analyze and compare execution quality across broker-
dealers or market centers and provide such information to individual 
investors in different formats that provide individual investors with 
alternative ways to engage with Rule 605 data. The Commission therefore 
does not believe it is necessary to prescribe investor education at 
this time. However, the Commission will monitor the implementation of 
Rule 605, including with regard to whether additional information about 
investor use or analysis of the summary report would be helpful.
---------------------------------------------------------------------------

    \857\ See, e.g., https://www.sec.gov/education/investor-education, https://www.investor.gov/introduction-investing/investing-basics/how-stock-markets-work/executing-order. The 
Commission's Office of Investor Education and Advocacy regularly 
posts investor alerts and bulletins. In addition, Investor.gov is an 
online resource from the Commission's Office of Investor Education 
and Advocacy to help individual investors ``make sound investment 
decisions and avoid fraud.'' See https://www.investor.gov/about-us.
---------------------------------------------------------------------------

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

A. Proposed Approach

    Prior to these amendments, the requirements for the dissemination 
of the market center report required by Rule 605 were set forth in 
paragraphs (a)(2) and (3) of Rule 605.\858\ Preexisting Rule 605(a)(2) 
required every national securities exchange on which NMS stocks are 
traded and each national securities association to act jointly in 
establishing procedures for market centers to make the reports required 
by Rule 605(a)(1) available to the public in a uniform, readily 
accessible, and usable electronic form.\859\ The Commission proposed to 
amend preexisting Rule 605(a)(2), which would be reorganized into 
amended Rule 605(a)(3), so that the proposed summary report would also 
be made available in accordance with the procedures established by the 
Rule 605 NMS Plan.\860\ Further, preexisting Rule 605(a)(2) provided 
that, in the event there is no effective national market system plan, 
market centers shall prepare their reports in a consistent, usable, and 
machine-readable electronic

[[Page 26492]]

format and make such reports available for downloading from an internet 
website that is free and readily accessible to the public.\861\ The 
Commission proposed to reorganize this provision into amended Rule 
605(a)(4) and modify amended paragraph (a)(4) to explicitly refer to 
the requirements in amended Rule 605(a)(1).\862\
---------------------------------------------------------------------------

    \858\ See Proposing Release, 88 FR 3786 at 3824 (Jan. 20, 2023).
    \859\ See id.
    \860\ See id.
    \861\ See id. at 3824, n.475.
    \862\ See id.
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    Rule 605(a)(2), prior to these amendments, also specified that the 
detailed reports required by Rule 605(a)(1) must be posted on an 
internet website that is free and readily accessible to the public for 
a period of three years from the initial date of posting.\863\ As 
proposed, these same requirements would be reorganized into amended 
Rule 605(a)(5) and would be extended to the summary report required 
under proposed Rule 605(a)(2).\864\
---------------------------------------------------------------------------

    \863\ See id. at 3824.
    \864\ See id. at 3824, n.475.
---------------------------------------------------------------------------

    Finally, prior to these amendments, Rule 605(a)(3) specified that 
the detailed report required by Rule 605(a)(1) must be made available 
within one month after the end of the month addressed in the 
report.\865\ The Commission proposed to renumber this provision as 
amended Rule 605(a)(6) and to extend this requirement to the amended 
Rule 605(a)(2) report.\866\
---------------------------------------------------------------------------

    \865\ See id. at 3825.
    \866\ See id.
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B. Final Rule and Discussion

1. Accessibility of Rule 605 Reports
    The Commission is updating these provisions of preexisting Rule 605 
by reorganizing paragraphs (a)(2) and (3) of preexisting Rule 605 into 
amended paragraph (a)(3) and new paragraphs (a)(4) through (6) as 
proposed.\867\ In the amended paragraphs, the Commission proposed to 
apply the website posting, timing, and retention requirements to the 
proposed Rule 605(a)(2) summary report and to extend Rule 605's 
procedural requirements to brokers and dealers subject to Rule 605. The 
Commission received no comments regarding the proposed renumbering and 
reorganization of preexisting Rule 605(a)(2) and (3), but did receive 
comments on the substance of proposed Rule 605(a)(3). The Commission is 
adopting paragraphs (a)(3) through (6) of Rule 605 as proposed. These 
rule provisions set forth the requirements for making the Rule 605 
reports accessible to the public, and retaining these requirements from 
preexisting Rule 605 will continue to provide interested parties with 
the ability to access the reports easily and efficiently.
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    \867\ See final 17 CFR 242.605(a)(3) through (6); Proposing 
Release, 88 FR 3786 at 3824-25 (Jan. 20, 2023). The Commission 
proposed to amend current Rule 605 by reorganizing paragraphs (a)(2) 
and (3) of current Rule 605 as paragraphs (a)(3) through (6) of 
proposed Rule 605.
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    Rule 605(a)(3) directs the SROs to act jointly in establishing 
procedures for market centers, brokers, and dealers to follow in making 
available to the public the detailed report under Rule 605(a)(1) and 
summary report under Rule 605(a)(2). The Rule 605 NMS Plan establishes 
procedures for market centers to make data available to the public in a 
uniform, readily accessible, and usable electronic form.\868\ The Rule 
605 NMS Plan requires each market center to arrange with a single plan 
participant to act as the market center's Designated Participant.\869\ 
The Rule 605 NMS Plan also requires market centers to post their 
monthly reports on an internet website that is free of charge and 
readily accessible to the public.\870\ Inclusion of Rule 605(a)(2)'s 
summary reports within the scope of the Rule 605 NMS Plan will promote 
consistent administration of Rule 605 and allow the Designated 
Participant for each reporting entity to play a role with respect to 
the reports required by Rule 605(a)(1) and (2). As is the case for 
market centers that are not Participants prior to these rule 
amendments, the Participants will be required to enforce compliance 
with the terms of the Rule 605 NMS Plan by their members and persons 
associated with their members.\871\ In addition, formatting for Rule 
605 data is governed by the Rule 605 NMS Plan. Among other things, the 
Rule 605 NMS Plan sets forth the file type and structure of the reports 
and the order and format of fields, yielding reports that are 
structured and machine-readable.\872\ Because of the amendments to Rule 
605, the Rule 605 NMS Plan will need to be updated in order to 
incorporate references to larger broker-dealers subject to Rule 605 and 
to account for summary reports and the new data fields required to be 
reported. The compliance period for amending the Rule 605 NMS Plan, and 
other implementation details, are discussed in infra section VII.
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    \868\ See final 17 CFR 242.605(a)(3) and Rule 605 NMS Plan. See 
also Rule 605 NMS Plan Release, 66 FR 19814 at 19815 (Apr. 17, 
2001). For a discussion of the implementation of amendments to the 
Rule 605 NMS Plan pursuant to 17 CFR 242.608 (``Rule 608''), see 
infra section VII.
    \869\ See Rule 605 NMS Plan at section VIII. As of January 2024, 
the parties to the Rule 605 NMS Plan are the 16 registered national 
securities exchanges trading NMS stocks and one national securities 
association (the ``Participants''). Although not all market centers 
are Participants, the Participants are required to enforce 
compliance with the terms of the Rule 605 NMS Plan by their members 
and persons associated with their members. See 17 CFR 242.608(c). 
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 Rule 605 NMS Plan at sections IV, VIII(c).
    \870\ See Rule 605 NMS Plan at section VII.
    \871\ See 17 CFR 242.608(c).
    \872\ See Rule 605 NMS Plan at 2 (``Section V . . . provides 
that market center files must be in standard, pipe-delimited ASCII 
format'').
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    With respect to report formatting, an investor advocacy group 
stated that header data should be included in the Rule 605 reports, 
arguing that ``it is impossible to understand the reports'' without 
looking separately to published Commission guidance.\873\ This 
commenter also stated that Rule 605 reports should continue to be made 
available in a machine-readable format.\874\ The Commission agrees that 
having more ready access to the information needed to understand the 
content of the reports could be beneficial for market participants. 
Because the Rule 605 NMS Plan establishes the procedures for reporting 
entities to follow in making the report available in a uniform, readily 
accessible, and usable electronic form, the Participants are well-
positioned to determine how to include header information in connection 
with the updates to the record layout for the detailed Rule 605(a)(1) 
reports.\875\ The Commission encourages the Participants to consider 
whether header information or a more accessible record layout or key 
should be part of the procedures for making the reports available to 
the public, especially as it pertains to the detailed Rule 605(a)(1) 
reports.\876\
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    \873\ See Healthy Markets Letter at 16. See also Better Markets 
Letter at 9, n.26 (``We agree with Healthy Market Association that 
improved header data would go a long way to making Rule 605 Reports 
more readable, particularly for retail investors, and suggest the 
Commission make this technical enhancement to the Rule 605 NMS 
Plan.'').
    \874\ See Healthy Markets Letter at 16.
    \875\ If the Plan Participants determine to amend the Rule 605 
NMS Plan to incorporate headers into the reports, an amendment must 
be filed with the Commission pursuant to Rule 608 of Regulation NMS. 
See 17 CFR 242.608(a). Amendments to NMS plans are subject to notice 
and comment, and may be either effective upon filing pursuant to 17 
CFR 242.608(b)(3) or subject to action by Commission order before 
amendments may be effective, pursuant to 17 CFR 242.608(b)(2).
    \876\ Under Rule 608(a)(2) of Regulation NMS, the Commission may 
propose amendments to any effective national market system plan. See 
17 CFR 242.608(a)(2). The Commission could in the future propose an 
amendment to the Rule 605 NMS Plan to address issues related to the 
Rule 605 reports.
---------------------------------------------------------------------------

    In the event that an amendment to the Rule 605 NMS Plan 
establishing

[[Page 26493]]

procedures for market centers, brokers, and dealers to comply with Rule 
605 has not been approved by the Commission prior to the compliance 
date of the amendments to Rule 605, paragraph (a)(4) of Rule 605 
provides that market centers, brokers, and dealers shall prepare their 
reports in a consistent, usable, and machine-readable electronic 
format, and make such reports available for downloading from an 
internet website that is free and readily accessible to the 
public.\877\ Paragraph (a)(5) of Rule 605 requires market centers, 
brokers, and dealers to keep the reports required by Rule 605(a)(1) and 
(2) posted on an internet website that is free and readily accessible 
to the public for a period of three years from the initial date of 
posting. Finally, paragraph (a)(6) of Rule 605 requires market centers, 
brokers, and dealers to make their Rule 605(a)(1) and (2) reports 
available within one month after the end of the month addressed in the 
reports. The Commission received no comments on its proposal to 
renumber and update paragraphs (a)(4) through (6) of Rule 605 and is 
adopting paragraphs (a)(4) through (6) of Rule 605 as proposed, for the 
reasons stated in the Proposing Release.\878\ Final Rule 605 will 
extend these procedural requirements to the Rule 605(a)(2) summary 
report so that valuable information on order execution quality will be 
made available to the public without undue delay.\879\ Further, the 
ability to access Rule 605(a)(1) and (2) reports at the same time and 
the availability of these reports for the same period of time will aid 
users of the reports in their review and analysis of execution quality 
data.\880\
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    \877\ The requirements of Rule 605(a)(4) do not apply to the 
Rule 605(a)(2) summary report because Rule 605(a)(2) specifies the 
necessary format for the reports, while Rule 605(a)(5) contains the 
requirement for internet posting.
    \878\ See Proposing Release, 88 FR 3786 at 3824-25 (Jan. 20, 
2023).
    \879\ See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75425 
(Dec. 1, 2000). If a market center or broker-dealer believes that 
its particular circumstances warrant an exemption from the 
provisions of the Rule, it may request an unconditional or 
conditional exemption pursuant to paragraph (b) of Rule 605. Such an 
exemption will be granted if the Commission determines that it 
necessary or appropriate in the public interest, and is consistent 
with the protection of investors. See 17 CFR 242.605(b).
    \880\ See Proposing Release, 88 FR 3786 at 3824-25 (Jan. 20, 
2023).
---------------------------------------------------------------------------

2. Alternatives to Rule 605 Proposal
(a) Centralization of Rule 605 Data
    In the Proposing Release, the Commission solicited comment on 
whether to require centralized posting of Rule 605 reports and 
discussed as an alternative that instead of, or in addition to, having 
market centers and larger broker-dealers post Rule 605 reports to their 
websites, the Commission could require these reporting entities to 
submit their Rule 605 reports to a centralized electronic system, which 
would then make these reports available to market participants.\881\ 
The Commission stated that the creation of a centralized electronic 
system could promote greater transparency by better enabling market 
participants to access and evaluate the reports of multiple reporting 
entities because the reports would be available at a single 
location.\882\ However, the Commission recognized that the entity 
responsible for administering the centralized electronic system would 
incur compliance costs as a result of the creation and maintenance of 
such a system, and these costs could be passed on to reporting entities 
in the form of filing fees or to consumers of Rule 605 reports in the 
form of access fees.\883\
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    \881\ See id. at 3825, 3894.
    \882\ See id. at 3894. The Commission also stated that a 
centralized system could enable programmatic checks that the Rule 
605 reports are appropriately standardized, formatted, and complete 
before posting. See id.
    \883\ See id.
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    Specifically, the Commission considered two options for how to 
implement a centralized electronic system. One option would have been 
for the Commission to require that the Plan Participants establish 
procedures pursuant to the Rule 605 NMS Plan to provide for the 
creation and maintenance of a centralized electronic system to serve as 
a repository for Rule 605 reports and make such reports available for 
viewing and downloading in a manner that is free and readily accessible 
to the public.\884\ The second option would have been for the 
Commission to require that reporting entities disclose Rule 605 
information directly to the Commission through the Commission's 
Electronic Data Gathering, Analysis, and Retrieval (``EDGAR'') system, 
with the Commission subsequently making the information publicly 
available on EDGAR.\885\
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    \884\ See id. at 3895.
    \885\ See id. at 3896. 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 as compared to 
documents otherwise provided to the Commission (e.g., documents 
furnished to the Commission). See 15 U.S.C. 78ff.
---------------------------------------------------------------------------

    Several commenters supported the centralized posting of Rule 605 
reports (summary and detailed).\886\ Some of these commenters stated 
that providing centralized access to Rule 605 reports would 
``facilitate accessibility and comparability of the metrics to the 
benefit of retail customers and market participants'' \887\ and that 
``market participants would be more likely to use the data to compare 
execution quality, leading to increased competition and improvements in 
execution quality.'' \888\ Some of these commenters suggested various 
means of centralizing Rule 605 reports--having FINRA maintain a public 
database for Rule 605 reports,\889\ creating a central repository for 
Rule 605 reports to be located on a single page on the Commission's 
website,\890\ or working out the details of a central repository 
through the Rule 605 NMS Plan.\891\ An individual investor suggested 
that the Commission should require the summary and detailed reports to 
be posted in a centralized electronic system implemented by the 
Commission that subjects reporting entities to liabilities and has no 
access fees.\892\ An industry group and an investor advocacy group both 
specifically discouraged the use of EDGAR as the centralization 
method,\893\ stating that the EDGAR system is ``outdated technology'' 
\894\ and ``inadequate for the task.'' \895\
---------------------------------------------------------------------------

    \886\ See BlackRock Letter at 4; Angel Letter at 3; Fidelity 
Letter at 8; Healthy Markets Letter at 16; Nasdaq Letter at 46; 
SIFMA Letter II at 25; J.T. Letter.
    \887\ Fidelity Letter at 8.
    \888\ Nasdaq Letter at 46. See also BlackRock Letter at 4.
    \889\ See Healthy Markets Letter at 16.
    \890\ See Fidelity Letter at 8.
    \891\ See Angel Letter at 3.
    \892\ See J.T. Letter. This commenter stated that it is 
``essential to ensure that these reports are appropriately 
standardized, formatted, and completed before acceptance through 
programmatic checks.'' Id.
    \893\ See FIF Letter at 33; Healthy Markets Letter at 16.
    \894\ See FIF Letter at 33.
    \895\ See Healthy Markets Letter at 16. Another commenter 
objected to the standardization and centralization of Rule 605 
reports and stated that ``[g]iving away vast amounts of information 
to free riders (e.g., activists, MEME stock insurgents, and foreign 
adversaries) increases vulnerabilities'' such as ``MEME events and 
other irrational exuberance.'' Data Boiler Letter at 27. The 
Commission does not agree that the standardization and 
centralization of Rule 605 reports would increase these so-called 
``vulnerabilities'' simply by making the reports viewable at one 
central location in a consistent format because it is unclear how 
the execution quality information contained in Rule 605 reports 
would lead to these outcomes.
---------------------------------------------------------------------------

    The Commission has considered the comments but is not adopting a 
requirement for centralized posting of Rule 605 reports for a number of 
reasons. While several commenters supported the goal of centralizing 
Rule

[[Page 26494]]

605 reports, commenters did not have a consensus view on how to 
accomplish centralization. Further, two commenters expressed specific 
concerns with the Commission using EDGAR as a centralized repository. 
The Commission acknowledges that centralization of Rule 605 data, by 
providing standardization to the reports, could help to make it easier 
for market participants to access and evaluate Rule 605 reports. 
However, developing a centralized repository and procedures for 
reporting entities to follow, whether done by the Commission or by Plan 
Participants, could potentially result in implementation time delays 
and require the expenditure of considerable technology and personnel 
resources. Further, although a centralized repository could lower 
search cost for market participants, even without centralization, Rule 
605 reports will be required to be readily available and 
accessible.\896\
---------------------------------------------------------------------------

    \896\ See final 17 CFR 242.605(a)(5).
---------------------------------------------------------------------------

    The changes to Rule 605 discussed herein will expand the scope of 
the reports and improve the usefulness of the execution quality 
statistics provided and made public. For example, the addition of a 
reporting requirement for larger-broker dealers will provide investors 
with information that they could use to compare the execution quality 
provided by different broker-dealers. The current disclosure 
requirements set forth in the amended rule and under the Plan will help 
ensure that implementation of final Rule 605 will proceed in a timely 
manner.\897\
---------------------------------------------------------------------------

    \897\ In May 2023, FINRA requested comment on whether to require 
its members to provide Rule 605 reports to FINRA for centralized 
publication. See FINRA Regulatory Notice 23-10 (May 31, 2023) 
(``Regulatory Notice''). FINRA stated in the Regulatory Notice that 
the proposed requirement to provide Rule 605 reports to FINRA would 
supplement, not replace, firm's current obligations under Rule 605. 
See Regulatory Notice at 3. Comments received on FINRA Regulatory 
Notice 23-10 are available at https://www.finra.org/rules-guidance/notices/23-10#comments.
---------------------------------------------------------------------------

(b) Generation of Order Execution Quality Reports Using CAT Data
    As an alternative to the proposed Rule 605 amendments, the 
Commission asked for comment on using CAT data to have either the 
Commission or the CAT NMS Plan Processor \898\ provide execution 
quality information to the public at monthly (or more frequent) 
intervals. This alternative would have effectively eliminated the need 
for market centers and larger broker-dealers to prepare Rule 605 
reports.\899\
---------------------------------------------------------------------------

    \898\ As set forth in the National Market System Plan for the 
Consolidated Audit Trail (``CAT NMS Plan''), the CAT NMS 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 Securities Exchange Act Release No. 79318 (Nov. 15, 2016), 81 FR 
84696 at 84704, n.136 (Nov. 23, 2016) (order approving the CAT NMS 
Plan).
    \899\ See Proposing Release, 88 FR 3786 at 3897 (Jan. 20, 2023).
---------------------------------------------------------------------------

    A few commenters supported the use of CAT data to produce Rule 605 
reports.\900\ An investment advisory firm stated that utilizing CAT 
data to create a report and making such reports easily accessible in 
one location ``will likely result in a meaningful increase in 
transparency for investors.'' \901\ An asset management firm stated 
that if every reporting firm generates its own reports, there would be 
``needless duplication of the costs and burdens associated with the 
implementation and ongoing maintenance of disclosures,'' and that ``a 
centralized processor for Rule 605 reports would also eliminate the 
inevitable inconsistencies or errors which arise when independent 
systems are responsible for creating reports.'' \902\ Another broker-
dealer specified that ``for the sake of consistency and transparency, 
FINRA is best positioned to provide these reports'' through the use of 
CAT data.\903\ Several commenters also stated that a central Rule 605 
report processor would lower compliance burdens for broker-
dealers.\904\ An industry group stated that if FINRA/CAT is not used to 
produce all Rule 605 reports, but FINRA prepares its own Rule 605 data 
for regulatory purposes, such FINRA data/report should be made 
available to the relevant firm.\905\
---------------------------------------------------------------------------

    \900\ See Angel Letter at 3; Black Rock Letter at 4; Fidelity 
Letter at 8; FIF Letter at 32; Healthy Markets Letter at 16; SIFMA 
Letter II at 27; State Street Letter at 2; Tastytrade Letter at 4; 
LPL Financial Letter at 4.
    \901\ LPL Financial Letter at 4.
    \902\ BlackRock Letter at 4.
    \903\ Tastytrade Letter at 4.
    \904\ See Angel Letter at 3; Black Rock Letter at 4; Fidelity 
Letter at 8; SIFMA Letter II at 27; State Street Letter at 2.
    \905\ See SIFMA Letter II at 27; see also Healthy Markets Letter 
at 16 (``we recommend that as part of its access to CAT data to 
create 605 reports as part of their regulatory oversight/
surveillance, FINRA should make its report cards publicly 
available'').
---------------------------------------------------------------------------

    The Commission recognizes the value in having one entity calculate 
the statistics required under Rule 605 and produce execution quality 
disclosures because it could result in more standardized data. This in 
turn could help facilitate one of the primary goals of the Rule 605 
amendments--to enhance order execution quality reporting to better 
enable investors to compare and evaluate execution quality among 
different market centers and larger-broker-dealers. This approach could 
also allow for the publication of execution quality data for all 
broker-dealers instead of just those that meet the customer account 
threshold. However, there are potentially significant costs and time 
delays associated with implementation of this alternative. The 
obstacles associated with authorizing and enabling FINRA CAT to prepare 
execution quality disclosures could hinder the ability of investors and 
market participants more broadly to have ready access to enhanced 
execution quality information. Rule 605, as adopted, will require 
updated disclosure within a comparatively shorter timeframe.\906\ 
However, the Commission will continue to monitor this alternative in 
the context of the implementation of CAT and may in the future consider 
whether execution quality disclosure utilizing CAT data is practicable 
or advisable.
---------------------------------------------------------------------------

    \906\ See infra section VII.
---------------------------------------------------------------------------

    If the Commission in the future determines that CAT data should be 
utilized to produce execution quality disclosures, the Commission could 
also consider whether to eliminate the requirement that market centers 
and broker-dealers themselves produce Rule 605 reports in that context.
    An industry group stated that ``[t]o the extent FINRA/CAT are not 
utilized to produce Rule 605 reports, the Commission or FINRA should be 
required to provide a publicly available data template that specifies 
exactly how a market center or broker-dealer's Rule 605 reports should 
be produced.'' \907\ The commenter further stated that ``[d]oing so 
would establish a standardized metric consistent with regulators' 
expectations and reduce any regulatory risks reporting entities may 
face from having to make independent interpretations of various 
reporting requirements.'' \908\ Although the Commission will not 
publish an exact data template for the detailed reports, the NMS Plan 
required by Rule 605(a)(3) will establish procedures for making the 
detailed report available to the public in a ``uniform, readily 
accessible, and usable electronic form.'' \909\ Further, Rule 605(a)(2) 
requires the summary report to be made available using the schema for 
CSV published on the Commission's website.\910\ In addition, the 
Commission is providing herein a detailed discussion of the final rule, 
including responses to issues and questions raised by commenters. 
Therefore, reporting entities will have

[[Page 26495]]

the information needed to produce Rule 605 reports in a uniform manner.
---------------------------------------------------------------------------

    \907\ SIFMA Letter II at 26.
    \908\ Id. at 26-27.
    \909\ Final 17 CFR 242.605(a)(3).
    \910\ See final 17 CFR 242.605(a)(2).
---------------------------------------------------------------------------

VI. Existing Commission Exemptive Relief and Staff Statements

    Upon the compliance date of the amendments to Rules 600 and 605, 
the Commission exemptive relief and staff statements listed below will 
be withdrawn. To the extent any staff statement is inconsistent with or 
conflicts with the requirements of Rule 600 or Rule 605, as amended, 
even if not specifically identified below, those statements are 
superseded.
[GRAPHIC] [TIFF OMITTED] TR15AP24.006

    As discussed in section III.A.1, the Commission is incorporating 
the Opening Exemption into the definition of covered order with respect 
to market or limit orders received during regular trading hours at a 
time when an NBBO is being disseminated.\911\ The Commission did not 
receive any comments opposing the proposed incorporation of the Opening 
Exemption into rule text or the rescission of the Opening Exemption in 
the 2001 Exemptive Letter. The Commission is rescinding the Opening 
Exemption as proposed, for the reasons discussed in the Proposing 
Release and in section III.A.1. The rescission of the Opening Exemption 
supersedes a staff FAQ.\912\
---------------------------------------------------------------------------

    \911\ See supra section III.A.1.b).
    \912\ See Staff Legal Bulletin No. 12R, ``Frequently Asked 
Questions About Rule 11Ac1-5'' (June 22, 2001) (``2001 FAQs''), 
Question 19.
---------------------------------------------------------------------------

    In addition to the Opening Exemption, the Market Systems Exemptive 
Letter included a separate exemption from Rule 605 for orders received 
during a time when the consolidated best bid and offer (``BBO'') 
reflects a spread that exceeds $1 plus 5% of the midpoint of the 
consolidated BBO (``Spread Width Exemption'').\913\ As proposed, the 
Commission is not modifying or rescinding the Spread Width Exemption. 
Orders received during a time when the consolidated BBO reflects a 
spread that exceeds $1 plus 5% of the midpoint of the consolidated BBO 
``could be the result of potentially erroneous quotes or of abnormal 
trading conditions'' and their inclusion ``could significantly affect 
the comparability and reliability of the execution quality measures in 
market center monthly reports.'' \914\
---------------------------------------------------------------------------

    \913\ See Market Systems Exemptive Letter at 2.
    \914\ Id.
---------------------------------------------------------------------------

    As discussed in section III.B.1, commenters supported the inclusion 
of larger-sized orders, which necessarily requires the recission of the 
Large Order Exemptive Relief.\915\ The Commission is rescinding the 
Large Order Exemptive Relief as proposed, for the reasons discussed in 
the Proposing Release and in section III.B.1. The rescission of the 
Large Order Exemptive Relief supersedes the relevant staff FAQ.\916\
---------------------------------------------------------------------------

    \915\ See supra notes 351-355 and accompanying text.
    \916\ See 2001 FAQs, Question 27.
---------------------------------------------------------------------------

    Finally, two additional staff FAQs are specifically superseded by 
Rule 605, as amended, and the guidance contained in this release.\917\ 
First, the final rule incorporates a provision that supersedes current 
staff statements regarding the treatment of riskless principal orders. 
Specifically, adopted Rule 605(a)(1)(i)(D) provides that the number of 
shares of covered orders executed at the receiving market center, 
broker, or dealer excludes shares that the market center, broker, or 
dealer executes on a riskless principal basis.\918\ Second, as 
proposed, the Commission is providing guidance that non-exempt short 
sale orders will not be special handling orders unless a price test 
restriction is in effect for the security.\919\ The FAQs will be 
updated accordingly consistent with these changes.
---------------------------------------------------------------------------

    \917\ See 2013 FAQs, Question 2; and 2001 FAQs, Question 24.
    \918\ One commenter requested confirmation that execution 
quality metrics reported under Rule 605 include execution quality 
information for riskless principal orders. See supra note 688 and 
accompanying text.
    \919\ See supra section III.A.2.b).
---------------------------------------------------------------------------

VII. Transition Matters

    The Commission is providing a transition period between when the 
amendments to Rule 605 are adopted and when the changes are fully 
implemented. As discussed above, the Rule 605 NMS Plan establishes 
procedures for market centers to make data available to the public in a 
uniform, readily accessible, and usable electronic form.\920\ In 
addition, formatting for Rule 605 data is governed by the Rule 605 NMS 
Plan, which sets forth, among other things, the file type and structure 
of the reports and the

[[Page 26496]]

order and format of fields.\921\ As described in section V.B.1 above, 
the Commission is adopting paragraph (a)(3) of Rule 605 as proposed to 
direct the SROs to act jointly in establishing procedures for market 
centers, brokers, and dealers to follow in making Rule 605 reports 
available to the public. Because of the amendments to Rule 605 that the 
Commission is adopting, the Rule 605 NMS Plan will need to be updated 
to: (1) incorporate references to broker-dealers subject to Rule 605; 
(2) account for summary reports that will be required under Rule 
605(a)(2); and (3) incorporate the new data fields that will be 
required under Rule 605(a)(1) for the detailed reports.\922\ In 
addition, larger broker-dealers and market centers will need time to 
test and implement programming and systems changes in order to comply 
with Rule 605 as amended.
---------------------------------------------------------------------------

    \920\ See prior 17 CFR 242.605(a)(2) and Rule 605 NMS Plan. See 
also Rule 605 NMS Plan Release, 66 FR 19814 at 19815 (Apr. 17, 
2001).
    \921\ See Rule 605 NMS Plan Release, 66 FR 19814 at 19815 (Apr. 
17, 2001) (``Section V . . . provides that market center files must 
be in standard, pipe-delimited ASCII format'').
    \922\ The Rule 605 NMS 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 Rule 605(a)(1). See 
Rule 605 NMS Plan generally and section VI.(a) of the Rule 605 NMS 
Plan. As is currently the case for market centers that are not 
Participants, the Participants will be required to enforce 
compliance with the terms of the Rule 605 NMS Plan by their members 
and persons associated with their members. See 17 CFR 242.608(c).
---------------------------------------------------------------------------

    The Proposing Release did not include a proposed compliance date 
for final Rule 605, but several commenters recommended that the 
Commission provide a sufficient implementation period for the proposed 
Rule 605 amendments, including an industry group that recommended a 
minimum of one year and an industry group that recommended a minimum of 
one year from ``approval of applicable Plan amendments.'' \923\ One of 
these industry groups suggested that the Commission should not require 
the inclusion of any data relating to the best available displayed 
price ``until the best odd-lot order to buy and the best odd-lot order 
to sell have been included in the SIP and firms have had a reasonable 
time period, subsequent to such inclusion, to incorporate this data 
into their Rule 605 reports.'' \924\ This industry group also stated 
that the implementation timetable for final Rule 605 should ``commence 
from the date that the Commission publishes guidance in response to 
interpretive questions from industry members'' regarding the adopted 
reporting requirements.\925\ However, an investor advocacy group 
recommended implementation of the proposed changes to Rule 605 
``without delay.'' \926\ In addition, a national securities exchange 
stated that deferring ``key implementation details'' to the 
Participants ``may introduce additional complications and further delay 
implementation of the Rule 605 Proposal since NMS Plan Participants 
would first need to reach agreement and then file amendments to the 
Rule 605 NMS Plan with the Commission, which the Commission would need 
to approve.'' \927\
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    \923\ See letter from Andrew M. Saperstein, Co-President, Morgan 
Stanley (Mar. 31, 2023) (``Morgan Stanley Letter'') at 7 (``The 
proposed amendments to Rule 605 involve a host of changes, including 
the introduction of new order types in scope, which will require 
broker-dealers and their vendors to adopt new processes and 
controls.''); SIFMA Letter II at 27 (recommending a minimum 
implementation period of one year and ``ideally two years'' 
following adoption of proposed Rule 605 ``to allow for the industry, 
SROs, and the Commission to ensure that revised Rule 605 reports are 
produced in a consistent way''); FIF Letter at 5, 33 (proposing that 
the implementation period should be a minimum of one year from the 
Commission's approval of applicable Plan amendments).
    \924\ FIF Letter at 33.
    \925\ FIF Letter III at 5 (``If the Commission does not publish 
proposed specifications prior to adopting a final rule, FIF members 
recommend that any implementation timetable commence from the date 
that the Commission publishes guidance in response to interpretive 
questions from industry members relating to the reporting 
requirements that the Commission adopts.'').
    \926\ See Healthy Markets Letter at 16. An industry group and a 
broker-dealer recommended implementing changes to Rule 605 before 
any of the other changes to the U.S. equity market structure that 
the Commission has proposed in order to provide a baseline for 
measuring market quality. See FIF Letter at 1, 33 (recommending 
implementation of proposed Rule 605 reporting changes at least one 
year prior to other changes); Morgan Stanley Letter at 2 
(recommending a staggered approach to changes to U.S. equity market 
structure, starting with changes to Rule 605). See also supra note 
79 and accompanying text (discussing other commenters' views on Rule 
605 sequencing).
    \927\ NYSE Letter at 8.
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    The amendments to Rule 605 discussed herein shall become effective 
60 days after the date of publication in the Federal Register 
(``Effective Date''). The compliance date shall be 18 months after the 
Effective Date (``Compliance Date'').\928\ This amount of time is 
consistent with the commenter's request that the Commission provide a 
minimum implementation period of one year following adoption of 
amendments to Rule 605.\929\ The Commission also recognizes that 
preexisting market centers and vendors will need time to update their 
systems and processes to ensure that data responsive to the amended 
requirements are correctly collected and formatted, and that larger 
broker-dealers and market centers newly subject to Rule 605 will need 
time to create such systems and processes. Although two commenters 
referred to a potentially longer timeframe for implementation,\930\ the 
adopted timeframe will allow the benefits of the amended rule to be 
achieved sooner and therefore the Commission is adopting the 
implementation timeframe discussed in this section. After considering 
the comments, the Commission agrees that implementation of Rule 605 as 
amended should not be unnecessarily delayed because the modifications 
to Rule 605 that the Commission is adopting will expand its scope and 
improve the usefulness of the execution quality statistics that 
reporting entities will make available pursuant to Rule 605.
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    \928\ With respect to the compliance date, commenters requested 
that the Commission consider interactions between the proposed rule 
and other recent Commission rules. See supra note 79. In determining 
compliance dates, the Commission considers the benefits of the rules 
as well as the costs of delayed compliance dates and potential 
overlapping compliance dates. For the reasons discussed throughout 
the release, to the extent that there are costs from overlapping 
compliance dates, the benefits of the rule justify such costs. See 
infra sections IX.C.1.d) and IX.D.2.a)(5) for a discussion of the 
interactions of final Rule 605 with certain other Commission rules.
    \929\ See SIFMA Letter II at 27.
    \930\ See id. (stating the Commission should provide for an 
implementation period of ``ideally two years following adoption of 
the Rule 605 Proposal'') and FIF Letter at 33 (stating the 
Commission's implementation period should be a ``minimum of one year 
from the Commission's approval of applicable Plan amendments''). 
Amendments to NMS plans are subject to notice and comment, and may 
be either effective upon filing pursuant to 17 CFR 242.608(b)(3) or 
subject to action by Commission order before amendments may be 
effective, pursuant to 17 CFR 242.608(b)(2).
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    As part of the implementation process, and pursuant to the 
requirement in paragraph (a)(3) of Rule 605 as amended directing the 
SROs to act jointly in establishing procedures for market centers, 
brokers, and dealers to follow in making Rule 605 reports available to 
the public, the Rule 605 NMS Plan Participants (16 national securities 
exchanges and one national securities association) will need to file 
with the Commission a proposed Rule 605 NMS Plan amendment updating the 
Plan to reflect the amendments made herein to Rule 605, pursuant to 
Rule 608(a)(1) of Regulation NMS. The NMS Plan Participants are the 
appropriate parties to update the Rule 605 NMS Plan provisions given 
their experience in administering the Rule 605 NMS Plan since its 
approval by the Commission in 2001. Many of the detailed issues 
relating both to the format of the reports under Rule 605 as amended, 
and to the means of access to the reports, are appropriately addressed 
in the context of approval of an amendment to the

[[Page 26497]]

Rule 605 NMS Plan.\931\ However, while the Rule 605 NMS Plan 
Participants will need to determine how to address certain technical 
elements of Rule 605,\932\ the modifications that will need to be made 
by the Rule 605 NMS Plan generally will be dictated by Rule 605 as 
amended (e.g., updates to the list of fields included in the reports 
required by Rule 605(a)(1)).
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    \931\ For example, in the Proposing Release, the Commission 
discussed potential alternatives to the website posting of Rule 605 
reports, including, among other things, requiring Rule 605 NMS Plan 
Participants to amend the Rule 605 NMS Plan to create a centralized 
electronic system repository for Rule 605 reports. See Proposing 
Release, 88 FR 3786 at 3895-96 (Jan. 20, 2023).
    \932\ Because an amendment to the Rule 605 NMS Plan will address 
certain technical elements of Rule 605, the Commission does not 
agree that it is necessary to commence implementation after 
publication of any Commission guidance. See FIF Letter III at 5. As 
noted above, amendments to NMS plans are subject to notice and 
comment. See supra note 930.
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    In accordance with Rule 605 as amended, the Rule 605 NMS Plan 
amendment will need to establish procedures for market centers, 
brokers, and dealers to follow in making Rule 605 reports publicly 
available.\933\ Notice of the proposed amendment to the Rule 605 NMS 
Plan and the opportunity for comment will be provided.\934\
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    \933\ Because final Rule 605(a)(2) requires the use of the 
Commission's schema for CSV and the associated PDF renderer, the 
Rule 605 NMS Plan will not establish the formats and fields for the 
summary reports.
    \934\ See 17 CFR 242.608(b).
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    In addition, market centers, brokers, and dealers will need to make 
necessary preparations to be in a position to comply with Rule 605 as 
amended by the Compliance Date.\935\ The Compliance Date strikes an 
appropriate balance between: (1) affording brokers, dealers, and market 
centers sufficient time to program their systems and implement business 
process changes necessary to comply with the new rules; and (2) 
requiring that the execution quality statistics in their Rule 605 
reports become available to investors in a timely manner.
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    \935\ If the Rule 605 NMS Plan does not incorporate the 
necessary changes to Rule 605 in advance of the Compliance Date, 
final Rule 605(a)(4) will govern and the Compliance Date will still 
apply. As described further above in section V.B.1, final Rule 
605(a)(4) will require that in the event that there is no effective 
national market system plan establishing required 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 final Rule 605(a)(1), and make 
such reports available for downloading from a website that is free 
and readily accessible to the public.
---------------------------------------------------------------------------

    The Compliance Date is designed to allow time for both an amendment 
to the Rule 605 NMS Plan and time for brokers, dealers, and market 
centers time to comply with Rule 605 as amended.\936\
---------------------------------------------------------------------------

    \936\ See supra note 923 and accompanying text.
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    Notwithstanding the Compliance Date, reporting entities will not be 
able to calculate the price improvement statistics relative to best 
available displayed price that will be required to be included in the 
detailed reports required by Rule 605(a)(1) for marketable order types, 
marketable stop orders, and midpoint-or-better order types until odd-
lot order information is made available pursuant to an effective 
transaction reporting plan or effective national market system 
plan.\937\ The MDI Rules included odd-lot information in the data that 
will be made available within the national market system. Although the 
Commission adopted the MDI Rules, the MDI Rules have not been 
implemented.\938\ Once odd-lot order information is made available 
pursuant to an effective national market system plan, market centers, 
brokers, and dealers will need time to make any program updates and 
changes to their business processes that are necessary to calculate the 
price improvement statistics relative to the best available displayed 
price. In order for odd-lot order information to be made available 
pursuant to an effective national market system plan, participants will 
need to file with the Commission a proposed NMS plan or a proposed 
amendment to an NMS plan pursuant to Rule 608(a)(1) of Regulation NMS. 
Any such filing will be subject to public comment and Commission 
approval by order before the effectiveness of such plan or plan 
amendments pursuant to Rule 608(b)(2) of Regulation NMS. A Commission 
order approving a proposed plan or plan amendment making odd-lot 
information available will provide market participants notice of when 
odd-lot order information will be required to be made available. 
Further, to the extent that odd-lot information is collected, 
consolidated, and disseminated by the effective national market system 
plan(s), market participants will be provided notice of the 
availability of such information through usual communication channels 
that may be established by the competing consolidator(s) or that are 
used by exclusive SIPs, to the extent exclusive SIPs collect, 
consolidate, and disseminate odd-lot information pursuant to an 
effective national market system plan. Market centers, brokers, and 
dealers will have six months after odd-lot order information sufficient 
to calculate the best available displayed price is made available 
pursuant to an effective national market system plan to start including 
price improvement statistics relative to the best available displayed 
price in their Rule 605 reports.
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    \937\ See final 17 CFR 242.605(a)(1)(ii)(M) through (Q).
    \938\ The Commission has outlined a phased transition plan for 
the implementation of the MDI Rules, including the implementation of 
odd-lot order information to be disseminated by competing 
consolidators. See Proposing Release, 88 FR 3786 at 3820, n.422 
(Jan. 20, 2023). The Commission is still considering whether to 
adopt the proposed changes in the Minimum Pricing Increments 
Proposal to accelerate the implementation of the odd-lot information 
definition and have odd-lot order information disseminated by the 
exclusive SIPs. See Minimum Pricing Increments Proposing Release, 87 
FR 80266 at 80295-99 (Dec. 29, 2022). If, in the future, the 
Commission accelerates implementation of this aspect of the MDI 
Rules, implementation of the modifications to the odd-lot definition 
and dissemination of odd-lot order information pursuant to an 
effective national market system plan would proceed on a revised 
timeframe as designated by the Commission at such time.
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VIII. Paperwork Reduction Act

    Certain provisions of the rule amendments contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\939\ The Commission requested comment 
on the collection of information requirements in the Proposing Release 
and submitted relevant information to the Office of Management and 
Budget (``OMB'') for review in accordance with 44 U.S.C 3507(d) and 5 
CFR 1320.11. The Commission is altering an existing collection of 
information and applying such collection of information to new 
categories of respondents. The title of such existing collection of 
information is: Rule 605 of Regulation NMS (f/k/a Rule 11Ac1-5).\940\ 
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.
---------------------------------------------------------------------------

    \939\ 44 U.S.C. 3501 et seq.
    \940\ OMB Control Number 3235-0542.
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    Views of commenters relevant to the Commission's analysis of the 
reporting burdens imposed by the collection of information for Rule 605 
as proposed are discussed below. In addition, certain estimates have 
been modified, as necessary, to conform to the adopted amendments and 
to reflect the most recent data available to the Commission.

A. Summary of Collection of Information

    The amendments create burdens under the PRA by: (1) adding new 
categories of respondents to the existing collection of information and 
(2) modifying the requirements of such existing collection of 
information. The

[[Page 26498]]

amendments do not create any new collections of information.
    The categories of new respondents subject to Rule 605, as amended, 
are larger broker-dealers and new market centers, consisting of SDPs 
and entities that act as market centers for orders that were previously 
not covered by Rule 605, e.g., orders smaller than 100 shares.
    The amendments modify both the scope of the standardized monthly 
reports required under Rule 605 and the required information. Rule 605, 
as amended: (1) expands the definition of ``covered order'' to include 
certain orders submitted outside of regular trading hours, certain 
orders submitted with stop prices, and non-exempt short sale orders; 
(2) modifies the existing order size categories to base them on 
notional value as well as whether an order is for less than a share, 
for an odd-lot, or for a round lot or greater rather than number of 
shares; (3) creates four new order type categories (marketable IOCs, 
executable market orders submitted with stop prices, executable 
marketable limit orders submitted with stop prices, and executable non-
marketable limit orders submitted with stop prices) and replaces three 
existing categories of non-marketable order types with four new 
categories of order types (midpoint-or-better limit orders, midpoint-
or-better IOCs, executable NMLOs, and NMLO IOCs); (4) modifies current 
time-to-execution reporting buckets; (5) modifies realized spread 
statistics to require realized spread to be calculated after 50 
milliseconds, 1 second, 15 seconds, 1 minute, and 5 minutes; and (6) 
requires new statistical measures of execution quality including 
average effective spread divided by quoted spread, percentage effective 
and realized spread statistics, a size improvement benchmark and 
statistic, and certain statistical measures that could be used to 
measure execution quality of NMLOs. The amendments require all 
reporting entities to make a summary report available that will be 
formatted using the most recent versions of the schema for CSV format 
and the associated PDF renderer as published on the Commission's 
website. Finally, as a result of the amendments to Rule 605, Rule 605 
NMS Plan Participants will need to amend the Rule 605 NMS Plan to 
account for the new data fields.

B. Proposed Use of Information

    The purpose of the information collection is to make information 
about order execution practices available to the public and allow 
investors, broker-dealers, and market centers (which include exchange 
markets, OTC market makers, and ATSs) \941\ 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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    \941\ See final 17 CFR 242.600(b)(55).
---------------------------------------------------------------------------

C. Respondents

    The collection of information obligations of Rule 605 applies to 
larger broker-dealers and market centers that receive covered orders in 
national market system securities (collectively, ``reporting 
entities''). The Commission estimates that there are approximately 228 
reporting entities (91 OTC market makers, plus 16 national securities 
exchanges, 1 national securities association, 87 exchange market 
makers, and 33 ATSs) under Rule 605 prior to these amendments.\942\ 
However, under the amendments, the Commission estimates there will be 
343 reporting entities (91 OTC market makers, 85 broker-dealers that 
introduce or carry 100,000 or more customer accounts,\943\ 16 national 
securities exchanges, 1 national securities association, 87 exchange 
market makers, 33 ATSs,\944\ plus 30 new market center respondents 
\945\) that will be subject to the collection of information 
obligations of Rule 605. Each of these respondents will be required to 
respond to the collection of information on a monthly basis.
---------------------------------------------------------------------------

    \942\ The PRA for preexisting Rule 605 estimates 319 reporting 
entities (153 OTC market makers, plus 24 national securities 
exchanges, 1 national securities association, 80 exchange market 
makers, and 61 ATSs). The Commission's method of estimating the 
reporting entities for the Commission's currently approved PRA for 
prior Rule 605 was over-inclusive. For example, it included national 
securities exchanges and ATSs that do not trade NMS stocks and 
broker-dealers that may trade NMS stocks but are not market makers. 
Based on updated estimates of the number of respondents, the 
Commission now estimates that there are only 228 current reporting 
entities.
    \943\ These 85 brokers-dealers include 39 broker-dealers that 
act as introducing brokers. The Commission initially estimated there 
would be 85 broker-dealers that introduce or carry 100,000 or more 
customer accounts, which included 37 broker-dealers and 48 carrying 
broker-dealers. See Proposing Release, 88 FR 3786 at 3826 (Jan. 20, 
2023). The Commission updated this estimate based on the FYE 2022 
FOCUS Reports received by the Commission and data from CAT for 
calendar year 2022. See infra Table 13.
    \944\ As of Nov. 21, 2023, there are 33 NMS Stock ATSs that have 
filed an effective Form ATS-N with the Commission.
    \945\ These 30 new market center respondents consist of 20 
market centers that will need to produce reports as a result of 
including fractional share orders within the scope of Rule 605 and 
10 SDPs. The Commission initially estimated there would be 38 new 
market center respondents, which included 8 entities that would 
operate qualified auctions. See Proposing Release, 88 FR 3786 at 
3826 (Jan. 20, 2023). Because final Rule 605 does not include a 
requirement that entities operating qualified auctions report 
separately, the Commission is revising its estimate to include 30 
new market center respondents.
---------------------------------------------------------------------------

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

D. Total PRA Burdens

    Rule 605, as amended, will require broker-dealers and market 
centers to make available to the public monthly order execution reports 
in electronic form. Broker-dealers and market centers retain most, if 
not all, of the underlying raw data necessary to generate these reports 
in electronic format or, if they do not, may obtain this information 
from publicly available data sources.\946\ Consequently, Rule 605 will 
not require new data collection or recordkeeping burdens. Respondents 
could either program their systems to generate the statistics and 
reports, or transfer the data to a service provider (such as an 
independent company in the business of preparing such reports or an 
SRO) that would generate the statistics and reports.
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    \946\ National securities exchanges, national securities 
associations, and registered brokers and dealers are subject to 
existing recordkeeping and retention requirements including 17 CFR 
240.17a-1 (``Rule 17a-1'') (for SROs); 17 CFR 240.17a-3 (``Rule 17a-
3'') and 240.17a-4 (``Rule 17a-4'') (for broker-dealers). See Rules 
17a-1, 17a-3, and 17a-4. The Commission's estimates include Rule 
605'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 final 17 
CFR 242.605(a)(5).
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    The currently approved PRA for prior Rule 605 estimates that each 
respondent spends 6 hours a month to collect the data necessary to 
generate the reports, or 72 hours per year.\947\ In the Proposing 
Release, the Commission estimated that each respondent would spend 8 
hours a month, or 96 hours per year, on an ongoing basis, to comply 
with Rule 605 as proposed to be amended.\948\
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    \947\ See infra note 953.
    \948\ See Proposing Release, 88 FR 3786 at 3826-27 (Jan. 20, 
2023).

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[[Page 26499]]

    One commenter stated that the proposal did not include burdens 
related to business-line personnel or technical staff.\949\ Further, 
one commenter stated that the Commission's compliance cost estimates 
were too low because the Commission neglected to take into account 
dedicated staff time needed for data reconciliation and validation and 
other ongoing compliance costs.\950\ The commenters provided no data 
and provided no alternative estimates of the cost of preparing the 
monthly reports.
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    \949\ See Data Boiler Letter at 21.
    \950\ See Robinhood Letter at 42 (stating that annual costs of 
up to $42,000 per year is ``an underestimation of annual costs'').
---------------------------------------------------------------------------

    In response to the commenters, the Commission is adjusting its 
estimated annual burdens to account for work to be performed by 
technical staff, as described below. In addition, the Commission is 
adjusting the hourly rates used to monetize burden hours in order to 
account for recent inflation rates.
    The Commission estimates that the initial and ongoing burdens will 
be different for those respondents that are already required to prepare 
reports and for new respondents. The Commission estimates that Rule 605 
amendments will result in an initial burden for current respondents of 
50 hours per respondent \951\ for systems updates to ensure that data 
responsive to the amended requirements is correctly collected and 
formatted. The initial burden estimate represents the work that will 
need to be done by existing respondents to modify their systems to 
collect data required under the amendments to Rule 605 and generate the 
monthly reports. The estimate includes time required to program and 
test automated systems to collect the necessary data, as well as review 
and approval by compliance personnel. The Commission does not believe 
the information required to be aggregated and included in Rule 605 
reports, as amended, will require preexisting respondents to acquire 
new hardware or systems to process the information required in the 
reports. The Commission further estimates that the Rule 605 amendments 
will result in an ongoing monthly burden of 11 hours per respondent to 
collect the necessary data and to prepare the required Rule 605 
reports, for a total annual burden of 132 hours per respondent.\952\ 
This estimate represents an increase of 3 hours per respondent over the 
Commission's initial estimate because it accounts for technical staff 
time that will be required to verify automated processes are 
functioning as intended and post and prepare the required reports, or 
transfer data to a service provider to generate the reports.\953\ This 
estimate has been revised from the Proposing Release in response to 
commenters who stated that the Commission did not adequately account 
for technical staff.\954\ With an estimated 228 respondents already 
subject to Rule 605, the total initial burden to comply with the Rule 
605 amendments is estimated to be 11,400 hours while the monthly 
reporting requirement is estimated to be 30,096 hours per year (228 x 
132). The burdens for respondents currently reporting under Rule 605 
are likely to be lower than those of new reporting entities because 
currently reporting entities already have systems in place to collect 
the data necessary to generate reports under the current rule. These 
estimates include the impact of preparing and making summary reports 
available using the most recent versions of the schema for CSV format 
and the associated PDF renderer as published on the Commission's 
website.
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    \951\ The Commission estimates the monetized initial burden for 
this requirement to be $4,577,100. The Commission derived this 
estimate based on per hour figures 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 $399 for 25 
hours) + (Sr. Systems Analyst at $343 for 10 hours) + (Compliance 
Manager at $373 for 10 hours) + (Director of Compliance at $588 for 
5 hours)] = $20,075 per respondent for a total initial monetized 
burden of $4,577,100 ($20,075 x 228 respondents).
    \952\ The Commission estimates the monetized annual burden for 
this requirement to be $11,775,744. 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 $440 for 6 
hours) + (Compliance Manager at $373 for 2 hours) + (Programmer at 
$301 for 2 hours) + (Systems Analyst at $316 for 1 hour)) x 12 
reports per year] = $51,648 per respondent for a total annual 
monetized burden of $11,775,744 ($51,648 x 228 respondents).
    \953\ The Commission's currently approved PRA for prior Rule 605 
(OMB Control Number 3235-0542), last updated in Apr. 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 amendments to Rule 605 will require additional 
data fields and the generation of summary reports, the data 
collection and report generation process will be an automated 
process that will not require substantial additional burden hours 
after initial set-up.
    \954\ See supra notes 949-950 and accompanying text. 
Specifically, although the commenters did not provide an estimate of 
the costs or time burdens that would be attributable to work 
performed by technical staff, the Commission is allocating 2 hours 
to a programmer and 1 hour to a systems analyst to account for 
technical assistance that may be necessary to ensure automated 
processes are functioning as intended.
    \955\ The Commission estimates the monetized initial burden for 
this requirement to be $4,617,250. 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 $399 for 50 
hours) + (Sr. Systems Analyst at $343 for 20 hours) + (Compliance 
Manager at $373 for 20 hours) + (Director of Compliance at $588 for 
10 hours)] = $40,150 per respondent for a total initial monetized 
burden of $4,617,250 ($40,150 x 115 respondents).
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    The Commission estimates that Rule 605 amendments will result in an 
initial burden for new respondents of 100 hours for each respondent 
\955\ for systems updates to ensure that data responsive to the amended 
requirements is correctly gathered and formatted. This burden is higher 
than the estimated burden for current respondents because new 
respondents do not currently have in place the systems to collect the 
information required for current Rule 605 reports. These respondents 
will likely require additional time to collect the relevant 
information. In addition, this estimate includes additional time for 
programming and testing automated systems to collect the necessary data 
and additional hours for review and approval by compliance personnel. 
Once the relevant data are collected, respondents could either program 
their systems to generate the reports or transfer the data to a service 
provider that will generate the reports. Respondents will likely not be 
required to acquire new hardware or other technological resources to be 
able to collect the data required by the amended rule given that 
respondents already have computing systems in place to, for example, 
transmit and process order information, and such systems could be 
leveraged to collect the required data. Further, to the extent a 
respondent does not have the technological capabilities or resources to 
generate the reports in-house, such respondents will likely utilize a 
service provider, as discussed below.

[[Page 26500]]

The Commission estimates that the Rule 605 amendments will result in an 
ongoing monthly burden of 11 hours to collect the necessary data and to 
prepare the required Rule 605 reports, for a total annual burden of 132 
hours per respondent.\956\ With an estimated 115 new respondents 
subject to Rule 605, the total initial burden to comply with the Rule 
605 amendments is estimated to be 11,500 hours while the monthly 
reporting requirement is estimated to be 15,180 hours per year (115 x 
132). These estimates include the impact of preparing and making 
summary reports available using the most recent versions of the schema 
for CSV format and the associated PDF renderer as published on the 
Commission's website.
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    \956\ The Commission estimates the monetized annual burden for 
this requirement to be $5,939,520. 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 $440 for 6 
hours) + (Compliance Manager at $373 for 2 hours) + (Programmer at 
$301 for 2 hours) + (Systems Analyst at $316 for 1 hour)) x 12 
reports per year] = $51,648 per respondent for a total annual 
monetized burden of $5,939,520 ($51,648 x 115 respondents).
[GRAPHIC] [TIFF OMITTED] TR15AP24.007


[[Page 26501]]


    The Commission estimates that in lieu of preparing both summary and 
detailed monthly reports in-house, an individual respondent could 
retain a service provider to prepare its monthly reports for between 
approximately $3,000 and $3,500 per month or approximately $36,000 to 
$42,000 per year.\957\ This per-respondent estimate is based on the 
rate that a reporting entity could expect to obtain if it negotiated on 
an individual basis. Based on the $3,000 to $3,500 estimate, the 
monthly cost to the 343 respondents to retain service providers to 
prepare reports will be between approximately $1,029,000 and $1,200,500 
((343 x $3,000) and (343 x $3,500), respectively), or a total annual 
cost of between approximately $12,348,000 and $14,406,000 (($1,029,000 
x 12) and ($1,200,500 x 12), respectively).
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    \957\ This estimate is the same as the Commission's estimate in 
the Proposing Release. The Commission's currently approved PRA for 
prior 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 Rule 605, as amended, are different than prior Rule 605 
or proposed Rule 605, the Commission does not believe that the 
overall cost of creating the required reports will differ 
substantially from these estimates. The Commission received no 
comments regarding its estimate of the external cost to retain a 
service provider. As discussed above, a commenter stated that the 
Commission underestimated annual compliance costs in the Proposing 
Release because the Commission's estimate of up to $42,000 per year 
in annual costs failed to account for staff time and other ongoing 
compliance costs. See supra note 950. In response to comments, the 
Commission increased its annual burden estimate. See supra notes 952 
and 956.
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    Finally, the 16 national securities exchanges and 1 national 
securities association will need to amend the Rule 605 NMS Plan to 
account for the new data fields required to be reported and to include 
references to larger broker-dealers in addition to market centers. The 
Commission is modifying the estimates for the initial burden and costs 
to the SROs to file the amendment to eliminate the per respondent 
burden for each SRO and instead estimate the burden for the SROs 
collectively because the respondents would file this amendment jointly, 
rather than individually, in connection with their status as 
participants in the effective national market system plan.\958\ The 
Commission estimates that there will be a one-time (or initial) burden 
of 85 hours \959\ to amend the Rule 605 NMS Plan to account for the new 
reporting fields and reporting parties. The Commission does not 
estimate that there will be any ongoing annual burden associated with 
the Rule 605 NMS Plan amendment to account for the new reporting fields 
and reporting parties. The Commission has based its estimate of SRO 
burden hours to amend the Rule 605 NMS Plan on the burden hours for 
existing NMS plans, while also taking into account the limited nature 
of the updates to the Rule 605 NMS Plan that will be required under the 
amendments to Rule 605.
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    \958\ Although the Commission is now estimating the collective 
burden for the SROs to make the necessary amendments to the Rule 605 
NMS Plan, the Commission's estimate of total initial burden hours 
and external costs remains consistent with the estimate in the 
Proposing Release. The Commission did not receive any comment on 
these burden hour estimates and external cost estimates.
    \959\ The Commission estimates the monetized initial burden for 
this requirement to be $43,605. 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 $501 for 68 hours) + (Assistant 
General Counsel at $561 for 17 hours)] = a total initial monetized 
burden of $43,605.
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    The Commission estimates that there will be outsourcing of legal 
time to develop and draft the Rule 605 NMS Plan amendment in order to 
account for additional data fields and reporting parties. The Rule 605 
NMS Plan amendment will be an update to the list of formats and fields 
to track the data elements set forth in the Rule and add references to 
broker-dealers subject to the Rule, and therefore the Commission 
estimates the hours necessary to develop and draft the amendment will 
be significantly lower than other recent NMS plan amendments. The 
Commission estimates that the plan participants will outsource 34 hours 
of legal time to prepare and file an amendment to the Rule 605 NMS 
Plan, at an average hourly rate of $575.\960\ The Commission estimates 
that the aggregate one-time reporting burden for preparing and filing 
an amendment to the Rule 605 NMS Plan will be approximately $19,550 in 
external costs from outsourced legal work [(at $575 for 34 hours = 
$19,550)].
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    \960\ The Commission's estimates of the relevant wage rates for 
outside legal services take 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 23,019 
hours for all respondents and a total annual burden of 45,276 hours for 
all respondents.\961\
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    \961\ (11,400 + 11,500 + 119) = 23,019 initial burden hours. 
(24,624 + 12,420) = 37,044 annual burden hours. The Commission 
estimates the monetized initial burden for all respondents to be 
$9,257,505 ($4,577,100 + $4,617,250 + $63,155) and the monetized 
annual burden for all respondents to be $17,715,266 ($11,775,744 + 
$5,939,520).
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IX. Economic Analysis

A. Introduction

    The Commission is mindful of the economic effects that may result 
from these amendments to Rule 605, including the benefits, costs, and 
the effects on efficiency, competition, and capital formation.\962\ The 
following economic analysis identifies and considers the costs and 
benefits--including the effects on efficiency, competition, and capital 
formation--that could result from these amendments to Rule 605.
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    \962\ 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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    In 2000, when the Commission adopted Rule 11Ac1-5, which was later 
redesignated as Rule 605, it stated that the rule should facilitate 
comparisons across market centers and provoke more vigorous competition 
on execution quality and broker-dealer order routing performance.\963\ 
However, under prior Rule 605 reporting requirements, market 
participants have not been able to observe the variations across 
broker-dealers in terms of the execution quality achieved by their 
order routing services using standardized and publicly available 
execution quality reports. Furthermore, in the subsequent decades, 
substantial changes in equity markets, including increases in trading 
speeds and fragmentation, have made it so that Rule 605 reports have 
become less informative than they were when Rule 605 was adopted. These 
amendments to Rule 605, including expanding the scope of reporting 
entities, modernizing the content of Rule 605 reports, and broadening 
the reports' accessibility, will increase the relevance and use of the 
information contained in the reports, and promote competition among 
market centers and broker-dealers. This increase in competition is 
expected to ultimately lead to improved execution quality for 
investors.
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    \963\ See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75417 
(Dec. 1, 2000).
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    The Commission recognizes that these amendments to Rule 605 will 
entail additional costs to market centers and broker-dealers of 
disclosing the required

[[Page 26502]]

execution quality information. Market centers will face initial 
compliance costs when updating their methods for preparing Rule 605 
reports, and broker-dealers that were not required to publish Rule 605 
reports prior to these amendments will face initial compliance costs, 
including, but not limited to, developing the systems and processes and 
organizing the resources necessary to generate the reports pursuant to 
Rule 605, and ongoing compliance costs to publish Rule 605 reports each 
month.
    The Commission has considered and is describing the economic 
effects of these amendments to Rule 605 and wherever possible has 
quantified the likely economic effects of these amendments. The 
Commission has incorporated data and other information, such as 
academic literature, to assist in the analysis of the economic effects 
of these amendments. However, because the Commission does not have, and 
in certain cases does not believe that it reasonably can obtain, data 
that may inform on certain economic effects, the Commission is unable 
to quantify those economic effects. Further, even in cases where the 
Commission has some data, the number and type of assumptions necessary 
to quantify certain economic effects would render any such 
quantification unreliable. Our inability to quantify certain costs, 
benefits, and effects does not imply that such costs, benefits, or 
effects are less significant.

B. Market Failure

    The information disclosed under Rule 605 has provided significant 
insight into execution quality at different market centers.\964\ 
However, the utility of some of the metrics in Rule 605 reports has 
eroded because such metrics have not kept up with the substantial 
changes in equity markets since the initial adoption of Rule 605's 
predecessor in 2000.\965\ As a result, Rule 605 is less able to address 
the market failures identified in the Rule 11Ac1-5 Adopting Release, 
including market centers' limited incentives to produce publicly 
available, standardized execution quality reports.\966\ While some 
metrics remain robust, particular metrics required to be reported by 
Rule 605 prior to these amendments have become less useful for 
comparing execution quality across market centers than they were when 
the predecessor of Rule 605 was initially adopted. Further, some 
metrics that will be useful in today's market were not required to be 
reported prior to these amendments. These market changes have limited 
the degree to which the metrics reported under prior Rule 605 promoted 
competition among market centers and improved execution quality.\967\ 
To enhance the value of Rule 605 reports, the Commission is updating 
the disclosure of order execution information and expanding the scope 
of reporting entities under Rule 605, which will result in a variety of 
improvements to market participants' access to information about 
execution quality.
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    \964\ See supra note 17.
    \965\ 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 but 
did not change the content of the reports. See supra note 45 and 
corresponding text.
    \966\ See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75414-15 
(Dec. 1, 2000).
    \967\ Several commenters stated that there are limitations to 
preexisting Rule 605 in light of significant market changes since 
2000. See, e.g., Vanguard Letter at 3 (stating that ``though [Rule 
605] provides a helpful baseline level of disclosure, it predates 
Regulation NMS and has not kept pace with advancements in technology 
and changes in market behavior''); Healthy Markets Letter at 16 
(stating that ``[t]he metrics [in Rule 605]--which are decades-old--
are wildly outdated''); Better Markets Letter at 1 (stating that 
``[Rule 605] has fallen well behind the dramatic changes in the 
structure of the markets and the advances in technology''); McHenry 
et al. Letter at 3 (stating that ``our equity markets have changed 
dramatically since Rule 605 was adopted in 2000 . . . the data 
reported under Rule 605 no longer provides an accurate measure of 
execution quality, particularly price improvement, for retail 
investors''). In addition, one commenter stated that Rule 605 
reports are ``incomplete'' and stated that they ``present an 
inaccurate picture of execution quality.'' Virtu Letter II at 1-2. 
One commenter believes that ``the current execution quality reports 
deliver sufficient comparative information on execution quality.'' 
TradeStation Letter at 6. For the reasons discussed throughout this 
release, in this section and in section IX.D.1, the Commission 
believes that there are currently limits to the usefulness of Rule 
605 for market participants, and that market participants will 
benefit from these updates to Rule 605.
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    The Commission does not believe that improvements to the 
preexisting Rule 605 metrics are likely to be achieved through a 
market-based solution.\968\ Even if all market centers were 
incentivized to voluntarily produce updated statistics for competitive 
or reputational reasons (e.g., they may lose business if their 
competitors provide reports and they do not), under current rules, 
there is little incentive for all market centers to agree on a 
standardized set of updated statistics. For example, market centers may 
be incentivized to design ad hoc reports to highlight areas where they 
believe they compare well to their competitors. Without a standardized 
set of statistics, it would be difficult for market participants to 
easily compare execution quality across market centers.
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    \968\ In the Rule 11Ac1-5 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 Rule 
11Ac1-5 Adopting Release, 65 FR 75414 at 75431 (Dec. 1, 2000).
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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 Rule 605 reports, due to the lack of granularity and 
significant time delay of many other publicly available datasets, which 
can lead to imprecise or stale measures. This limits certain market 
participants' ability to conduct analyses that examine and compare 
execution quality across market centers to inform investors. Moreover, 
even if execution quality information were voluntarily reported by 
market centers, there may also be limits to market participants' 
incentives to access it. For example, even if a subset of market 
centers is able to coordinate on and produce a standardized set of 
voluntary execution quality metrics, the ability of market participants 
to use this measure to make comparisons across reporting entities would 
depend on the subset of reporting entities that choose to report it. If 
this subset is not of a significant enough size, there may be few 
incentives for market participants to access the information.\969\ 
Therefore, this rulemaking to modernize the information required to be 
reported by all Rule 605 reporting entities will prove beneficial.\970\
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    \969\ For example, in 2015, a working group associated with the 
Financial Information Forum[thinsp]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''). See Retail Execution Quality 
Statistics, Fin. Info. F., available at https://fif.com/tools/retail-execution-quality-statistics. While the FIF Template 
represents a standardized set of execution quality statistics, only 
one wholesaler currently produces reports using the FIF Template. 
See also infra notes 1084-1085 and accompanying text (discussing the 
limited number of firms that have produced reports utilizing the FIF 
Template at various points in time). While it is unclear whether the 
lack of widespread uptake of the FIF Template was due to a lack of 
incentives for reporting entities to report or due to a lack of 
consumption by market participants, in either case these market 
failures are addressed by the current amendments to Rule 605, which 
require updates to the information reported under Rule 605 by all 
reporting entities. The amendments additionally increase the 
usefulness and accessibility of Rule 605 reports by expanding the 
scope of reporting entities to include larger broker-dealers, and by 
requiring summary execution quality reports.
    \970\ See supra section III describing the amendments modifying 
the scope of orders covered and information required to be disclosed 
pursuant to Rule 605.

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[[Page 26503]]

    In addition to modernizing the content of Rule 605, expanding the 
scope of entities that will be required to prepare Rule 605 reports to 
include larger broker-dealers will result in benefits that are unlikely 
to be achieved absent the amendments.\971\ 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.\972\ This limits the extent to which broker-dealers need to 
compete for customers or order flows on the basis of execution quality, 
which may result in lower execution quality for their customers.
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    \971\ A ``larger broker-dealer'' is a broker-dealer that meets 
or exceeds the ``customer account threshold,'' as defined in final 
17 CFR 242.605(a)(7). See supra note 61; see also supra section II.A 
(describing the amendments expanding the scope of Rule 605 reporting 
entities to include larger broker-dealers).
    \972\ Similar information asymmetries were recognized in the 
Rule 11Ac1-5 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.'' Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75433 
(Dec. 1, 2000).
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    As with market centers, most broker-dealers also do not necessarily 
have incentives to produce public and standardized execution quality 
reports and, therefore, are subject to the same market failures 
identified in the Rule 11Ac1-5 Adopting Release and described above. 
Furthermore, as discussed above in the context of market centers, even 
if broker-dealers are incentivized to produce execution quality 
reports, for example for marketing purposes or to protect against 
reputation loss, there are few incentives for broker-dealers to provide 
execution quality information that is standardized.\973\ As a result, 
individual investors and, to some extent, institutional investors,\974\ 
have limited access to standardized information that could be used to 
compare how execution quality varies across broker-dealers.\975\ 
Without standardized reporting requirements, broker-dealers may provide 
their customers with different metrics, such that customers would not 
be able to make comparisons among broker-dealers on the basis of 
execution quality. Additionally, even if broker-dealers provide their 
customers with the same metrics, they may use different methodologies 
to calculate these metrics, such that they would not be easily 
comparable. Both of these factors would limit customers' abilities to 
compare execution quality across broker-dealers.
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    \973\ See, e.g., supra note 969 for a discussion of the FIF 
Template. 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, e.g., reporting different metrics, using different 
methodologies, or different samples of stocks. See also Order 
Execution Quality, TD Ameritrade, available at https://www.tdameritrade.com/tools-and-platforms/order-execution.html (last 
updated 2024); Execution Quality, E*TRADE, available at https://us.etrade.com/trade/execution-quality (last updated 2024); Our 
Execution Quality, Robinhood, available at https://robinhood.com/us/en/about-us/our-execution-quality/ (last updated 2024). Several 
commenters stated that the execution quality metrics produced by 
broker-dealers are ``not universal'' (see Vanguard Letter at 4) and 
``haphazard and generally not comparable across brokers'' (see 
Professor Schwarz et al. Letter at 3).
    \974\ While some 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 nonpublic and highly 
individualized, and therefore limited to the execution quality 
obtained from broker-dealers with which the institutional investors 
currently do business. Since 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. See infra section IX.C.2.c) 
for further discussion.
    \975\ 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 IX.C.2.b) 
and IX.C.2.c) for further discussion.
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    One commenter stated that vendors could provide a market-based 
solution for producing comprehensive metrics and could compete for 
business.\976\ The Commission disagrees that a vendor-based market 
solution would achieve the same benefits as these amendments to Rule 
605. Vendors would not have access to information that is granular 
enough to produce execution quality metrics similar to the ones 
required by Rule 605 reporting requirements without getting data from 
market centers and broker-dealers. As discussed above, market centers 
and broker-dealers do not necessarily have incentives to provide public 
and standardized execution quality information, and those who choose 
not to contribute data may do so because they believe it is in their 
interest to keep their data out of public view.\977\ This makes it 
unlikely that a commercial data vendor will be able to produce an 
execution quality data product that is comprehensive and free from 
selection biases.\978\ Absent a requirement for reporting entities to 
publish standardized execution quality reports, competing vendors would 
likely have incomplete data or produce non-standardized metrics while 
market centers and broker-dealers might select the vendors that make 
them look the best. As a result, this market-based solution would be 
less valuable for comparing execution quality across market centers and 
broker-dealers. Furthermore, while competing vendors would likely be 
able to offer a data product summarizing the information contained in 
Rule 605 reports, it is not necessarily the case that these summary 
reports would be ``free and readily accessible to the public,'' as 
required by the amended rule.\979\
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    \976\ See Data Boiler Letter at 5 and 18.
    \977\ Even if there are reputational reasons for a reporting 
entity to provide its execution quality data to a vendor, for 
example, because a decision not to report would serve as a signal of 
poor execution quality, the relevance of this as an incentive to 
report depends on whether market participants are incentivized to 
access the information in the first place. The benefits to market 
participants from accessing execution quality information, and 
therefore their incentives to do so, are limited if the execution 
quality information only contains a limited subset of reporting 
entities. See, e.g., the discussion of the limited uptake of the FIF 
Template in note 969, supra, and corresponding text. In theory, this 
could result in multiple equilibria, in which either all market 
participants are incentivized to access execution quality data and 
all reporting entities are incentivized to report, or no market 
participants are incentivized to access execution quality data and 
no reporting entities are incentivized to report. Since the benefits 
from execution quality transparency are diffused across many market 
participants, while the costs of reporting are concentrated among a 
smaller subset of entities, it is likely that the cost effect will 
dominate, such that the latter equilibrium is more likely. The 
latter equilibrium is also similar to what was observed with the 
limited uptake of the FIF Template. See supra note 969.
    \978\ Market participants that voluntarily contribute data to 
commercial datasets ``self-select'' the data that they would like to 
be included in the dataset. It is widely acknowledged in the 
empirical economics literature that the practice of having entities 
under study self-select into the dataset very likely leads to biased 
data. See, e.g., James J. Heckman, Selection Bias and Self-
Selection, in Econometrics 201-224 (John Eatwell, et al., eds., 
Palgrave Macmillan 1990).
    \979\ For example, while it is likely that data vendors would 
make summary reports available for a fee, final 17 CFR 242.605(a)(5) 
requires that reporting entities keep the required summary execution 
quality 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.''
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C. Baseline

    The baseline is the status quo against which the costs, benefits, 
and the effects on efficiency, competition, and capital formation of 
these amendments are measured. This baseline consists, first, of the 
regulatory baseline, which frames both investors' access to execution 
quality information under Rule 606 and preexisting Rule 605 and market 
participants' access to market data, both currently and as expected 
under the

[[Page 26504]]

unimplemented MDI Rules.\980\ The regulatory baseline also consists of 
other recently adopted rules. In addition, the baseline consists of the 
usage of preexisting Rule 605 execution quality information by market 
participants. Next, the baseline discusses issues with market 
participants' ability to use preexisting Rule 605 information to 
evaluate and compare execution quality across reporting entities prior 
to these amendments. Lastly, this baseline describes the state of the 
markets for brokerage and trading services and the extent to which Rule 
605's ability to promote competition on the basis of execution quality, 
both among broker-dealers and among market centers, may have been 
limited prior to these amendments. The economic analysis considers 
existing regulatory requirements, including recently adopted rules, as 
part of its economic baseline against which the costs and benefits of 
the amended rule are measured.\981\
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    \980\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021).
    \981\ See, e.g., Nasdaq v. SEC, 34 F.4th 1105, 1111-15 (D.C. 
Cir. 2022). This approach also follows Commission staff guidance on 
economic analysis for rulemaking. See Memorandum from SEC Div. of 
Risk, Strategy Fin. Innovation & Off. Of Gen. Couns. To Staff of the 
Rulewriting Divisions and Offices (Mar. 16, 2012), available at 
https://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf (``The economic 
consequences of proposed rules (potential costs and benefits 
including effects on efficiency, competition, and capital formation) 
should be measured against a baseline, which is the best assessment 
of how the world would look in the absence of the proposed 
action.''); id. at 7 (``The baseline includes both the economic 
attributes of the relevant market and the existing regulatory 
structure.''). The best assessment of how the world would look in 
the absence of the proposed or final action typically does not 
include recently proposed actions, because doing so would improperly 
assume the adoption of those proposed actions.
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1. Regulatory Baseline
(a) Disclosure Requirements Under Preexisting Rule 605
    Rule 605 requires reporting entities to make available, on a 
monthly basis, standardized information concerning execution quality 
for covered orders in NMS stocks; prior to these amendments, these 
reporting entities included only market centers.\982\ 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.\983\ This format allows 
market participants to partially control for differences in market 
centers' order flow characteristics when assessing execution quality 
information, facilitating more apples-to-apples comparisons of 
execution quality across market centers. This is important because a 
particular market center's order flow may be made up of a different 
mixture of securities, order types, and order sizes, which may impact 
or constrain that market center's overall execution quality.\984\ In 
addition, some of the information required to be reported by Rule 605, 
such as the realized spread, does not measure execution quality 
directly but serves the purpose of providing context to execution 
quality metrics and ascertaining how entities handle orders during 
different market conditions.\985\
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    \982\ See prior 17 CFR 242.605.
    \983\ See prior 17 CFR 242.605(a)(1). These size categories 
were: 100 to 499 shares; 500 to 1,999 shares; 2000 to 4,999 shares; 
and 5,000 or greater shares. See prior 17 CFR 242.600(b)(13).
    \984\ 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. Several commenters 
discussed the importance of being able to make apples-to-apples 
comparisons of execution quality to help ensure that differences in 
execution quality are not driven by factors such as stock 
characteristics and different clientele. See, e.g., TradeStation 
Letter at 7, stating that ``differences [in retail client personas] 
cause execution quality data to be difficult to compare on an 
apples-to-apples basis because, for example, trade and execution 
data generated from buy-and-hold investors' orders differs vastly 
from the same data generate[d] from active traders' orders;'' and 
Virtu Letter II at 13, stating that ``[f]actors like the mix of 
stocks a broker handles and the trading strategies of its customers 
can make one broker's order flow more costly to fulfill and/or 
challenging to execute than another's and therefore explain 
potential differences in execution quality between brokers.''
    \985\ See infra note 1229 and accompanying text for a discussion 
of realized spread as a measure of market makers' ability to provide 
liquidity during adverse market conditions.
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    In addition, the execution quality information required by Rule 605 
pertains to several different aspects of execution quality, namely, 
execution prices, execution speeds, and fill rates. Prior to these 
amendments, this information on execution prices included, for market 
orders and marketable limit orders, the average effective spread,\986\ 
number of shares executed at prices better than the quote, at the 
quote, or outside the quote,\987\ as well as average dollar amount per 
share that orders were executed at prices better than the quote or 
outside the quote.\988\ Information on execution speeds included, for 
all order types, the cumulative number of shares executed within 
different time-to-execution buckets \989\ 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.\990\ Information that could be used to calculate fill rates 
included, for all order types, the cumulative number of shares of 
covered orders, the cumulative number of shares of covered orders 
executed at the receiving market center, and the cumulative number of 
shares of covered orders executed at any other venue.\991\
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    \986\ See prior 17 CFR 242.605(a)(1)(ii)(A).
    \987\ See prior 17 CFR 242.605(a)(1)(ii)(B), (C), and (G), 
respectively.
    \988\ See prior 17 CFR 242.605(a)(1)(ii)(C) and (H), 
respectively.
    \989\ Prior to amendment, the time-to-execution categories 
defined in Rule 605 were 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 prior 17 CFR 242.605(a)(1)(i)(F) through 
(J).
    \990\ See prior 17 CFR 242.605(a)(1)(ii)(D), (F), and (I), 
respectively.
    \991\ See prior 17 CFR 242.605(a)(1)(i)(B), (D), and (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).
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    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.\992\ 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.\993\ 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.\994\ 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.\995\
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    \992\ See Rule 605 NMS Plan Release, 66 FR 19814 (Apr. 17, 
2001).
    \993\ See supra note 869 for further discussion.
    \994\ See Rule 605 NMS Plan at section VII & n.3.
    \995\ See Rule 605 NMS Plan Release, 66 FR 19814 at 19815 (Apr. 
17, 2001) (``Section V . . . provides that market center files must 
be in standard, pipe-delimited ASCII format'').
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(b) Disclosure Requirements Under Rule 606
    Under Rule 606, broker-dealers are required to identify the venues, 
including market centers, to which they route customer orders for 
execution.\996\ Specifically, with respect to held orders, Rule 
606(a)(1) requires broker-dealers to produce quarterly public reports 
containing information about the venues to which the broker-dealer 
regularly routed non-directed orders for execution, including any 
payment relationship between the broker-dealer and the venue, such as 
any PFOF

[[Page 26505]]

arrangements.\997\ 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.\998\ For orders submitted on a held basis, 
the reports required by Rule 606 do not contain any execution quality 
information.
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    \996\ See 17 CFR 242.606(a)(1).
    \997\ See id. These reports must provide information, for each 
venue identified, on the net aggregate amount of any payment for 
order flow received, payment from any profit-sharing relationship 
received, transaction fees paid, and transaction rebates received, 
both as a total dollar amount and per share, for each of the 
following non-directed order types: (A) market orders; (B) 
marketable limit orders; (C) non-marketable limit orders; and (D) 
other others. See 17 CFR 242.606(a)(1)(iii).
    \998\ See 17 CFR 242.606(b)(1).
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    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.\999\ 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.\1000\ 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.
---------------------------------------------------------------------------

    \999\ See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75435 
(Dec. 1, 2000), stating that ``[s]upplied 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.''
    \1000\ See infra section IX.C.3.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,\1001\ broker-dealers are 
subject to requirements to provide information about the execution 
quality that they achieved for not held orders, which are typically 
used by institutional investors.\1002\ 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.\1003\ 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.\1004\
---------------------------------------------------------------------------

    \1001\ See generally 2018 Rule 606 Amendments Release, 83 FR 
58338 (Nov. 19, 2018).
    \1002\ 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 Dec. 5, 2016, to Dec. 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 at 58393 (Nov. 19, 2018); 
see also id. 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).
    \1003\ 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).
    \1004\ See 17 CFR 242.606(b)(3)(ii).
---------------------------------------------------------------------------

(c) Rules Addressing Consolidated Market Data
    In 2020, the Commission adopted a new rule and amended existing 
rules to establish a new infrastructure for consolidated market 
data,\1005\ and the regulatory baseline includes these changes to the 
current arrangements for consolidated market data. However, as 
discussed in more detail below, the MDI Rules have not been 
implemented, and so they have not yet affected market practices. As a 
result, the data used to measure the baseline below reflects the 
regulatory structure in place for consolidated market data prior to the 
implementation of the MDI Rules.
---------------------------------------------------------------------------

    \1005\ See MDI Adopting Release, 86 FR 18596 (Apr. 9, 2021).
---------------------------------------------------------------------------

    The Commission received comments regarding uncertainty over the 
market effect of the MDI Rules, once implemented, and how this will 
affect the baseline assumptions of Rule 605, as amended.\1006\ 
Accordingly, this section will first briefly summarize the regulatory 
structure for consolidated market data prior to the implementation of 
the MDI Rules. It then will discuss the current status of the 
implementation of the MDI Rules and provide an assessment of the 
potential effects that the implementation of the MDI Rules can have on 
the baseline estimations.
---------------------------------------------------------------------------

    \1006\ See Schwab Letter at 2; Tastytrade Letter at 2 & n.1; DOJ 
Letter at 6-7.
---------------------------------------------------------------------------

(1) Regulatory Structure for Consolidated Market Data Prior to the MDI 
Rules
    Consolidated market data are made widely available to investors 
through the national market system, a system set forth by Congress in 
section 11A of the Exchange Act \1007\ and facilitated by the 
Commission in Regulation NMS.\1008\ Market data are collected by 
exclusive SIPs,\1009\ 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.\1010\ 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

[[Page 26506]]

consolidated market data.\1011\ Disseminated quotation information 
includes each exchange's current highest bid and lowest offer and the 
shares available at those prices, as well as the NBBO. For transaction 
information, currently all national securities exchanges that trade NMS 
stocks, as well as FINRA, provide real-time transaction information to 
the SIPs for dissemination in consolidated market data. Such 
information includes the symbol, price, size, and exchange of the 
transaction, and it includes odd-lot transactions.
---------------------------------------------------------------------------

    \1007\ See 15 U.S.C. 78k-1(a)(1)(C).
    \1008\ 17 CFR 242.600 through 242.614.
    \1009\ See MDI Adopting Release, 86 FR 18596 at 18598-99 (Apr. 
9, 2021) (describing that the exclusive SIPs, among other things, 
disseminate core data, which currently consist 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).
    \1010\ 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 No. 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); Securities Exchange Act Release No. 
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. See id. at 10407.
    \1011\ On Dec. 16, 2022, FINRA filed with the Commission a 
proposed rule change to add IntelligentCross ATS as a new entrant to 
the ADF. On Aug. 24, 2023, the Division of Trading and Markets 
approved FINRA's proposed rule change pursuant to delegated 
authority. On Aug. 25, 2023, the Deputy Secretary of the Commission 
notified FINRA that, pursuant to Commission Rule of Practice 431, 
the Commission would review the Division of Trading and Markets' 
action pursuant to delegated authority and that the Division of 
Trading and Markets' action pursuant to delegated authority was 
stayed until the Commission orders otherwise. See Securities 
Exchange Act Release No. 96550 (Dec. 20, 2022), 87 FR 79401 (Dec. 
27, 2022) (FINRA proposed rule change to add IntelligentCross ATS as 
a new entrant to the ADF); Securities Exchange Act Release No. 98212 
(Aug. 24, 2023), 88 FR 59958 (Aug. 30, 2023) (release approving 
FINRA's proposal by the Division of Trading and Markets pursuant to 
delegated authority). Securities Exchange Act Release No. 98642 
(Sept. 29, 2023) (Commission order staying the Division of Trading 
and Markets' approval pursuant to delegated authority until the 
Commission orders otherwise).
---------------------------------------------------------------------------

(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; \1012\ (2) information about certain orders that are 
outside of an exchange's best bid and best offer (i.e., certain depth 
of book data); \1013\ and (3) information about orders that are 
participating in opening, closing, and other auctions.\1014\ The MDI 
Rules also introduce a four-tiered definition of round lot that is tied 
to a stock's average closing price during the previous month.\1015\ For 
stocks with prices greater than $250, a round lot is defined as 
consisting of between 1 and 40 shares, depending on the tier.\1016\ 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.\1017\ These competing consolidators are not required to 
offer a product containing all elements of consolidated market data, 
but are able to develop the consolidated market data products that 
their subscribers demand.\1018\
---------------------------------------------------------------------------

    \1012\ See final 17 CFR 242.600(b)(69); MDI Adopting Release, 86 
FR 18596 at 18613 (Apr. 9, 2021).
    \1013\ See MDI Adopting Release, 86 FR 18596 at 18625 (Apr. 9, 
2021).
    \1014\ See id. at 18630.
    \1015\ See id. at 18617.
    \1016\ 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.
    \1017\ See id. at 18637.
    \1018\ See id. at 18608, 18671-72.
---------------------------------------------------------------------------

    In the MDI Adopting Release, the Commission established a 
transition period for the implementation of the MDI Rules.\1019\ The 
Commission's approval of such amendments will be the starting point for 
the rest of the MDI implementation schedule.\1020\ After approval of 
the MDI Plan Amendments, the next step will be a 180-day development 
period, during which competing consolidators can register with the 
Commission.\1021\ Based on the times provided in the transition plan 
for implementation of the MDI Rules, the Commission estimated that the 
full implementation of the MDI Rules will be at least two years after 
the Commission's approval of the plan amendment(s) required by Rule 
614(e).\1022\
---------------------------------------------------------------------------

    \1019\ See id. at 18698-18701.
    \1020\ See id. at 18698.
    \1021\ See id. at 18699-18700.
    \1022\ See id. at 18700-18701; Minimum Pricing Increments 
Proposing Release, 87 FR 80266 at 80295 (Dec. 29, 2022). The 
transition time frame includes the implementation of the round lot 
definition, which is scheduled to occur at the end of the transition 
plan. The Commission has proposed to accelerate the implementation 
of the odd-lot information and round lot definition. See id. at 
80295-99. As this proposal has not been adopted, it is not part of 
the baseline of the Rule 605 amendments. See supra note 981.
---------------------------------------------------------------------------

    The Operating Committees of the CTA/CQ Plan and UTP Plan filed the 
MDI Plan Amendments on November 5, 2021.\1023\ The Commission 
disapproved the proposed amendments on September 21, 2022.\1024\ As a 
result, the participants to the effective national market system 
plan(s) will need to develop and file new proposed amendments as 
required by Rule 614(e), before the implementation period prescribed by 
the phased transition plan can commence. Because the implementation of 
the MDI Rules has been delayed, the end date of the implementation 
period cannot be estimated with greater certainty.
---------------------------------------------------------------------------

    \1023\ The Operating Committees of CTA Plan and UTP Plan filed 
proposed amendments on Nov. 5, 2021, which were published for 
comment in the Federal Register. See Securities Exchange Act Release 
Nos. 93615 (Nov. 19, 2021), 86 FR 67800 (Nov. 29, 2021); 93625 (Nov. 
19, 2021), 86 FR 67517 (Nov. 26, 2021); 93620 (Nov. 19, 2021), 86 FR 
67541 (Nov. 26, 2021); 93618 (Nov. 19, 2021), 86 FR 67562 (Nov. 26, 
2021).
    \1024\ See Securities Exchange Act Release Nos. 95848 (Sept. 21, 
2022), 87 FR 58544 (Sept. 27, 2022); 95849 (Sept. 21, 2022), 87 FR 
58592 (Sept. 27, 2022); 95850 (Sept. 21, 2022), 87 FR 58560 (Sept. 
27, 2022); 95851 (Sept. 21, 2022), 87 FR 58613 (Sept. 27, 2022).
---------------------------------------------------------------------------

    Given that the MDI Rules have not yet been implemented, they have 
not affected market practice and therefore data that would be required 
for a quantitative analysis of a baseline that includes the effects of 
the MDI Rules is not available. It is possible that the baseline (and 
therefore the economic effects relative to the baseline) could be 
different once the MDI Rules are implemented. The following discussion 
reflects the Commission's assessment of the anticipated economic 
effects of the MDI Rules described in the MDI Adopting Release as they 
relate to the baseline for the adoption of these amendments.\1025\
---------------------------------------------------------------------------

    \1025\ See MDI Adopting Release, 86 FR 18596 at 18741-18799 
(Apr. 9, 2021).
---------------------------------------------------------------------------

    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 \1026\) 
to form a round lot and qualify for the NBBO.\1027\ 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.\1028\ 
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

[[Page 26507]]

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.\1029\ More broadly, the Commission anticipated that the 
adopted rules will have these effects whenever the new round lot bids 
do not exactly balance the new round lot offers. However, the 
Commission stated that it does not know to what extent or in which 
direction such odd-lot imbalances in higher priced stocks currently 
exist, so it is uncertain of the extent or direction of the 
change.\1030\
---------------------------------------------------------------------------

    \1026\ The calculation of the NBBO includes odd-lots that, when 
aggregated, are equal to or greater than a round lot. Under final 17 
CFR 242.600(b)(26)(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.
    \1027\ 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.
    \1028\ See supra note 1026. 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 18596 at 18743 (Apr. 9, 
2021).
    \1029\ 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 higher for sell orders.
    \1030\ See MDI Adopting Release, 86 FR 18596 at 18750 (Apr. 9, 
2021).
---------------------------------------------------------------------------

    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.\1031\ 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.''
---------------------------------------------------------------------------

    \1031\ However, this effect will depend on how market 
participants adjust their order submissions. See id. at 18746 for 
further discussion.
---------------------------------------------------------------------------

    The new round lot definition will result in fewer odd-lot orders in 
stocks with prices greater than $250, as some orders that were defined 
as odd-lots prior to the MDI Rules are now defined as round lots. At 
the same time, the MDI Rules may also result in a higher number of odd-
lot trades, as the inclusion of odd-lot quotes that may be priced 
better than the current NBBO in consolidated market data may attract 
more trading interest from market participants that did not have access 
to this information prior to the MDI Rules.\1032\ However, the 
magnitude of this effect depends on the extent to which market 
participants who rely solely on SIP data and lack information on odd-
lot quotes choose to receive the odd-lot information and trade on it. 
The Commission states in the MDI Adopting Release that it believes it 
is not possible to observe this willingness to trade with existing 
market data.\1033\
---------------------------------------------------------------------------

    \1032\ See id. at 18754.
    \1033\ 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.\1034\ Broker-dealers 
may choose to receive market data from competing consolidators, who may 
offer different consolidated market data products at different prices 
or at different latencies or with different amounts of data 
content.\1035\ Competing consolidators will be required to disclose 
information about their consolidated market data products, including 
the services they will offer, the prices for such services as well as 
performance metrics, which will assist a broker-dealer in selecting an 
appropriate competing consolidator.\1036\ The Commission states in the 
MDI Adopting Release that it believes that competition among 
consolidators will support high quality consolidated market data.\1037\ 
Furthermore, while competing consolidators are not required to offer a 
product containing all elements of consolidated market data, the 
Commission states that it believes that one or more competing 
consolidators will be incentivized to offer a consolidated market 
product containing all of the data elements.\1038\
---------------------------------------------------------------------------

    \1034\ See id. at 18725.
    \1035\ See id. at 18606.
    \1036\ See id.
    \1037\ See id. at 18661.
    \1038\ See id. at 18752.
---------------------------------------------------------------------------

    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.\1039\ 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.\1040\ However, the 
Commission stated that it was uncertain about the magnitude of both of 
these effects.\1041\ 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.
---------------------------------------------------------------------------

    \1039\ See id. at 18744.
    \1040\ See id. at 18596, 18754.
    \1041\ 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.\1042\ 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.\1043\ However, the Commission stated that 
it was uncertain of the magnitude of these effects.\1044\
---------------------------------------------------------------------------

    \1042\ See id. at 18748.
    \1043\ See id.
    \1044\ 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.\1045\ 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,\1046\ and to make

[[Page 26508]]

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.\1047\ 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.
---------------------------------------------------------------------------

    \1045\ See id. at 18747.
    \1046\ Individual investor orders typically feature lower 
adverse selection than other types of orders, such as institutional 
orders. 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. 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).
    \1047\ See MDI Adopting Release, 86 FR 18596 at 18748 (Apr. 9, 
2021).
---------------------------------------------------------------------------

    Where implementation of the above-described MDI Rules may affect 
certain numbers in the baseline, the description of the baseline below 
notes those effects.
(d) Other Recently Adopted/Proposed Rules
    Several commenters requested that the Commission consider 
interactions between the economic effects of the proposal to amend Rule 
605 and other recent Commission proposals.\1048\ In addition to 
interaction between this rulemaking and the MDI Adopting Release, 
discussed supra, commenters stated that there could be interactions 
between this rulemaking and another proposal \1049\ that has since been 
adopted, the Settlement Cycle Adopting Release,\1050\ which affects the 
same market participants as the amendments to Rule 605. Commenters 
stated that implementing the rules together would impact industry 
resources, or that the rules had uncertain interacting effects.\1051\ 
This rule was not included as part of the baseline in the Proposing 
Release because it was not adopted at the time of the Proposing 
Release. In response to commenters, this economic analysis considers 
potential economic effects arising from any overlap between the 
compliance period for the final amendments and that of the Settlement 
Cycle Adopting Release.\1052\
---------------------------------------------------------------------------

    \1048\ See, e.g., Nasdaq Letter at 6 (``the Commission must be 
careful to consider both the individual and combined effects of its 
Proposals''); SIFMA AMG Letter at 4 (``the cumulative effects of 
multiple, major changes to the market structure necessarily 
compound, making the need for careful analysis of their 
intersections indispensable'').
    \1049\ Securities Exchange Act Release No. 94196 (Feb. 9, 2022), 
87 FR 10436 (Feb. 24, 2022) (Shortening the Securities Transaction 
Settlement Cycle).
    \1050\ Securities Exchange Act Release No. 96930 (Feb. 15, 
2023), 88 FR 13872 (Mar. 6, 2023) (Shortening the Securities 
Transaction Settlement Cycle) (``Settlement Cycle Adopting 
Release''). The Settlement Cycle Adopting Release shortens the 
standard settlement cycle for most broker-dealer transactions from 
two business days after the trade date to one business day after the 
trade date (``T+1''). To facilitate orderly transition to a shorter 
settlement cycle, the rule requires same-day confirmations, 
allocations, and affirmations for processing transactions subject to 
the rule, and requires records of each confirmation received, and of 
any allocation and each affirmation sent or received, with a date 
and time stamp for each indicating when it was sent or received. 
With certain exceptions, the rule has a compliance date of May 28, 
2024. See Settlement Cycle Adopting Release, 88 FR 13872 at 13918, 
section VII (Mar. 6, 2023).
    \1051\ See SIFMA AMG Letter at 3; Chamber of Commerce Letter at 
3; Fidelity Letter at 4, n.4; BlackRock Letter at 17; Rebekah 
Goshorn Jurata, General Counsel, American Investment Council, at 9, 
n.30 (Aug. 8, 2023), available at https://www.sec.gov/comments/s7-29-22/s72922-245802-509962.pdf (``American Investment Council'').
    \1052\ Since proposing this rule, the Commission adopted 
Securities Exchange Act Release No. 99477 (Feb. 6, 2024) (Further 
Definition of ``As a Part of a Regular Business'' in the Definition 
of Dealer and Government Securities Dealer) (``Dealer Definition 
Amending Release''). Commenters identified the proposed rule as 
having interacting effects with Rule 605. See Chamber of Commerce 
Letter at 3; Fidelity Letter at 4, n.4; BlackRock Letter at 2 & n.6, 
17 (citing Securities Exchange Act Release No. 94524 (Mar. 28, 
2022), 87 FR 23054 (Apr. 18, 2022)). The Dealer Definition Amending 
Release adopts new rules to further define the phrase ``as a part of 
a regular business'' as used in the statutory definitions of 
``dealer'' and ``government securities dealer.'' The Commission 
believes there are no potential significant effects from overlapping 
requirements to comply with the amendments to Rule 605. Under Rule 
605(a)(7), as adopted, a broker-dealer which is not a market center 
is subject to the final rule only if it ``introduces or carries 
100,000 or more customer accounts through which transactions are 
effected for the purchase or sale of NMS stocks.'' By contrast, 
under the Dealer Definition Amending Release, the affected parties 
are liquidity providers that introduce or carry no customer 
accounts, that will be required to register as dealers. As a result, 
the Commission does not anticipate the compliance costs associated 
with these amendments to Rule 605 to be incurred directly by those 
who are impacted by the Dealer Definition Amending Release.
---------------------------------------------------------------------------

    In addition, commenters stated that there were overlapping 
compliance costs between the final amendments and the proposals that 
have not been adopted: in particular, the Order Competition Rule 
Proposing Release, the Regulation Best Execution Proposing Release, and 
the Minimum Pricing Increments Proposing Release.\1053\ Numerous 
commenters accordingly recommended an incremental or sequential 
approach to the Commission's market structure proposals.\1054\ To the 
extent the Commission takes final action on any or all of those 
proposals, the baseline in each of those subsequent rulemakings will 
reflect the existing regulatory requirements at that time.
---------------------------------------------------------------------------

    \1053\ See, e.g., SIFMA Letter II, at 2-3, 8-9, 11-13, 16-21 & 
app. E. In addition to the three other market structure proposals, 
commenters also stated interacting effects with another proposal 
that has not yet been adopted, Securities Exchange Act Release No. 
94062 (Jan. 26, 2022), 87 FR 15496 (Mar. 18, 2022) (Amendments 
Regarding the Definition of ``Exchange'' and Alternative Trading 
Systems (ATSs) That Trade U.S. Treasury and Agency Securities, 
National Market System (NMS) Stocks, and Other Securities). See, 
e.g., Chamber of Commerce Letter at 3; Fidelity Letter at 4 nn.4, 
10.
    \1054\ See, e.g., SIFMA AMG Letter at 2, 18; STA Letter at 9-10.
---------------------------------------------------------------------------

    In a related comment, one commenter stated that the other market 
structure proposals should be delayed for a period sufficient to 
analyze the metrics under the amended Rule 605 reporting requirements, 
to establish an updated baseline for the other rules' benefits and 
costs and--if the other rules are adopted--to accurately measure their 
impact.\1055\ This comment pertains to the timing of adoption and 
baseline assumptions of the other market structure proposals and will 
be considered in connection with those proposals.
---------------------------------------------------------------------------

    \1055\ See Rule 605 Citadel Letter at 1-2, 4; see also Equity 
Market Structure Citadel Letter at 15, 21; Equity Market Structure 
Citadel Letter II at 1-3.
---------------------------------------------------------------------------

2. Use of Reports Under Rule 605 Prior to Rule Amendments
(a) Relevance of Execution Quality Information
    When a customer places an order in an NMS stock with a broker-
dealer, the broker-dealer acts as an agent on behalf of that customer, 
to whom the broker-dealer owes a duty of best execution.\1056\ These 
broker-dealers can generally decide how to route that order for 
execution to an exchange, a wholesaler, or an ATS, where the trade may 
be executed or potentially routed further. These market centers, among 
other things, match traders with counterparties, provide a framework 
for price negotiation and provide liquidity to those seeking to trade. 
In this way, individual and institutional investors are subject to a 
principal-agent relationship in which an order submitter (the 
principal) submits an order to an agent to handle on its behalf, in 
this case the broker-dealer. Since information asymmetries prevent the 
principal from being able to directly observe the agent's handling of 
the order, this creates possible conflicts of interest in which the 
agent's incentives may not align with the interests of the

[[Page 26509]]

principal.\1057\ Since the broker-dealers typically do not directly 
observe market centers' executions of their routed orders,\1058\ 
similar information asymmetries exist between broker-dealers and the 
market centers to which they route customer orders.
---------------------------------------------------------------------------

    \1056\ 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 
IX.C.4.a)(1)(b) for further discussion.
    \1057\ 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 a situation where the 
agent's incentives may not align with the principal's, as the 
principal would be able to directly observe the agent's actions and 
switch to another agent.
    \1058\ See supra note 972, noting that a similar principal-agent 
problem was recognized in the Rule 11Ac1-5 Adopting Release, 65 FR 
75414 (Dec. 1, 2000).
---------------------------------------------------------------------------

    Standardized execution quality information, such as the information 
available from Rule 605 reports, alleviates these information 
asymmetries.\1059\ First, it provides broker-dealers access to 
information about the execution quality of market centers, which they 
can use to inform their routing decisions.\1060\ Secondly, in 
conjunction with broker-dealer routing information from Rule 606 
reports,\1061\ preexisting Rule 605 allowed investors access to 
information about the execution quality achieved by the market centers 
to which their broker-dealers typically route.\1062\
---------------------------------------------------------------------------

    \1059\ Several commenters stated that execution quality 
information from Rule 605 reports is generally useful, including as 
a ``valuable source of information which the investing public 
reviews to compare and evaluate executions'' (see BlackRock Letter 
at 3); as a ``valuable feature of the equities markets and provides 
investors the ability to make informed decisions about where to send 
their orders'' (see SIFMA Letter II at 25); and as ``the primary 
tool for measuring the quality of order execution in our equity 
markets'' (see McHenry et al. Letter at 3).
    \1060\ This was supported by comment. See, e.g., Healthy Markets 
Letter at 15 (``Timely, reliable, and useful statistics about order 
execution information from trading venues is essential to empowering 
investors and their brokers with the information they need to make 
sound order routing decisions'').
    \1061\ See infra section IX.C.3.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.
    \1062\ 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 sections IX.C.2.b) through IX.C.2.d) for a detailed 
discussion. Any source of ex post execution quality information is 
unlikely to eliminate this information asymmetry entirely, as it is 
likely infeasible for any principal to perfectly observe ex ante or 
even in real time how an agent will perform in executing its 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 how and where to route orders 
for execution,\1063\ their routing decisions affect the execution 
quality that their customers' orders receive, leading to significant 
variations in execution quality across broker-dealers. For example, a 
broker-dealer may route a marketable IOC order to a market center that 
is not posting any liquidity at the NBBO (in which case the order would 
be cancelled), or a broker-dealer may route a NMLO to a market center 
that is not attracting any trading interest (in which case the NMLO 
would likely be cancelled at the end of day, if not earlier). The 
authors of one recent academic working paper ran an experiment in which 
they placed identical simultaneous market orders across various broker-
dealers; they found that the execution quality of these orders differed 
significantly in terms of average price improvement and effective 
spreads.\1064\ 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.\1065\ The 
evidence that there are significant differences in execution quality 
across broker-dealers suggests that without access to standardized 
information about broker-dealer execution quality, it is difficult for 
investors to compare these differences when choosing a broker-dealer.
---------------------------------------------------------------------------

    \1063\ See infra section IX.C.4.b)(1) for a discussion of 
fragmentation in the market for trading services.
    \1064\ See Christopher Schwarz et al., The `Actual Retail Price' 
of Equity Trades (working paper Sept. 14, 2022), available at 
https://ssrn.com/abstract=4189239 (retrieved from SSRN Elsevier 
database) (``Schwarz et al. (2023)''). The authors find that this 
dispersion is due to off-exchange wholesalers systematically giving 
different execution prices for the same trades to different brokers. 
See also Bradford (Lynch) Levy, Price Improvement and Payment for 
Order Flow: Evidence from A Randomized Controlled Trial (working 
paper June 27, 2022), available at https://ssrn.com/abstract=4189658 
(retrieved from SSRN Elsevier database) (``Levy (2022)''). Levy 
(2022) also conducts a randomized controlled trial that involves 
trading random stocks at random times across random brokers and 
comparing execution quality across direct market access and PFOF-
based brokers. The author found variation in the extent of price 
improvement provided by PFOF-based brokers, with the broker deriving 
high PFOF revenues providing less price improvement to customer 
orders compared to the broker deriving low PFOF revenue. Levy (2022) 
also stated that one limitation of Schwarz et al. (2023) is that 
they limited their study to $100 orders, so it is unclear whether 
execution statistics of $100 orders generalize to those of the 
average retail trader. However, Schwarz et al. (2023) also observe 
differences in the price improvement offered by broker-dealers in a 
more limited sample of $1,000 orders they place. Both these studies 
include only trades that were initiated by the authors and do not 
include other trades that were handled by the brokers in their 
samples, preventing them from examining the attributes of a typical 
retail order handled by each broker. As such, these studies would 
not observe the variation in price improvements that reflect 
differences in the adverse selection risk associated with the order 
flow of different brokers. At the same time, an analysis by the 
Commission found that wholesalers provide different execution 
quality to different retail brokers depending on the adverse 
selection risk of their orders; see Table 3 of the Proposing 
Release, 88 FR 3786 at 3839 (Jan. 20, 2023). Additionally, analysis 
submitted by two commenters also showed that for a given broker-
dealer, execution quality can also vary across different 
wholesalers. See Huang et al. Letter at 27 and Professor Spatt et 
al. Letter at 30-32.
    \1065\ See id. at 27.
---------------------------------------------------------------------------

    Some information asymmetries are not fully addressed through the 
use of aggregated execution quality information, such as that available 
through Rule 605 (both prior to and after these amendments), because 
the principal is not able to use these data to observe the execution 
quality that the agent achieved for the principal's individual orders. 
However, the principal is able to receive a signal of the execution 
quality that the agent has achieved for comparable orders over a 
certain time period. This signal can be a useful proxy that investors 
and their broker-dealers can use to assess and compare the execution 
quality that they can expect to receive across market centers. Despite 
being aggregated, Rule 605 reports have indeed been useful. One 
academic study examining the introduction of Rule 605 found that the 
routing of marketable order flow by broker-dealers became more 
sensitive to changes in execution quality across market centers after 
Rule 605 reports became available.\1066\ 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.
---------------------------------------------------------------------------

    \1066\ See Boehmer et al., supra note 16.
---------------------------------------------------------------------------

    Market participants have access to some public information about 
the execution quality of market centers from sources other than Rule 
605. For example, some wholesalers and ATSs produce order flow and 
execution quality statistics other than those required under Rule 605 
and make them available either on their websites or as part of their 
ATS-N filings.\1067\ However, these sources are either not standardized 
\1068\ or are not available

[[Page 26510]]

across all market centers \1069\ such that Rule 605 remains an 
important source of standardized information about market center 
execution quality. At the same time, while Rule 605 data have been used 
by some market participants, such as broker-dealers and investment 
advisers as part of their review of execution quality, and by 
academics, analysts and the financial press, the use of these data by 
both individual and institutional investors to directly evaluate and 
compare execution quality across market centers has been limited. The 
following sections will discuss the use of data under preexisting Rule 
605 by individual investors, institutional investors, and other market 
participants.
---------------------------------------------------------------------------

    \1067\ If an ATS provides one or more of its subscribers with 
aggregate platform-wide order flow and execution statistics that are 
not otherwise required disclosures under Rule 605, that ATS is 
required either to attach that information to its Form ATS-N, or to 
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.
    \1068\ 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) (last visited Jan. 25, 2024, 4:26 p.m.), 
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) (last visited Jan. 25, 2024, 5:05 p.m.).
    \1069\ While the FIF Template provides a standardized template 
for summary information about execution quality for retail investor 
orders in exchange-listed stocks, the Commission understands that 
currently only one retail broker voluntarily provides reports using 
the FIF Template. See supra note 973.
---------------------------------------------------------------------------

(b) Usage of Rule 605 Reports by Individual Investors
    The extent to which individual investors directly access Rule 605 
reports has likely been limited. Several commenters to the Proposing 
Release stated that individual investors have limited or no usage of 
Rule 605 data.\1070\ This limited usage is likely for two reasons.
---------------------------------------------------------------------------

    \1070\ See, e.g., Direct Edge Letter at 10, stating that ``Rule 
605 is not a meaningful factor in how retail investors decide which 
brokers to use and how to place and route orders;'' see also 
comments discussed in the Proposing Release, 88 FR 3786 at 3833, 
n.541-542 (Jan. 20, 2023).
---------------------------------------------------------------------------

    First, since Rule 605 reporting requirements did not extend to 
broker-dealers that were not market centers prior to these 
amendments,\1071\ investors' ability to use preexisting Rule 605 to 
assess and compare the execution quality that they receive from their 
broker-dealers has been limited. Information about the execution 
quality received by market centers is only or mostly relevant for 
investors to the extent that investors can combine this information 
with information about broker-dealer routing practices from Rule 606 
reports to infer the execution quality of their broker-dealers. As will 
be discussed in detail later in this analysis, if broker-dealers 
receive different execution quality from a given market center, 
combining Rule 606 and preexisting Rule 605 data is not necessarily 
informative about an individual broker-dealer's average execution 
quality at that market center, since a market center's Rule 605 report 
is aggregated across all of its broker-dealer customers.\1072\ This has 
likely limited the incentive for broker-dealer customers, including 
individual investors, to access Rule 605 reports. Second, to the extent 
that information in Rule 605 reports has been relevant to individual 
investors such that they are incentivized to access them, Rule 605 
reports are designed to be machine readable, rather than human 
readable. While machine-readable data are useful for facilitating 
further processing and analysis,\1073\ they are not easily consumable 
by market participants who do not have the access to necessary software 
or programming skills. This may limit the accessibility of Rule 605 
reports, particularly for those individual investors who lack access to 
these resources.\1074\ Such individual investors may instead prefer to 
consume human-readable reports or summary statistics. In the Rule 
11Ac1-5 Adopting Release, the Commission anticipated that, rather than 
individual investors obtaining and digesting Rule 605 reports 
themselves, independent analysts, consultants, broker-dealers, the 
financial press, and market centers would analyze the information and 
produce summaries that respond to the needs of investors.\1075\ 
Although the Commission is unable to observe the full extent to which 
this has occurred, third parties have produced information based on 
Rule 605 reports that is meant for public consumption. For example, 
data obtained from Rule 605 reports have been used by academics to 
study a variety of topics related to execution quality, including 
liquidity measurement, exchange competition, zero-commission trading, 
and broker-dealer execution quality.\1076\ Rule 605 data have also been 
used in the financial press.\1077\
---------------------------------------------------------------------------

    \1071\ Prior to these amendments, a broker-dealer may have been 
subject to Rule 605 reporting requirements to the extent that the 
broker-dealer was acting as or operates a market center. However, 
such reports were required to cover the orders that the broker-
dealer handled within its capacity as a market center. See Proposing 
Release, 88 FR 3786 at 3798, n.179-180 (Jan. 20, 2023) and 
corresponding text, for further discussion.
    \1072\ See infra section IX.C.3.a)(1) for a detailed discussion.
    \1073\ See discussion in supra section IX.C.2.c).
    \1074\ Several commenters described a similar assessment of 
usability of Rule 605 reports for individual investors. See, e.g., 
Robinhood Letter at 41, stating that ``[Rule 605 data] has proven 
not to be a particularly useful format for individual investors;'' 
and TastyTrade Letter at 4, stating that ``neither [Rule 606 nor 
Rule 605] report is easily digestible nor often, if ever, used by 
retail customers.''
    \1075\ See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75419 
(Dec. 1, 2000).
    \1076\ See, e.g., Ruslan Y. Goyenko et al., 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 et al., Trading Volume Shares and Market 
Quality: Pre-and Post-Zero Commissions (working paper Feb. 15, 
2023), available at https://ssrn.com/abstract=3741470 SSRN 3741470 
(retrieved from SSRN Elsevier database); Schwarz et al. (2023), 
supra note 1064; Anne Haubo Dyhrberg et al., The Retail Execution 
Quality Landscape (working paper Dec. 10, 2022), available at 
https://ssrn.com/abstract=4313095 SSRN 4313095 (retrieved from SSRN 
Elsevier database).
    \1077\ 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,\1078\ individual investors 
typically have limited access to alternative sources of standardized 
execution quality information that could be used to compare across 
broker-dealers other than information obtained (directly or indirectly) 
from reports under prior Rule 605.\1079\ The requirement in Rule 
606(b)(3) for broker-dealers to provide individualized reports of 
execution quality to their customers upon request does not extend to 
held orders, which are those most used by individual investors,\1080\ 
and contains a customer-level de minimis exception that likely excludes 
most individual investors.\1081\ In addition, many individual investors 
likely do not have access to the data processing tools and/or 
sufficiently granular datasets that are required to calculate their own 
execution quality statistics, which makes it difficult for them to 
compare how execution quality varies across broker-dealers.\1082\ One 
exception is the recent effort by a few

[[Page 26511]]

broker-dealers and wholesalers to make available voluntary summary 
disclosures of execution quality in exchange-listed stocks for 
individual investors using the FIF Template.\1083\ Although the reports 
produced using the FIF Template may be useful, this disclosure is 
voluntary, and only a few firms are making or have made such 
disclosures. The Commission understands that only three retail brokers 
began producing reports using the FIF Template in 2015 on a quarterly 
basis. One of these broker-dealers was acquired and stopped producing 
these reports in 2017, and another stopped producing these reports in 
2018. Only one retail broker currently produces reports using the FIF 
Template.\1084\ Likewise, the Commission understands that there is 
currently only one wholesaler producing reports using the FIF 
Template.\1085\
---------------------------------------------------------------------------

    \1078\ See discussion in infra section IX.C.2.c).
    \1079\ 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 using different samples of stocks. 
See supra note 973.
    \1080\ See supra note 1002 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.
    \1081\ See supra note 1003 describing the customer-level de 
minimis exception of Rule 606(b)(5).
    \1082\ See infra section IX.C.3.a)(1) discussing several 
analyses that find significant differences in execution quality 
across retail brokers.
    \1083\ See supra note 973 and accompanying text for further 
discussion of the FIF Template.
    \1084\ See Retail Execution Quality Statistics, Fin. Info. F., 
available at https://fif.com/tools/retail-execution-quality-statistics (last visited Jan. 18, 2024); 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 (last visited Jan. 26, 2024).
    \1085\ See Retail Execution Quality Statistics, supra note 1084; 
Retail Execution Quality Statistics--Wholesale Market Maker 
Perspective, Two Sigma, available at https://www.twosigma.com/businesses/securities/execution-statistics/ (2024). The Commission 
is aware of at least two wholesalers that formerly produced reports 
using the FIF Template, but both stopped in Q3 2019.
---------------------------------------------------------------------------

(c) Usage of Rule 605 Reports by Institutional Investors
    The Commission understands that, while the usage of Rule 605 
reports by institutional investors has been limited by several factors, 
Rule 605 reports nevertheless contain information about execution 
quality that has been useful for institutional investors.
    First, the ability of institutional investors to use preexisting 
Rule 605 to assess and compare the execution quality that they receive 
from their broker-dealers has been limited, for several reasons. First, 
Rule 605 reports only contain information about the execution quality 
of investors' held orders. Not held orders, which are excluded from the 
definition of ``covered order,'' \1086\ are excluded from Rule 605 
metrics.\1087\ As many institutional orders tend to be not held,\1088\ 
this may limit the extent to which Rule 605 reports contain relevant 
information for institutional investors. Second, to the extent that 
institutional investors make use of held orders,\1089\ the ability of 
institutional investors to use Rule 605 reports in combination with 
Rule 606 reports to assess the execution quality of broker-dealers has 
been limited for the same reasons described above.\1090\ This has 
likely limited the incentives for some institutional investors to 
access Rule 605 reports.
---------------------------------------------------------------------------

    \1086\ See prior 17 CFR 242.600(b)(22). Currently, there are no 
requirements for aggregated information about the execution quality 
of not held orders to be made public. 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 because of the disparate behavior of 
customers when using not held orders. See, e.g., 2018 Rule 606 
Amendments Release, 83 FR 58338 at 58369-70 (Nov. 19, 2018), 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.
    \1087\ See supra note 1003 and accompanying text discussing 
broker-dealer requirements under Rule 606(b)(3) to provide 
individualized reports of execution quality upon request for not 
held orders.
    \1088\ See supra note 1002 discussing an analysis showing that 
institutional investors are more likely than individual investors to 
use not held orders.
    \1089\ For example, 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. 
Institutional investors may incorporate information from Rule 605 
reports into their TCA when evaluating the performance of their 
broker-dealers' Smart Order Router (``SOR'') algorithms. See infra 
section IX.C.4.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.
    \1090\ See supra note 1072 and infra section IX.C.3.a)(1).
---------------------------------------------------------------------------

    Second, even if institutional investors are incentivized to access 
execution quality information such as that in Rule 605 reports, 
institutional investors typically have access to alternative sources of 
execution quality information. Many institutional investors regularly 
conduct, directly or through a third-party vendor, transaction cost 
analysis (``TCA'') of their orders to assess execution quality against 
various benchmarks. Institutional investors that perform their own in-
house analyses of execution quality or obtain analyses of execution 
quality from third-party vendors may have been less likely to rely on 
information from Rule 605 reports. Furthermore, Rule 606(b)(3) requires 
broker-dealers to provide some of their customers with individualized 
reports of execution quality of not held orders upon request.\1091\ 
Since not held orders, which are not covered by Rule 605 reporting 
requirements,\1092\ are most likely to be utilized by institutional 
investors,\1093\ Rule 606(b)(3) provides institutional investors with 
another alternative source of information about the execution quality 
of their orders. Given the large size of most institutional investors 
and their businesses, institutional investors may also have sufficient 
bargaining power such that broker-dealers have strong incentives to 
provide them with execution quality information of their held orders 
when asked. However, any ad hoc reports that institutional investors 
may receive from their broker-dealers containing information about 
their held orders may not be sufficiently standardized to allow for 
easy comparisons across broker-dealers or market centers.
---------------------------------------------------------------------------

    \1091\ See supra section IX.C.1.b) discussing broker-dealer 
reporting requirements under Rule 606; see also supra note 1003 
describing the customer-level de minimis exception of Rule 
606(b)(5).
    \1092\ The exclusion of held orders from Rule 605 reporting 
requirements is not affected by these amendments.
    \1093\ See supra note 1002 discussing an analysis showing that 
institutional investors are more likely than individual investors to 
use not held orders.
---------------------------------------------------------------------------

    At the same time, the information on execution quality that is 
collected by institutional investors from these alternative sources may 
only cover the institutions' own orders, and as such could be highly 
individualized and nonpublic.\1094\ Therefore, institutional investors 
may not be able to use these individualized reports to compare their 
broker-dealers' execution quality to that of broker-dealers with which 
they do not currently have a relationship, or to examine the execution 
quality of a market center to which their broker-dealers do not 
currently route orders.\1095\ In contrast, because Rule 605 reports are 
public, institutional investors can use these reports to assess the 
execution quality of the broker-dealers and market centers with which 
they do not currently do business.
---------------------------------------------------------------------------

    \1094\ 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 at 58369 (Nov. 19, 
2018).
    \1095\ Some broker-dealers may make aggregate execution quality 
information from their customer's orders available to other 
institutional investors. However, for the reasons described in supra 
section IX.B, this information may not be standardized.
---------------------------------------------------------------------------

    To the extent that institutional investors do utilize Rule 605 
reports, the Commission believes that, due to their typically greater 
resources, institutional investors may be more likely than individual 
investors to access Rule 605 reports directly. Rule 605 reports are 
machine-readable, which makes them useful for facilitating further 
processing and analysis by market participants that have access to the 
resources necessary for handling large amounts of raw data,

[[Page 26512]]

such as many institutional investors. However, the Commission 
understands some institutional investors may use aggregated statistics 
or summaries of Rule 605 reports prepared by third parties, who make 
these reports available, possibly for a fee.
(d) Other Users of Rule 605 Reports
    While the direct usage of Rule 605 reports by individual and 
institutional investors may have been limited, Rule 605 reports have 
been used by other market participants, including analysts and 
researchers,\1096\ as well as financial service providers, such as 
investment advisers and broker-dealers, that are subject to best 
execution obligations.
---------------------------------------------------------------------------

    \1096\ See, e.g., supra notes 1076-1077, describing the use of 
Rule 605 data in academic literature, in comment letters related to 
Commission and SRO rulemaking, and the financial press.
---------------------------------------------------------------------------

    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.\1097\ 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.\1098\ 
Broker-dealers also have an obligation to seek best execution of 
customer orders.\1099\ 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.\1100\
---------------------------------------------------------------------------

    \1097\ 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'').
    \1098\ 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. See IA Fiduciary 
Interpretation, 84 FR 33669 at 33674-75 (July 12, 2019). 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).
    \1099\ See, e.g., Regulation NMS Adopting Release, 70 FR 37496 
at 37537 (June 29, 2005); Newton v. Merrill, Lynch, Pierce, Fenner & 
Smith, Inc., 135 F.3d 266, 269-70, 274 (3d Cir. 1998), 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)).
    \1100\ See, e.g., 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'').
---------------------------------------------------------------------------

3. Disclosure Requirements Under Preexisting Rule 605
    The information disclosed under preexisting Rule 605 has provided 
significant insight into execution quality at different market centers. 
However, market participants' access to information about execution 
quality under Rule 605 has been limited in several areas. Specifically, 
broker-dealers that are not market centers have not been required to 
report under Rule 605, which has limited market participants' ability 
to assess and compare the execution quality that broker-dealers obtain 
for their customers. Furthermore, changes in equity market conditions 
and technological advancements since Rule 11Ac1-5 was adopted in 2000, 
such as an increase in the number of high-priced stocks,\1101\ the 
corresponding greater use of odd-lots, and the greater speed of trading 
in some stocks, have led to a situation in which certain aspects of 
Rule 605 reports are no longer as well-tailored to current market 
conditions.
---------------------------------------------------------------------------

    \1101\ See, e.g., infra note 1133.
---------------------------------------------------------------------------

(a) Scope of Reporting Entities Under Preexisting Rule 605 Reporting 
Requirements
    The scope of entities that were required to report under Rule 605 
prior to these amendments did not include broker-dealers that only 
route customer orders externally, rather than executing customer orders 
internally, because they did not meet the definition of a market 
center. As a result, it has been difficult for market participants to 
use available execution quality statistics to compare execution quality 
across these broker-dealers. Furthermore, to the extent that firms 
operating two separate market centers commingled execution quality 
information about multiple market centers in Rule 605 reports, this has 
made it difficult for market participants to assess the execution 
quality of each market center individually.
(1) Broker-Dealers
    Prior to these amendments, broker-dealers that were not market 
centers were not required to prepare Rule 605 reports,\1102\ which has 
limited market participants' ability to assess and compare the 
execution quality that broker-dealers obtain for their customers.
---------------------------------------------------------------------------

    \1102\ Prior to these amendments, a broker-dealer may have been 
subject to Rule 605 reporting requirements to the extent that the 
broker-dealer was acting as or operates a market center. See supra 
note 1071 for further discussion.
---------------------------------------------------------------------------

    Rules 605 and 606 operate together to allow investors to evaluate 
what happens to their orders after investors submit their orders to a 
broker-dealer for execution.\1103\ If a market center's Rule 605 
reports are representative of the aggregate execution quality that any 
given broker-dealer receives from that market center, then a customer 
of a broker-dealer can use that broker-dealer's Rule 606 reports to 
identify the venues to which the broker-dealer regularly routes orders 
for execution and use Rule 605 reports to get information on aggregate 
order execution quality at those market centers.\1104\ However, if the 
aggregate execution quality from a given market center varies across 
broker-dealers, combining Rule 606 and Rule 605 data will not be 
informative about the execution quality of individual broker-dealers' 
average execution quality.\1105\
---------------------------------------------------------------------------

    \1103\ See supra note 999 and accompanying text.
    \1104\ See supra section IX.C.1.b) for a discussion of broker-
dealers' current reporting requirements under Rule 606.
    \1105\ Several commenters stated that market participants' 
ability to use Rule 606 and Rule 605 reports to assess and compare 
broker-dealers' execution quality is currently limited. See, e.g., 
Vanguard Letter at 3-4; Nasdaq Letter at 43; Virtu Letter II at 11; 
see also supra note 1070, describing a commenter who stated that 
Rule 605 reports are generally not a meaningful factor in how retail 
investors decide which brokers to use and how to place and route 
orders.

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[[Page 26513]]

Specifically, combining this data will not be informative because a 
market center's Rule 605 report is aggregated across all of its broker-
dealer customers, meaning that it is not possible to determine how 
execution quality varies across individual broker-dealers at a 
particular market center.\1106\ This is an important consideration 
given evidence that execution quality can differ significantly across 
broker-dealers, and that this dispersion is at least partially due to 
off-exchange wholesalers systematically giving different execution 
prices for the same trades to different brokers.\1107\
---------------------------------------------------------------------------

    \1106\ 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 its broker-dealer achieves for 
its 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.
    \1107\ See supra note 1076 for a discussion of Schwarz et al. 
(2023), an academic paper finding that OTC market maker execution 
quality of identical orders differed significantly across different 
broker dealers, and that this dispersion was due to off-exchange 
wholesalers systematically giving different execution prices for the 
same trades to different brokers. See also Table 3 of the Proposing 
Release, 88 FR 3786 at 3839 (Jan. 20, 2023), showing that 
wholesalers provide different execution quality to different retail 
brokers depending on the adverse selection risk of their orders.
---------------------------------------------------------------------------

(2) Reporting Entities That Operate SDPs
    Prior to these amendments, the commingling of SDP activity in Rule 
605 reports with other market center activity, by market centers that 
also operate SDPs, may have obscured or distorted information about the 
market centers' execution quality, making it more difficult for market 
participants to observe the execution quality of each separate trading 
venue. For example, an SDP that accepts IOC orders will offer different 
order execution quality than other market centers.\1108\ These types of 
SDPs are sometimes called ``ping pools,'' \1109\ reflecting that 
institutional investors use these venues to ``ping'' (i.e., submit a 
small order in search of hidden liquidity on) SDPs, often using IOC 
orders.\1110\ IOC orders typically have different execution profiles 
than other types of orders, including lower fill rates.\1111\ Combining 
information on orders submitted to a market center's SDP ``ping pool'' 
along with its other orders will therefore effect a downward skew on 
the market center's fill rates, and analogously an upward skew on the 
SDP's fill rates.\1112\ This may particularly be the case for 
wholesalers who combine the orders submitted to their SDPs with orders 
that are internalized or executed on a riskless principal basis,\1113\ 
since SDP activity represents a significant portion of their trading 
volume.\1114\ Also, since information on executions in SDPs largely 
reflects institutional orders, combining information on SDP orders 
along with other orders will tend to obscure information that is 
particularly relevant for institutional investors or broker-dealers 
handling institutional investors' orders in assessing differences 
across these market centers. To the extent that institutional investors 
have been less able to observe and compare differences in execution 
quality across market centers as a result, this may have reduced 
incentives for these market centers to compete for institutional 
investor orders on the basis of execution quality.
---------------------------------------------------------------------------

    \1108\ See supra section II.C.2 for additional discussions on 
different types of SDPs.
    \1109\ See, e.g., Annie Massa, Trader VIP Clubs, `Ping Pools' 
Take Dark Trades to New Level, Miami Daily Bus. J. (Jan. 17, 2018) 
(retrieved from Factiva database).
    \1110\ See, e.g., Rule 605 Citadel Letter at 7, stating that 
``[m]any wholesale broker-dealers execute immediate-or-cancel 
(`IOC') orders for non-retail investors (including pension plans, 
insurance companies, and other asset managers), particularly through 
the use of a single-dealer platform (`SDP').''
    \1111\ See infra section IX.C.3.c)(9) for discussion of 
differences between marketable IOC order executions and the 
executions of other marketable order types.
    \1112\ See, e.g., Rule 605 Citadel Letter at 7, stating that 
``[a]t the moment, depending on the structure of the broker-dealer, 
these IOC orders [executed on SDPs] may be aggregated with retail 
orders for reporting purposes, even though the execution profile is 
very different and could negatively skew a wholesale broker-dealer's 
execution quality metrics.''
    \1113\ See infra section IX.C.3.c)(10) for a discussion of how 
the treatment of wholesalers' riskless principal trades in Rule 605 
reports may also obscure information on execution quality.
    \1114\ See infra note 1312 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 Q1 2023.
---------------------------------------------------------------------------

(b) Coverage of Orders Under Preexisting Rule 605 Reporting 
Requirements
    Prior to these amendments, Rule 605 reporting requirements excluded 
execution quality information about some order sizes and types that are 
relevant to market participants.

[[Page 26514]]

    To estimate the percentage of shares that have been excluded from 
Rule 605 reporting requirements and the driving factor behind their 
exclusion (i.e., whether they are excluded based on their submission 
time, type, or size), the Commission analyzed data from the Tick Size 
Pilot B.I Market Quality dataset,\1115\ which had much broader 
reporting requirements than Rule 605 prior to these amendments,\1116\ 
for a period from April 2016 to March 2019. As a first step, 
approximately 25% of orders were estimated to have been excluded from 
Rule 605 requirements as they were flagged as having special handling 
requests.\1117\ A breakdown of the remaining submitted share volume 
(i.e., after excluded special handling orders) is presented in Figure 
4,\1118\ and shows that around 2.2% of shares were excluded from 
preexisting Rule 605 reporting requirements due to having effective 
times outside of regular trading hours. A further 51.6% of shares were 
excluded from Rule 605 reports because they were of an order type that 
was excluded from reporting requirements prior to these 
amendments.\1119\ An additional 11.3% of the remaining order volume was 
excluded from Rule 605 reports because of the exclusion of orders less 
than 100 shares and larger-sized orders from reporting requirements 
prior to these amendments. This leaves only around a third of share 
volume that was eligible to be included in Rule 605 reports prior to 
these amendments.\1120\
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    \1115\ 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 Apr. 2016 to Mar. 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.
    \1116\ See FINRA, 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 FINRA, 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.
    \1117\ These orders will continue to be excluded following the 
amendments to Rule 605, as the amended definition of covered orders 
will continue to exclude orders subject to special handling. See 
final 17 CFR 242.600(b)(27).
    \1118\ The same figure can be found in the Proposing Release; 
see Proposing Release, 88 FR 3786 at 3840 (Figure 2) (Jan. 20, 
2023).
    \1119\ Of the shares excluded on the basis of order type, the 
largest percentage (73.6%) are excluded because they are not-held 
orders.
    \1120\ 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, supra note 1116. In addition, an analysis 
in the Proposing Release examined changes over time in one market 
center's Rule 605 coverage (as compared to its execution volume in 
TAQ), and found that Rule 605 coverage was on a slightly downward 
trend between mid-2012 and Feb. 2021, when an estimated 50% of 
shares executed during regular market hours were included in Rule 
605 reports. See Figure 3 of the Proposing Release, 88 FR 3786 at 
3841 (Jan. 20, 2023). An analysis of more recent data found that 
this number rose somewhat in 2023, to around 64% as of Aug. 2023.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

[[Page 26515]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.008

    The following sections will discuss the various facets of 
preexisting Rule 605 reporting requirements that led to the exclusion 
of orders from Rule 605 reports prior to these amendments, as well as 
the extent to which these orders are relevant for assessing execution 
quality. This includes orders that were excluded on the basis of size, 
as well as other orders that were excluded such as stop orders, non-
exempt short sale orders, and orders submitted outside of regular 
trading hours.
(1) Orders Less Than 100 Shares and Larger-Sized Orders
    Prior to these amendments, orders of certain sizes were excluded 
from Rule 605 reporting requirements, including orders for less than 
100 shares and larger-sized orders.\1121\ Taken together, data on the 
usage of orders of these sizes imply that a large percentage of orders 
and trades was excluded from preexisting Rule 605 reporting 
requirements on the basis of order size, thus limiting the ability of 
reporting entities to compete for customers on the basis of execution 
quality.
---------------------------------------------------------------------------

    \1121\ See prior 17 CFR 242.605(a)(1). The size categories in 
preexisting Rule 605 included: 100 to 499 shares; 500 to 1,999 
shares; 2,000 to 4,999 shares; and 5,000 or greater shares. See 
prior 17 CFR 242.600(b)(13); see also supra note 9 discussing the 
Large Order Exemptive Relief, which grants exemptive relief to any 
order with a size of 10,000 shares or greater.
---------------------------------------------------------------------------

(a) Orders Less Than 100 Shares
    Due to preexisting Rule 605's exclusion of orders sized smaller 
than 100 shares, which excluded all odd-lot orders and, in some cases, 
round lot orders where a round lot was less than 100 shares, 
information about an important segment of order flow has been missing 
from Rule 605 reports.\1122\
---------------------------------------------------------------------------

    \1122\ The idea that Rule 605 reports have been missing an 
important segment of order flow because of the preexisting exclusion 
of orders less than 100 shares was supported by comment. See, e.g., 
Rule 605 Citadel Letter at 11; Better Markets Letter at 3; and Virtu 
Letter II at 9. In addition, citing an earlier comment letter 
examining how the inclusion of odd-lots would impact execution 
quality metrics, one commenter stated that the lack of information 
about odd-lots in preexisting Rule 605 ``has created perverse 
reporting issues.'' Healthy Markets Letter at 17, citing Healthy 
Markets 2019 Letter (Mar. 5, 2019), available at https://www.sec.gov/comments/4-729/4729-5020185-182987.pdf.
---------------------------------------------------------------------------

    The rise in the use of odd-lot orders is a phenomenon that has been 
well-documented in modern markets.\1123\ An analysis of data from the 
SEC's MIDAS analytics tool \1124\ confirms that the use of odd-lots has 
increased substantially as a percentage of total on-exchange trades 
within the past decade. Figure 5 \1125\ plots monthly averages of odd-
lot

[[Page 26516]]

share volumes across stock price deciles, showing that executed odd-lot 
shares as a percentage of total executed shares have increased sharply 
between 2012 and 2023, for high-priced stocks in particular.\1126\ 
Specifically, the figure shows that odd-lot share volume increased from 
around 0.6% to 1.25% for the lowest-price stocks (Decile 1), and from 
10.6% to 37.5% for the highest-priced stocks (Decile 10).\1127\
---------------------------------------------------------------------------

    \1123\ See, e.g., Proposing Release, 88 FR 3786 at 3808, n.273 
(Jan. 20, 2023). 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 1016 for a definition of these tiers.
    \1124\ See Summary Metrics by Decile and Quartile, SEC (2023), 
available at https://www.sec.gov/marketstructure/downloads.html. 
This analysis uses data between Jan. 2012 and Mar. 2023.
    \1125\ The data used in this analysis have been updated since 
the Proposing Release to include a more recent time period. See 
Proposing Release, 88 FR 3786 at 3842 (Figure 4) (Jan. 20, 2023), 
which presents the same analysis for the period of Jan. 2012 to Mar. 
2022. Between Mar. 2022 and Mar. 2023, we observe small overall 
declines in odd-lot share volumes. However, these differences due to 
updates to the dataset did not affect the Commission's conclusions 
from this analysis relative to the Proposing Release, namely that 
odd lots represent a significant percentage of executed share 
volume.
    \1126\ The number of executed odd-lot shares 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 executed odd-lot shares, as more odd-lot 
trades will be incorporated into the definition of round lots. See 
supra section IX.C.1.c)(2) for further discussion.
    \1127\ See, e.g., Virtu Letter II at 7 (quoting Phil Mackintosh, 
Odd Facts About Odd Lots, NASDAQ (Apr. 22, 2021, 10:23 a.m. EDT), 
available at https://www.nasdaq.com/articles/odd-facts-about-odd-lots-2021-04-22), that ``over the past nine years the proportion of 
odd-lot trades has roughly tripled, and in high-priced stocks, odd-
lots have increased to 70% of all trades.'' Another commenter stated 
that, based on data from TAQ, ``two-thirds of all trades represent 
odd-lots.'' Professor Schwarz et al. Letter at 4.
[GRAPHIC] [TIFF OMITTED] TR15AP24.009

    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.\1128\ This is 
supported by an analysis of the distribution of order sizes using order 
submission data from MIDAS for a sample of 80 stocks \1129\ during the 
month of Mar. 2023.\1130\ Confirming

[[Page 26517]]

results from Figure 5 examining the time series of odd-lot order rates, 
Figure 6 \1131\ shows that odd-lot orders make up a significant 
percentage of orders (13.81%), although these orders are only a small 
percentage of total submitted share volume (0.68%).\1132\
---------------------------------------------------------------------------

    \1128\ See Bartlett, et al (2022), supra note 33. 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.
    \1129\ This sample of 80 stocks was constructed from the sample 
of 400 stocks described in infra note 1181, in which a random sample 
of 5 stocks was selected from each of the 16 combinations of market 
capitalization group and price quartile.
    \1130\ This dataset consists of NMLO order 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 Mar. 2023. For more details on this dataset, see 
https://www.sec.gov/marketstructure/midas-system. See supra note 
1129 for information about the sample selection. The MIDAS dataset 
has some limitations. First, MIDAS data include only on-exchange, 
non-marketable limit orders that do not execute immediately, and 
thus do not include some orders that are included in Rule 605 data 
both prior to and after these amendments, such as market and 
marketable limit orders, inside-the-quote NMLOs that execute 
immediately, IOC orders, and off-exchange orders. Furthermore, MIDAS 
data include some order types that were excluded from Rule 605 prior 
to these amendments but that are not possible to distinguish in 
MIDAS data, such as short sale orders, as well as some order types 
that are excluded from Rule 605 data both prior to and after these 
amendments, such as orders with special handling requests. Second, 
in order to identify the NBBO at the time of order receipt, this 
dataset uses timestamps assigned to orders by MIDAS, which may 
differ from the order submission times at the exchange. The 
magnitude of this difference is typically a few hundred 
microseconds, and thus in this context the effects of this 
difference are expected to be minor. Lastly, there are some orders 
in MIDAS for which no corresponding execution or cancellation 
message can be identified; these orders are discarded from the 
dataset. Relative to the Proposing Release, this dataset has been 
updated to account for a more recent time period, and also reflects 
several corrections; see Proposing Release, 88 FR 3786 at 3842, 
n.634 (Jan. 20, 2023). First, the data has been corrected to include 
orders associated with more than one order cancellation message, 
which were inadvertently excluded from the data in the Proposing 
Release and may have undercounted orders. Second, the dataset 
excludes several groups of orders that were included in the 
Proposing Release. Orders received during the first five minutes of 
the trading day (2.4% of orders) are excluded to avoid including 
orders received before there is a valid non-crossed quote following 
the opening at the primary market center, which are not defined as 
covered orders under amended Rule 605; see amended Rule 600(b)(27). 
Orders received when the NBBO is locked or crossed (1.6% of orders) 
are also discarded to simplify the analysis. See 2001 FAQs, Question 
7, for staff statements regarding covered orders received when the 
NBBO is locked or crossed. The exclusion of orders received during 
the first five minutes of the trading day and orders received when 
the NBBO is locked or crossed is similar to what is done in academic 
literature; see, e.g. Hagstr[ouml]mer, infra note 1244. Lastly, we 
exclude orders associated with more than one order submission 
message (1.6% of orders). These represent orders that are modified 
after their submission. Identifying and assigning an outcome to each 
iteration of a modified order would be complex using MIDAS, so we 
drop these orders to simplify the analysis. See 2001 FAQs, Question 
23, for staff statements regarding modified orders. As will be 
discussed in more detail in reference to each analysis using this 
MIDAS dataset below, these changes to the MIDAS dataset did not 
affect the Commission's conclusions from the analyses using MIDAS 
data relative to the Proposing Release.
    \1131\ The MIDAS data used in this analysis have been updated 
and corrected since the Proposing Release for the reasons described 
in supra note 1130. See Proposing Release, 88 FR 3786 at 3843 
(Figure 5) (Jan. 20, 2023), where Figure 5 presents the same 
analysis using data from Mar. 2022 (see Proposing Release, 88 FR 
3786 at 3842, n.634 (Jan. 20, 2023), for data description). The 
analysis in the Proposing Release similarly found that odd-lot 
orders made up a significant percentage of orders (18.2%), though 
only a small percentage of total submitted share volume (2.8%). 
Therefore, changes to the MIDAS dataset did not affect the 
Commission's conclusions from this analysis relative to the 
Proposing Release, namely that odd-lot orders made up a significant 
percentage of orders, though only a small percentage of total 
submitted share volume.
    \1132\ These data include information only about NMLOs, and 
therefore information about the sizes of market orders and 
marketable limit orders is not available.
[GRAPHIC] [TIFF OMITTED] TR15AP24.010

BILLING CODE 8011-01-C

[[Page 26518]]

    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.\1133\ In this vein, 
one commenter to the Proposing Release stated that ``the fact that many 
issuers have moved away from stock splits and allowed their stock 
prices generally to increase'' has contributed to the increase in odd-
lot orders.\1134\
---------------------------------------------------------------------------

    \1133\ See, e.g., Odd Facts About Odd Lots, supra note 1127.
    \1134\ See Virtu Letter II at 4.
---------------------------------------------------------------------------

    Another factor is a rise in algorithmic trading, which chops orders 
into many smaller orders. Broker-dealers that handle institutional 
orders often make use of odd-lot orders because of trading algorithms 
that split larger parent orders into smaller child orders to reduce the 
market impact of their trades.\1135\ 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.\1136\ 
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.\1137\ All-in-all, by not capturing information 
related to these orders, preexisting Rule 605 reports have been missing 
information about potentially important segments of order flow from 
both individual and institutional investors.
---------------------------------------------------------------------------

    \1135\ See infra section IX.C.4.a)(1)(b), discussing the 
practice of broker-dealers handling institutional parent orders as 
not held orders and splitting them up into child orders.
    \1136\ See, e.g., Hardy Johnson et al., Are All Odd-lots the 
Same? Odd-lot Transactions By Order Submission and Trader Type, 79 
J. Banking & Fin. 1 (2017); Maureen O'Hara et al., What's Not There: 
Odd lots and Market Data, 69 J. Fin. 2199 (2014).
    \1137\ See, e.g., Bartlett et al. (2022), supra note 33; 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/. Similarly, one commenter stated that ``advances 
in technology that have dramatically expanded the number of 
participants in the market'' is one reason for the increase in odd-
lot orders. See Virtu Letter II at 7.
---------------------------------------------------------------------------

(b) Orders Less Than a Share
    Due to the exclusion of fractional orders that are smaller than one 
share from Rule 605 prior to these amendments,\1138\ information about 
an increasingly important segment of individual investor order flow has 
been missing from Rule 605 reports. Similar to the increase in odd-
lots, one reason for the increase in the use of fractional shares is 
the increasing presence of trading by individual investors, who tend to 
use smaller order sizes.\1139\ The past few years have seen increasing 
attention paid to fractional shares, as more and more retail brokers 
are offering this functionality.\1140\ The Commission understands that 
there are at least two different ways that retail brokers handle 
fractional trades: first, they rely on their clearing firm, which will 
often ``round up'' the fractional part of the order and deposit the 
residual in an internal ``fractional inventory account;'' and second, 
they execute fractional trades against their own inventory.\1141\
---------------------------------------------------------------------------

    \1138\ 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.
    \1139\ 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.
    \1140\ See, e.g., Rick Steves, Fractional Shares: Experts Weight 
in Amid Exploding Retail Trading Volumes, Fin. Feeds (June 7, 2021, 
8:25 a.m. UTC), 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, reported as more than 1,400%, year over year) for brokers 
after they introduced the use of fractional shares.
    \1141\ See, e.g., Robert P. Bartlett et al., A Fractional 
Solution to a Stock Market Mystery (working paper Nov. 17, 2023), 
available at https://ssrn.com/abstract=4167890 (retrieved from SSRN 
Elsevier database). As fractional shares fell below the smallest 
order size category in Rule 605 prior to these amendments, a broker-
dealer that currently exclusively executes fractional shares would 
be a market center, but was not required to file Rule 605 reports.
---------------------------------------------------------------------------

    An estimation of the percentage of orders that were excluded from 
preexisting Rule 605 reporting requirements because they are smaller 
than one share is difficult, as these orders are executed off-exchange 
and therefore not included in public datasets. However, an analysis 
using data from CAT \1142\ confirms that levels of fractional trading 
are mostly the result of individual investor trading: \1143\ in August 
2023, there were 54.7 million orders for less than one share that 
eventually received an execution, the majority (65.3%) of which were 
submitted by accounts attributed to ``Individual Customers.'' \1144\ 
While these fractional orders represented only a small part (around 
3.3%) of total executed orders, they represented a much higher 
percentage (16.4%) of executions received by individual account 
holders.\1145\ Therefore, by not capturing information related to these 
orders, Rule 605 reports have been missing information about an 
important segment of individual investor trades.\1146\ The Commission 
estimates

[[Page 26519]]

that there are 20 market centers \1147\ that exclusively execute 
fractional orders less than one share and were not required to file 
Rule 605 reports prior to these amendments due to these orders falling 
below the smallest order size category in preexisting Rule 605.
---------------------------------------------------------------------------

    \1142\ This dataset contains CAT records capturing introducing 
and trading activity in Aug. 2023, 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, the Commission 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.
    \1143\ The CAT data used in this analysis have been updated from 
the Proposing Release for a more recent time period. See Proposing 
Release, 88 FR 3786 at 3844 (Jan. 20, 2023). The analysis in the 
Proposing Release found that, as of Mar. 2022, orders from 
individual customers accounted for 92% of all fractional orders 
(both orders less than a share and orders with fractional 
components). This number was 70% in Aug. 2023 (65% for fractional 
orders less than one share). Further analysis reveals that this 
difference can mostly be attributed to an increase in fractional 
shares from institutional investor accounts, rather than a decrease 
in fractional shares from individual investor accounts. This 
highlights that fractional trading may be an increasingly important 
segment of institutional order flow as well. However, these 
differences due to updates to the data did not affect the 
Commission's conclusions from this analysis relative to the 
Proposing Release, namely that fractional orders for less than one 
share are an important segment of order flow.
    \1144\ CAT account type definitions are available in Appendix G 
to the CAT Reporting Technical Specifications for Industry Members, 
under the field name ``accountHolderType.'' See CAT Reporting Tech. 
Specifications for Indus. Members version 4.0.0 r20 app. G (CAT NMS 
Plan Participants 2023) (July 31, 2023), available at https://catnmsplan.com/sites/default/files/2023-09/09.01.2023_CAT_Reporting_Technical_Specifications_for_Industry_Members_v4.0.0r20_CLEAN.pdf. 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 Account, Foreign, Individual 
Customer, Market Making, Firm Agency Average Price Account, Other 
Proprietary, and Error Account. An Institutional Customer account is 
defined by FINRA Rule 4512(c) as a bank, savings and loan 
association, insurance company, registered investment company, 
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.
    \1145\ In terms of notional volume, executed fractional orders, 
including orders for less than one share and orders greater than one 
share with a fractional component, make up around 0.003% of total 
executed dollar volume and 1.2% of executed dollar volume attributed 
to individual account holders. Furthermore, executed fractional 
orders for less than one share made up about 7.06 million shares, 
which is only about 0.001% of total executed share volume.
    \1146\ One commenter used a sample of TAQ data to show that 
``25% of reported trades are for one share, which includes 
fractional trades for less than one share,'' and stated that 
``[t]hus, under current disclosure requirements, retail traders are 
unable to evaluate market center execution quality for a majority of 
their trades.'' Professor Schwarz et al. Letter at 4.
    \1147\ See infra note 1659 for further discussion of this 
estimate.
---------------------------------------------------------------------------

(c) Larger-Sized Orders
    Due to the exclusion of orders sized larger than 10,000 shares from 
preexisting Rule 605,\1148\ information about another important segment 
of order flow has been missing from Rule 605 reporting 
requirements.\1149\ 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.\1150\ As shown in Figure 7,\1151\ 
which plots the number of shares associated with trades that are for 
10,000 or more shares as a percent of total executed shares,\1152\ the 
rate of larger-sized trades declined from more than 25% in late 2003 to 
12.8% as of March 2023. This decline is likely at least partly due to 
the increased use of SORs,\1153\ though other market changes such as 
the overall increase in stock prices may also play a part. However, the 
rate of larger-sized trades has been increasing since August 2011, when 
the rate of larger-sized trades was around 6.7%.
---------------------------------------------------------------------------

    \1148\ See supra note 9 and corresponding discussion describing 
the exemptive relief provided by the Commission in 2001 for orders 
with a size of 10,000 shares or greater.
    \1149\ This was supported by a commenter. See Virtu Letter II at 
9.
    \1150\ See infra section IX.C.4.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.
    \1151\ The TAQ data used in this analysis have been updated from 
the Proposing Release for a more recent time period. See Proposing 
Release, 88 FR 3786 at 3844 (Figure 6) (Jan. 20, 2023), which 
presents the same analysis for the time period Sept. 2003 to Mar. 
2022. Between Mar. 2022 and Mar. 2023, there is a small overall 
increase in the rate of large-sized trades. Therefore, updates to 
the TAQ dataset did not affect the Commission's conclusions from 
this analysis relative to the Proposing Release, namely that larger-
sized orders of 10,000 have been increasing since August 2011.
    \1152\ This analysis uses data from intraday TAQ Consolidated 
Trade files for the period from Sept. 2003 to Mar. 2023 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 are 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 Specifications (May 20, 2020), available at https://www.nyse.com/publicdocs/nyse/data/Daily_TAQ_Client_Spec_v3.3.pdf.
    \1153\ See, e.g., M. O'Hara, High Frequency Market 
Microstructure, 116 J. Fin. Econ. 257 (2015).
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BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TR15AP24.011

BILLING CODE 8011-01-C

[[Page 26520]]

    Furthermore, larger-sized orders make up a non-negligible percent 
of order flow. Figure 6,\1154\ which plots the distribution of NMLO 
sizes in order submission data from MIDAS for the month of Mar. 2023, 
shows that while NMLOs of 10,000 or more shares made up only 0.27% of 
order flow in terms of number of orders, they made up around 8.5% of 
order flow in terms of share volume.\1155\ However, some, or possibly 
most, of these larger-sized orders may be not held to the market, and 
so would not be required to be included in Rule 605 reports even 
without the exemptive relief.\1156\
---------------------------------------------------------------------------

    \1154\ The MIDAS data used in this analysis have been updated 
and corrected since the Proposing Release for the reasons discussed 
in supra note 1131. See Figure 5 in the Proposing Release, 88 FR 
3843 (Jan. 20, 2023). The analysis in the Proposing Release 
similarly found that larger-sized orders of 10,000 or more shares 
make up a small percent of order flow in terms of orders (2.5%), but 
a non-negligible percent of order flow in terms of share volume 
(7.75%). Therefore, changes to the MIDAS dataset did not affect the 
Commission's conclusions from this analysis relative to the 
Proposing Release, namely that larger-sized orders of 10,000 or more 
shares make up a small percent of order flow in terms of number of 
orders, but a non-negligible percent of order flow in terms of share 
volume.
    \1155\ This result supports the statement of one commenter, that 
``while orders greater than 9,999 shares may comprise a relatively 
small number of total orders, when viewed through the lens of total 
shares, they comprise a meaningful amount of the total share 
volume.'' Virtu Letter II at 9.
    \1156\ See supra note 1003 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 exclusion of orders with stop prices from the definition of 
``covered order'' prior to these amendments has resulted in the 
exclusion of orders that are likely relevant for investors from 
preexisting Rule 605 reports. A stop order, also referred to as a stop-
loss order, is an order to buy or sell a stock once the price of the 
stock reaches the specified price, known as the stop price. When the 
stop price is reached, a stop order becomes a market order, or a limit 
order in the case of so-called stop limit orders.\1157\ The treatment 
of stop orders varies across broker-dealers and market centers.\1158\ 
At the same time, the execution prices of stop orders are highly 
sensitive to handling and execution practices, as these orders are more 
likely to execute when the stock price is in decline and any delay in 
execution will result in a larger loss (or smaller gain) for the 
investor.\1159\
---------------------------------------------------------------------------

    \1157\ See, e.g., SEC, Types of Orders, Investor.gov, 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.
    \1158\ 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 the market center to which 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 (Jan. 2023), 
available at https://www.ubs.com/content/dam/static/wmamericas/bestexecution.pdf.
    \1159\ See, e.g., Stop Orders: Factors to Consider During 
Volatile Markets, FINRA: Investor Insights (June 28, 2016), 
available at https://www.finra.org/investors/insights/stop-orders-factors-consider-during-volatile-markets; see also FIF Letter at 9, 
stating that ``[a] stop order is often triggered under market 
conditions that reflect a market moving adverse to the order. For 
example, the triggering of a buy stop limit order would reflect a 
rising market, which could be detrimental to the execution quality 
for that order.''
---------------------------------------------------------------------------

    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.\1160\ Some national securities 
exchanges have eliminated this order type from their rule book.\1161\ 
Furthermore, the use of stop orders has typically been associated with 
individual investors,\1162\ who may be less likely to have the 
resources to actively monitor their orders, and thus use stop orders to 
try to protect a gain or to limit potential losses of a currently held 
position.\1163\ Table 3 \1164\ breaks down a sample of stop loss order 
volume by account type and stop loss order type using CAT data for Mar. 
2023.\1165\ The data confirm that the use of stop orders by 
institutional investors is very rare (only 0.25% of market and 0.0011% 
of limit orders are submitted with stop prices), while their use is 
relatively more common for individual investors, particularly for 
market orders, around 4.91% of which are submitted with stop 
prices.\1166\ The data also confirm that, while most stop orders are 
triggered by the last sale price (``Stop/Stop Limit''), there is also 
nontrivial order flow associated with other trigger events as well, 
such as the

[[Page 26521]]

quotation (``Stop on Quote/Stop Limit on Quote'').\1167\
---------------------------------------------------------------------------

    \1160\ See, e.g., Memorandum from SEC, Div. of Trading and Mkts. 
to Equity Market Structure Advisory Committee (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) (``SEC Division of 
Trading and Markets Memorandum''); see also How to Survive the 
Markets Without Stop-Loss Orders, NASDAQ (Dec. 2, 2015, 10:58 a.m. 
EST), 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.
    \1161\ 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).
    \1162\ See, e.g., Annie Massa & Sam Mamudi, BlackRock Calls for 
Halting Stock Market to Avoid Volatility, Bloomberg Bus. (Oct. 7, 
2015), available at https://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'').
    \1163\ See, e.g., SEC Division of Trading and Markets 
Memorandum, supra note 1160. 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, supra note 1160.
    \1164\ The CAT data used in this analysis have been updated from 
the Proposing Release for a more recent time period. See Table 4 of 
the Proposing Release, 88 FR 3786 at 3845 (Jan. 20, 2023). The 
results of the analysis in the Proposing Release are similar to 
those presented here, except that the analysis in the Proposing 
Release found that 49.4% of institutional stop/stop limit orders 
were market orders and 37.8% were limit orders in Mar. 2022; the 
results in Table 3 for Mar. 2023 show a reverse pattern, in which 
the majority of institutional stop/stop limit orders are limit 
(63.4%) and relatively fewer are market orders. A closer inspection 
of the data revealed that this reversal is driven by the order 
volume of several market participants. The analysis in the Proposing 
Release similarly found that a significant percentage of 
institutional stop orders are limit orders. Therefore, the updates 
to the dataset did not affect the Commission's conclusions from this 
analysis relative to the Proposing Release, namely that a 
significant percentage of institutional stop orders have limit 
prices, as discussed in note 1166 infra.
    \1165\ This analysis uses data from CAT for all NMS stocks for 
the period of Mar. 2023 that originated either from Institutional 
Customer or from Individual Customer accounts. Stop orders are 
identified using the reporting requirements for stop orders in the 
CAT Reporting Technical Specifications for Industry Members. See CAT 
Reporting Tech. Specifications for Indus. Members version 4.0.0 r18 
(Dec. 16, 2022), available at https://www.catnmsplan.com/sites/default/files/2022-12/12.16.2022_CAT_Reporting_Technical_Specifications_for_Industry_Members_v4.0.0r18_CLEAN.pdf.
    \1166\ One commenter stated that ``a material percentage of stop 
orders have a limit price and a material percentage of stop orders 
do not have a limit price.'' FIF Letter II at 2. Table 4 in the 
Proposing Release showed that, as of Mar. 2022, 0.0003% of 
institutional and 0.03% of individual limit orders consisted of 
orders with stop prices. At the same time, stop orders with limit 
prices made up 38.7% of institutional stop orders, and 12.4% of 
individual stop orders. See Proposing Release, 88 FR 3786 at 3845 
(Jan. 20, 2023). Table 3 shows similar numbers for Mar. 2023, with 
0.0011% of institutional and 0.02% of individual limit orders 
consisting of orders with stop prices, and 63.9% of institutional 
and 11.0% of individual stop orders consisting of stop orders with 
limit prices. These numbers show that, while stop orders with limit 
prices are generally a small percentage of total orders, they 
constitute a significant percentage of orders with stop prices, 
particularly for institutional investors.
    \1167\ See, e.g., FIF Letter II at 2, confirming ``that a 
material percentage of stop orders are triggered based on a change 
in the NBBO (in most cases, but not always, the opposite-side quote) 
and a material percentage of stop orders are triggered based on a 
change in the last sale price.''
[GRAPHIC] [TIFF OMITTED] TR15AP24.012

(3) Non-Exempt Short Sale Orders
    Prior to these amendments, Commission staff had taken the position 
that staff would view all non-exempt short sale orders as special 
handling orders.\1168\ As a result, these orders have not been included 
in prior Rule 605 statistics, which has resulted in the exclusion of a 
large portion of orders that are likely relevant for market 
participants.
---------------------------------------------------------------------------

    \1168\ See 2013 FAQs.
---------------------------------------------------------------------------

    Non-exempt short sale orders are orders that are subject to price 
restrictions under Rule 201 of Regulation SHO,\1169\ 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.'' \1170\ Since a non-
exempt short sale that is subject to a price restriction is only 
allowed to take place at least one tick above the NBB, these could be 
``orders to be executed on a particular type of tick or bid,'' which 
would exclude them from the definition of ``covered order.'' \1171\ The 
exclusion of tick-sensitive orders from preexisting Rule 605 reporting 
requirements was designed so that these orders did not skew execution 
quality statistics, as the prevention of these orders from executing at 
the best bid would likely lead to lower execution quality statistics 
(e.g., negative price improvement and higher effective spreads) as 
compared to other orders.
---------------------------------------------------------------------------

    \1169\ See supra note 299 for more information about Rule 201 of 
Regulation SHO.
    \1170\ ``Short exempt'' orders include certain 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).
    \1171\ See prior 17 CFR 242.600(b)(22).
---------------------------------------------------------------------------

    In the years since Rule 201's adoption, it has become clear that 
Rule 201 price test restrictions are not often triggered. Between April 
2015 and November 2023, a Rule 201 trigger event only occurred on 1.8% 
of trading days for an average stock.\1172\ Around 15.4% of Rule 201 
triggers occur the day after a previous trigger event, and around 45.4% 
occur within a week after a previous trigger event. These statistics 
imply that Rule 201 triggers tend to be relatively rare, and clustered 
around a few isolated events. This has resulted in a significant 
portion of non-exempt short sale orders being excluded from prior Rule 
605 statistics when Rule 201 was not triggered, at which point a price 
test restriction was not in effect and their exclusion would not have 
skewed execution quality statistics.
---------------------------------------------------------------------------

    \1172\ This analysis looked at the percentage of trading days 
that experienced a Rule 201 trigger event for the period Apr. 2015 
and Nov. 2023 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/. A similar analysis was included in the 
Proposing Release and found substantially similar results. See 
Proposing Release, 88 FR 3786 at 3846 (Jan. 20, 2023).
---------------------------------------------------------------------------

(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.\1173\ 
However, the preexisting exclusion of

[[Page 26522]]

all orders submitted outside of regular market hours from the 
definition of ``covered order,'' \1174\ in addition to excluding orders 
that execute outside of regular hours, also extended to orders that, 
while submitted outside of regular market hours, are only eligible to 
execute during regular market hours. While these orders represent only 
a small portion of order flow, they represent a relatively high 
concentration of orders from individual investors. Therefore, the 
exclusion of all orders submitted outside of regular trading hours from 
Rule 605 prior to these amendments may have led to the exclusion of an 
important segment of individual investor orders.
---------------------------------------------------------------------------

    \1173\ See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75421 
(Dec. 1, 2000).
    \1174\ See prior 17 CFR 242.600(b)(22), (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.\1175\
---------------------------------------------------------------------------

    \1175\ See, e.g., SEC, Div. of Mkt. Regul., Special Study: 
Electronic Communication Networks and After-Hours Trading (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.'' \1176\ 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.\1177\ Since these orders are not intended, 
and in many cases are not eligible, to execute outside of regular 
trading hours, these orders may not be subject to the same concerns 
that drove the Commission to exclude orders submitted outside of 
trading hours from Rule 605 reporting requirements in the Rule 11Ac1-5 
Adopting Release.
---------------------------------------------------------------------------

    \1176\ Jennifer Wu et al., Online Trading: An internet 
Revolution, 4 Sloan Sch. of Mgmt. Mass. Inst. of Tech. Rsch. Notes 
(1999).
    \1177\ See, e.g., Extended Hours Overview, Charles Schwab, 
available at https://www.schwab.com/public/schwab/nn/qq/about_extended_hours_trading.html (2023); Extended-Hours Trading, 
Robinhood, available at https://robinhood.com/us/en/support/articles/extendedhours-trading/ (last visited Jan. 29, 2024, 1:21 
p.m.).
---------------------------------------------------------------------------

    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 \1178\ were analyzed to break order volume down into different 
trading sessions according to when the order was eligible to 
trade.\1179\ The Commission considered only those orders that have an 
effective time during regular market hours to be eligible for Rule 605 
reporting, and excluded orders that were otherwise excluded from 
preexisting Rule 605 reporting requirements, i.e., because they are an 
excluded order type or size. The Commission found that a small fraction 
of orders are effective outside of regular market hours (1.3%), while 
the vast majority of orders (98.7%) are effective during regular market 
hours.
---------------------------------------------------------------------------

    \1178\ See supra note 1115 for dataset description. This 
analysis was included in the Proposing Release; see Proposing 
Release, 88 FR 3786 at 3846 (Jan. 20, 2023).
    \1179\ 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 FAQs, Q4.11, supra note 1116.
---------------------------------------------------------------------------

    At least some of these orders, while submitted outside of regular 
market hours, execute during regular trading hours, e.g., because they 
are NMLOs that are only executable during regular trading hours.\1180\ 
In order to estimate the extent to which this occurs, a sample of 400 
stocks \1181\ using CAT data from Q1 2023 \1182\ was analyzed to 
examine how the submission volume of executable NMLOs submitted outside 
of regular trading hours \1183\ compares to the full sample of 
executable NMLO

[[Page 26523]]

submission volume.\1184\ This analysis confirms that pre-open orders 
make up a small percentage of order volume, representing around 1.3% of 
total submitted shares (0.4% of total submitted orders). However, 
further analysis reveals that these orders contain a higher 
concentration of orders associated with Individual Customer accounts. 
Specifically, for those pre-open orders that could be identified as 
originating from either individual or institutional customer 
accounts,\1185\ 81.8% of these pre-open orders (82.6% of pre-open 
shares) originated from individual customer accounts. In comparison, 
individual customer accounts were responsible for just 1.5% of orders 
(1.7% of shares) of total individual and institutional customer account 
originations.
---------------------------------------------------------------------------

    \1180\ Most retail brokers do not permit market orders during 
extended hours trading. See, e.g., Extended Hours Overview and 
Extended-Hours Trading, supra note 1177.
    \1181\ This sample of stocks was constructed using data as of 
market close on Dec. 30, 2022, using the same methodology as in the 
Proposing Release. Market capitalization and price information were 
collected from the Center for Research in Security Prices (CRSP), 
and stocks with volume less than 1,000 shares, stocks with a closing 
price of less than $2, and dual-class shares were excluded. For each 
of the four market capitalization groups (less than or equal to $100 
million, greater than $100 million and less than or equal to $1 
billion, greater than $1 billion and less than or equal to $10 
billion, greater than $10 billion), stocks were sorted by price and 
assigned to four equally-sized buckets. Within each sorted price 
bucket, 25 stocks were chosen at evenly spaced intervals, yielding 
100 stocks per group for a total of 400 stocks. As a hypothetical 
example, from a price-sorted bucket with 50 stocks every second 
stock would be chosen to get 25 total stocks. From this initial 
sample of 400 stocks, four stocks were replaced due to being 
delisted during the Q1 2023 analysis period, and one stock was 
replaced due to abnormally high volume.
    \1182\ This analysis uses CAT data for 400 stocks for the period 
Q1 2023. See supra note 1181 for information about how the 400-stock 
sample was selected. The CAT data consist of all orders eligible to 
trade during regular hours during Q1 2023 that were received for the 
400 stocks at four types of reporting entities: (1) Exchanges, (2) 
Wholesalers, (3) Alternative Trading Systems (ATSs) and (4) Broker-
Dealers. We excluded multi-day orders, orders received when the NBBO 
was locked or crossed, and all orders with handling instructions, 
with the exception of intermarket sweep orders (ISOs) for on-
exchange orders, and with the exception of orders with handling 
codes CASH, DIR, DISQ, DNR, DNRT, RSV, and STP, for broker-dealer 
and off-exchange orders. Certain on-exchange TIF codes are also 
excluded, including Fill or Kill, Good For Seconds, At the Close, At 
the Open, Auction or Kill, and Auction Only Order. For more 
information on order handling codes in CAT, see CAT Reporting Tech. 
Specifications for Indus. Members version 4.0.0 r18 (Dec. 16, 2022), 
available at https://www.catnmsplan.com/sites/default/files/2022-12/12.16.2022_CAT_Reporting_Technical_Specifications_for_Industry_Members_v4.0.0r18_CLEAN.pdf. We also exclude a small percentage of orders 
that had more shares traded than the original order size in its CAT 
lifecycle. We also excluded orders that had order modifications 
(3.4% of orders). For ATSs, we additionally excluded ATS-specific 
order types that were determined to not be eligible for Rule 605 
reporting. For Broker-Dealer order originations, we excluded orders 
received from the following account holder types: Employee Account, 
Market Making, Other Proprietary, and Error Account of the Firm. For 
both of the Broker-Dealer and Wholesaler route acceptances, we kept 
order acceptances if the CAT Reporter ID associated with the CRD is 
not an ATS. Execution times and effective spreads are measured 
relative to the time of order receipt by the market entity. Orders 
received in off trading hours were benchmarked to the first non-
locked and crossed quote in the stocks' listing market on the next 
trading day. For simplicity and without loss of generality, the 
analysis considers only NMLOs that are priced at the quote or 
better, i.e., NMLOs that are immediately executable upon order 
receipt. Limit orders are classified as marketable, at-the-quote, 
below-the-midpoint, at-the-midpoint, or beyond-the-midpoint, based 
on the distance of their limit price from the NBBO or NBBO midpoint 
at the time of order receipt.
    \1183\ The definition of marketability for the purposes of this 
analysis for pre-open orders is determined using the NBBO at the 
time that primary listing market has disseminated its first firm, 
uncrossed quotations in the security, such that orders to be 
executed prior to this time opening price are excluded. See supra 
section III.A.1.b) for more information about defining the 
marketability of orders submitted outside of regular market hours.
    \1184\ The CAT data used in this analysis have been updated 
since the Proposing Release for a more recent time period and to 
include the full sample of executable NMLOs described in note 1182 
supra. A similar analysis in the Proposing Release used CAT data for 
a sample of 390 stocks from Mar. 2021 to compare NMLOs submitted 
outside of regular trading hours that were designated as only 
eligible to trade during regular trading hours to the volumes and 
characteristics of NMLOs submitted during a sample time window from 
9:40 a.m. to 10:40 a.m. See Proposing Release, 88 FR 3786 at 3847 
(Jan. 20, 2023). These updates to the data and methodology did not 
affect the Commission's conclusions from this analysis relative to 
the Proposing Release, namely that pre-open orders represent a small 
percentage of order flow, contain a high concentration of individual 
investor orders, and likely have some differences in execution 
profiles as compared to orders submitted during regular market 
hours.
    \1185\ 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, the Commission was not 
able to differentiate individual investors in the CAT data for 
exchanges.
---------------------------------------------------------------------------

    This is consistent with the idea that at least some of this order 
flow represents orders that are submitted by individual investors 
outside of market hours, i.e., via online brokerage accounts, but not 
necessarily with the intention to engage in after-hours trading.
(c) Required Information
    In addition to decreasing the coverage of Rule 605, subsequent 
market changes since the initial adoption of Rule 605 may have also 
decreased the relevance of some of the metrics required to be reported 
by preexisting Rule 605 reporting entities. This section will discuss 
how market changes may have affected, or will likely affect in the near 
future, aspects of several such metrics, including the definition of 
round lots for order size categories, the granularity of metrics 
related to time-to-execution, and the use of a five-minute time horizon 
for realized spreads.
(1) Order Size Categories
    Preexisting Rule 605 defined order size categories in terms of 
numbers of shares. Given that share prices and thus the notional value 
of orders can differ dramatically, defining a size category in terms of 
number of shares has disadvantages.\1186\ Figure 1 shows that the vast 
majority of orders are for a notional value of less than $100,000, and 
Figure 2 shows that this is the case for stocks across all different 
price levels. This implies that, for a $500 stock in which a $100,000 
order is equivalent to an order of only 200 shares, nearly all covered 
orders were clustered within preexisting Rule 605's smallest order size 
category of 100 to 499 shares.\1187\ Clustering all covered orders into 
a single category would have limited market participants' ability to 
use these categories to compare across orders of different sizes in 
such higher-priced stocks. Furthermore, combined with the exclusion of 
orders for less than 100 shares, defining order sizes in terms of 
number of shares led to the exclusion of many orders in higher-priced 
stocks. For example, a 99-share odd-lot in a $500 stock already has a 
notional value of $49,500, which is greater than the notional value of 
around 93% all orders according to Figure 1. Similarly, one industry 
analyst stated that the definition of order size categories in terms of 
number of shares, together with the exclusion of orders of less than 
100 shares under preexisting Rule 605,\1188\ has led to the exclusion 
of more orders with low dollar values as the average stock price 
increases.\1189\
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    \1186\ See Virtu Letter II at 5, stating that ``Rule 605's 
approach to bucketing orders solely by share quantity yields skewed 
comparisons because it fails to take into account the notional value 
of orders.''
    \1187\ See prior 17 CFR 242.605(a)(1); see also supra note 1121 
and corresponding text for a definition of the order size categories 
included in Rule 605 reporting requirements prior to these 
amendments. Consider also that a 400-share order in a $500 stock 
would already be considered a large ``block'' order according to 
some Regulation NMS rules. See, e.g., Rule 606(a)(1) of Regulation 
NMS (requiring reports on the routing of customer orders) and prior 
Rule 600(b)(25) of Regulation NMS (defining ``customer order'' to 
exclude an order with a market value of $200,000 or more); 17 CFR 
242.604(b)(6) (providing an exception for orders of block size from 
required limit order display) and prior 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). 
Therefore, in reports under preexisting Rule 605, all non-block 
covered orders in such a stock were grouped in the smallest order 
size category.
    \1188\ See supra section IX.C.3.b)(1)(a) for a discussion of the 
exclusion of orders that are less than 100 shares from preexisting 
Rule 605 reporting requirements.
    \1189\ See Phil Mackintosh, Modern Retail Needs Modern Rules, 
NASDAQ (May 27, 2021, 11:54 a.m. EDT), available at https://www.nasdaq.com/articles/modern-retail-needs-modern-rules-2021-05-27/
.
---------------------------------------------------------------------------

    Lastly, the Commission's 2020 adoption of the MDI Rules included a 
new definition of ``round lot'' that would have caused some round lots 
to be excluded from reporting requirements, absent an update to Rule 
605's order size categories.\1190\ Specifically, the order size 
categories as defined under preexisting Rule 605, which excluded orders 
with fewer than 100 shares, would have excluded a portion of round lots 
for stocks with prices greater than $250.\1191\
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    \1190\ See supra note 1016 for a definition of these tiers.
    \1191\ 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. Until the round lot definition adopted pursuant to the MDI 
Rules is implemented, round lots continue to be defined in exchange 
rules. See MDI Adopting Release, 85 FR 16726 at 16738 (Mar. 24, 
2020). For most NMS stocks, a round lot is defined as 100 shares. 
According to TAQ Data, as of Mar. 2023, 11 stocks had a round lot 
size other than 100. Nine stocks had a round lot of 10 and two 
stocks had a round lot of one.
---------------------------------------------------------------------------

(2) Non-Marketable Limit Order Categories
    As a result of the categorization of NMLOs under preexisting Rule 
605, execution quality statistics for some NMLOs may have included 
orders whose executions are more likely to depend on their limit prices 
and price movements in the market, and excluded orders whose executions 
are more likely to depend on their handling by the market center.\1192\
---------------------------------------------------------------------------

    \1192\ The execution quality of NMLOs is relevant for both 
individual and institutional investors. Studies have shown that 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 et al., 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).
    \1193\ See supra note 13.
    \1194\ See, e.g., Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 
75421 (Dec. 1, 2000), stating that Rule 11Ac1-5 ``contains several 
conditions and exclusions that are intended to limit its scope to 
those orders that provide a basis for meaningful and comparable 
statistical measures of execution quality.''
---------------------------------------------------------------------------

    Given that the aim of Rule 605 is to enable investors to compare 
and evaluate execution quality among different market centers,\1193\ 
Rule 605 reports are designed to include only orders that provide a 
basis for meaningful comparisons across measures of execution 
quality.\1194\ Depending on their characteristics,

[[Page 26524]]

execution quality statistics for some NMLOs may be less meaningful 
because their executions depend more on the order's limit price and 
price movement in the market than on handling by the market center. In 
preexisting Rule 605, the exclusion of NMLOs with limit prices more 
than $0.10 outside the NBBO (``away-from-the-quote'' NMLOs) from 
reporting requirements \1195\ was intended to eliminate NMLOs with less 
meaningful execution quality statistic.\1196\ The ``near-the-quote'' 
limit order category, consisting of NMLOs that were outside the NBBO by 
no more than 10 cents, was meant to include limit orders that are 
submitted away from the NBBO, but that still have a relative likelihood 
of being executed (hence the maximum distance requirement from the 
NBBO).\1197\
---------------------------------------------------------------------------

    \1195\ See prior 17 CFR 242.600(b)(14), (37); prior 17 CFR 
242.605(a)(1).
    \1196\ See, e.g., Disclosure of Order Routing and Execution 
Practices (Proposing Release), 65 FR 48406 at 48414 (Aug. 8, 2000), 
stating that ``Commission preliminarily believes that the rule's 
statistical measures (e.g., fill rates and speed of execution) for 
[limit orders with limit prices that are more than $0.10 outside the 
consolidated BBO at the time of order receipt] 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.''
    \1197\ In preexisting Rule 605, the categorization of a NMLO as 
a ``near-the-quote'' NMLO was based on the NBBO as of the time of 
order receipt. See prior 17 CFR 242.600(b)(37).
---------------------------------------------------------------------------

    However, the likelihood of execution of a NMLO greatly depends on 
the movement of the NBBO, such that even an order submitted within 10 
cents of the NBBO may never receive an opportunity to be executed if 
that order never touches the NBBO (e.g., if prices were to move away 
from that order immediately after submission), and an order that is 
submitted further than 10 cents may indeed eventually execute if prices 
move towards the order. Figure 8 \1198\ presents data on the fill rates 
of NMLO orders,\1199\ broken down by NMLO type, including away-from-
the-quote, near-the-quote, and at-the-quote NMLOs, along with several 
categories of inside-the-quote NMLOs depending on their distance from 
the midpoint (below-the-midpoint, at-the-midpoint, and beyond-the-
midpoint),\1200\ using a sample of MIDAS NMLO submission data.\1201\ 
The figure shows that near-the-quote and away-from-the-quote NMLOs 
appear very similar in terms of fill rates (0.27% and 0.02%, 
respectively), particularly compared to other types of NMLOs (e.g., 
inside-the-quote NMLOs have an average fill rate of around 0.36% to 
3.57%). The fact that near-the-quote and away-from-the-quote NMLOs have 
similar fill rates is consistent with the possibility that the 
exclusion of NMLOs priced more than 10 cents away from the NBBO under 
preexisting Rule 605 was based on a threshold that does not optimally 
differentiate between orders that have a meaningful chance to execute. 
Meanwhile, orders that never have a meaningful opportunity to execute 
(e.g., because they never touch the NBBO) may have been included in 
Rule 605 statistics prior to these amendments.
---------------------------------------------------------------------------

    \1198\ The MIDAS data used in this analysis have been updated 
and corrected since the Proposing Release for the reasons described 
in supra note 1130. See Proposing Release, 88 FR 3786 at 3849 (fig. 
8) (Jan. 20, 2023). The fill rates in the analysis in the Proposing 
Release are somewhat higher--beyond-the-midpoint (5.07%), at-the-
midpoint (4.96%), below-the-midpoint (2.66%), at-the-quote (2.89%), 
near-the-quote (0.61%), and away-from-the-quote (0.18%)--compared to 
those in the updated analysis in Figure 8. However, it remains the 
case that near-the-quote and away-from-the-quote NMLOs have 
similarly low fill rates compared to other types of NMLOs. 
Therefore, changes to the MIDAS dataset did not affect the 
Commission's conclusions from this analysis relative to the 
Proposing Release, namely that the exclusion of away-from-the-quote 
NMLOs and the inclusion of near-the-quote NMLOs under preexisting 
Rule 605 was based on a threshold that does not optimally 
differentiate between orders that do and do not have a meaningful 
chance to execute.
    \1199\ Due to the exclusion of orders with more than one 
submission message from the MIDAS dataset as described in supra note 
1130, an analysis using this data may overestimate fill rates. This 
is because many of the orders associated with more than one 
submission message are so-called ``cancel/replace'' orders, in which 
an existing order is cancelled and replaced with a modified order, 
such as an order with a different price. The exclusion of these 
orders will thus tend to exclude more cancellations than executions, 
leading to higher fill rates. An alternate analysis, rather than 
dropping order ids (``oids'') with multiple submission messages, 
summed submission volume by stock-day-exchange-oid and assigned to 
this volume the price at the time of first submission. The fill 
rates resulting from this alternative analysis differ from those in 
Figure 8 by less than 0.01 percentage points; thus, the Commission's 
conclusions from this analysis are not affected by the exclusion of 
orders with multiple submission messages.
    \1200\ These categories of NMLOs are defined as follows. 
``Beyond-the-midpoint'' NMLOs consist of, for sell orders, NMLOs 
with limit prices lower than the midpoint but higher than the NBB, 
and, for buy orders, NMLOs with limit prices higher than the 
midpoint but lower than the NBO. ``At-the-midpoint'' NMLOs consist 
of NMLOs with limit prices equal to the NBBO midpoint. ``Below-the-
midpoint'' NMLOs consist of, for sell orders, NMLOs with limit 
prices higher than the midpoint but less than the NBO and, for buy 
orders, NMLOs with limit prices lower than the midpoint but higher 
than the NBB. ``At-the-quote'' NMLOs consist of, for sell orders, 
NMLOs with limit prices equal to the NBO and, for buy orders, NMLOs 
with limit prices equal to the NBB. ``Near-the-quote'' NMLOs consist 
of, for sell orders, NMLOs with limit prices worse (i.e., higher) 
than the NBO by no more than $0.10 and, for buy orders, NMLOs with 
limit prices worse (i.e., lower) than the NBB by no more than $0.10. 
``Away-from-the-quote'' NMLOs consist of, for sell orders, NMLOs 
with limit prices worse (i.e., higher) than the NBO by more than 
$0.10 and, for buy orders, NMLOs with limit prices worse (i.e., 
lower) than the NBB by more than $0.10.
    \1201\ The distribution of orders into various NMLO categories 
may change 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 
will 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 IX.C.1.c)(2). However, it is not clear how 
a change in the distribution of orders into various NMLO categories 
will affect the average fill rates of these NMLO categories.
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BILLING CODE 8011-01-P

[[Page 26525]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.013

    To get an idea of the extent to which these orders were included in 
Rule 605 statistics prior to these amendments, Figure 9 \1202\ breaks 
down the sample of MIDAS NMLO submission data \1203\ into NMLO 
types.\1204\ According to Figure 8, more than 99% of near-the-quote 
NMLOs do not execute, which, according to Figure 9 represents around 
29.3% of total submission volume.\1205\ While it is possible that some 
of these orders did not execute because of their handling by the market 
center, it is unlikely that this is the case for all of them, and 
likely that some of the lack of fills was the result of other factors, 
such as price movements or cancellations by the submitter.\1206\
---------------------------------------------------------------------------

    \1202\ The MIDAS data used in this analysis have been updated 
and corrected since the Proposing Release for the reasons described 
in supra note 1130. See Proposing Release, 88 FR 3786 at 3848 (fig. 
7) (Jan. 20, 2023). The share volumes in the Proposing Release are 
similar for beyond-the-midpoint (2.9%), at-the-midpoint (1.2%), 
below-the-midpoint (2.9%), at-the-quote (33.3%), near-the-quote 
(35.8%), and away-from-the-quote (23.8%) NMLOS. Therefore, changes 
to the MIDAS dataset did not affect the Commission's conclusions 
from this analysis relative to the Proposing Release, namely that 
near-the-quote NMLOs represent around a third of total submission 
volume.
    \1203\ See supra note 1130 for a description of the dataset.
    \1204\ Results may be different following the implementation of 
the MDI Rules. See supra note 1201 and section VII.C.1.d)(2) for 
further discussion.
    \1205\ These numbers are the same as those in the Proposing 
Release. See Proposing Release, 88 FR 3786 at 3848 (Jan. 20, 2023).
    \1206\ See infra section IX.E.2.b) for a discussion of how NMLO 
orders that are cancelled quickly after submission may impact fill 
rates.

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[[Page 26526]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.014

    Furthermore, the fact that the threshold for inclusion in 
preexisting Rule 605 reports was based on nominal terms (i.e., 10 
cents) means that NMLO coverage varied depending on the stock price: 
high-price stocks with smaller relative tick sizes would have had less 
NMLO coverage, since 10 cents represents a relatively tighter band 
around the NBBO when considered as a percentage of stock price.\1207\ 
This is shown in Figure 10,\1208\ which breaks down the NMLO submission 
volumes in Figure 9 by both order type and average share prices. The 
figure shows that away-from-the-quote NMLOs represent 35.5% of total 
NMLO share volume for the group of stocks with the highest share 
prices, but only 15.0% for the group of stocks with the lowest share 
prices. Given the positive fill rates for away-from-the-quote NMLOs 
from Figure 8, this implies that a higher portion of executed away-
from-the-quote NMLOs have been excluded from preexisting Rule 605 
reports for high-priced stocks. Excluding large portions of relevant 
NMLOs results in less reliable market quality measures; this may 
especially be the case for high-priced stocks, thus making comparisons 
between market centers less reliable for these stocks.
---------------------------------------------------------------------------

    \1207\ 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 will result in even tighter price bands. See supra 
section IX.C.1.c)(2) for further discussion.
    \1208\ The MIDAS data used in analysis has been updated and 
corrected since the Proposing Release for the reasons described in 
supra note 1130. See Proposing Release, 88 FR 3786 at 3850 (fig. 9) 
(Jan. 20, 2023). The Proposing Release similarly found that away-
from-the-quote NMLOs represent a higher percentage (24.4%) of total 
NMLO share volumes for the group of stocks with the highest share 
prices as compared to the group of stocks with the lowest share 
prices (8.4%). Therefore, changes to the MIDAS dataset did not 
affect the Commission's conclusions from this analysis relative to 
the Proposing Release, namely that a higher portion of executed 
away-from-the-quote NMLOs in high-priced stocks were excluded from 
preexisting Rule 605 reports.

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[[Page 26527]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.015

    Preexisting Rule 605 also required execution quality information 
for NMLOs to be measured relative to the time of order receipt. As will 
be shown in Figure 12 below, NMLOs that are submitted further away from 
the NBBO tend to take longer from the time of order receipt to execute 
than those submitted closer to the NBBO, as the NBBO has a further 
distance to move before it reaches the order's limit price. This 
requirement thus may have made it difficult to compare the execution 
times of market centers that handle NMLOs with varying distances from 
the NBBO.
(3) Midpoint-or-Better NMLOs
    Prior to these amendments, Rule 605 reports required the separate 
reporting of execution quality information for inside-the-quote NMLOs. 
However, the Commission understands that some inside-the-quote limit 
orders may have different execution quality characteristics than other 
types of NMLOs, including other inside-the-quote NMLOs, and that this 
may vary across market centers. In particular, similarly to market and 
marketable limit orders, some at-the-midpoint and beyond-the-midpoint 
limit orders (collectively, ``midpoint-or-better'' orders) are 
submitted by traders with the intention of executing immediately, in 
this case against hidden or odd-lot inside-the-quote liquidity. 
However, because they are not a marketable order type (i.e., they do 
not fully cross the spread), preexisting Rule 605 did not require 
certain statistics that are appropriate for marketable orders, such as 
effective spreads, to be reported for inside-the-quote NMLOs.\1209\ 
Furthermore, some market centers, such as some wholesalers, treat 
``beyond-the-midpoint'' limit orders (i.e., NMLOs that are priced more 
aggressively than the midpoint) like marketable limit orders and will 
offer price improvement to these orders.
---------------------------------------------------------------------------

    \1209\ 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. See 
infra section IX.C.3.c)(6).
---------------------------------------------------------------------------

    Confirming that there are differences between certain types of 
inside-the-quote NMLOs, Table 4 \1210\ presents

[[Page 26528]]

results from an analysis of the execution quality of different order 
types, including market, marketable limit, and various types of inside-
the-quote NMLOs, along with at-the-quote NMLOs. The analysis uses a 
sample of orders from CAT data for the period of Q1 2023.\1211\ First, 
the high percentage of beyond-the-midpoint and at-the-midpoint NMLO 
share volume that is submitted with IOC designations as compared to 
below-the-midpoint and at-the-quote NMLOs confirms that these orders 
are often submitted with the intention of executing immediately.\1212\ 
Furthermore, the results show that there are differences between the 
execution characteristics of midpoint-or-better NMLOs as compared to 
NMLOs that are below the midpoint or at the quote. For example, for 
wholesalers, there is a notable difference in the fill rates of 
midpoint-or-better NMLOs (9.8% to 10%%) as compared to NMLOs below the 
midpoint (3.7% to 4.4%). Similarly, while around 70-77% of on-exchange 
midpoint-or-better NMLOs execute in less than a millisecond, this 
number drops to around 28.6% for below-the-midpoint NMLOs, and 9.3% for 
at-the-quote NMLOs.\1213\ This analysis suggests that midpoint or 
better orders have a sufficiently different execution profile from 
other NMLOs to warrant different reporting requirements.
---------------------------------------------------------------------------

    \1210\ The CAT data used in this analysis have been updated 
since the Proposing Release for a more recent time period, as well 
as to include a larger sample of reporting entities (both 
wholesalers and exchanges/ATSs). Consistent with requiring time-to-
execution buckets in Rule 605 reports rather than time-to-execution 
statistics (see supra section III.B.3), the methodology has also 
been updated to capture execution speeds as the percent of executed 
shares that are executed in under one millisecond, rather than mean 
and median execution times. See Proposing Release, 88 FR 3786 at 
3850 (tbl. 5) (Jan. 20, 2023). The results in the Proposing Release 
similarly show that beyond-the-midpoint NMLOs executed by 
wholesalers tend to have faster time-executions and higher fill 
rates than other types of inside-the-quote NMLOs. Therefore, these 
updates did not affect the Commission's conclusions from this 
analysis relative to the Proposing Release, namely that beyond-the-
midpoint orders have different execution characteristics than other 
types of inside-the-quote NMLOs. See infra note 1213 for further 
discussion comparing the results from the Proposing Release to those 
in Table 4.
    \1211\ This analysis uses CAT data for a sample of 400 stocks. 
See supra note 1182 for a description of the dataset. In order to 
focus on NMLOs that will be included in Rule 605 reports as amended, 
the analysis includes only NMLOs that are immediately executable 
upon entry, i.e., NMLOs that are submitted at or better than the 
quote.
    \1212\ This dataset is from prior to the implementation of the 
MDI Rules and the distribution of orders into various NMLO 
categories, including at-and-beyond-the-midpoint orders, may change 
following the implementation of the MDI Rules. See supra note 1207 
and section IX.C.1.c)(2). However, it is not clear how a change in 
the distribution of orders into various NMLO categories will affect 
the average fill rates and time-to-execution of these NMLO 
categories.
    \1213\ The analysis in the Proposing Release additionally looked 
at the percentage of price-improved orders across different order 
types executed by wholesalers and found that beyond-the-midpoint 
orders are offered price improvement by wholesalers more often than 
other inside-the-quote NMLOs. See Table 5 in the Proposing Release, 
88 FR 3786 at 3850 (Jan. 20, 2023). However, as stated by a 
commenter, at least some of a NMLO's price improvement will be 
driven by its limit price, which is outside the control of the 
market center. See Schwab Letter at 32. The Commission agrees with 
the commenter and therefore focuses this analysis on time-to-
execution and fill rates.
[GRAPHIC] [TIFF OMITTED] TR15AP24.016


[[Page 26529]]


(4) Time-to-Execution
    Prior to these amendments, Rule 605 required the reporting of time-
to-execution information in two ways. First, for market and marketable 
limit orders, reporting entities were required to report the share-
weighted average time-to-execution for orders executed with price 
improvement, at the quote, and with price dis-improvement, calculated 
based on timestamps recorded in seconds. Second, for all orders, 
reporting entities were required to report the number of shares 
executed within certain predefined time-to-execution categories or 
buckets.\1214\
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    \1214\ See prior 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).
---------------------------------------------------------------------------

    First, calculating average time-to-execution statistics using 
timestamps recorded in terms of seconds does not reflect changes in 
market speeds. Figure 11 \1215\ uses data from the SEC's MIDAS 
analytics tool \1216\ to plot the percentage of on-exchange NMLOs that, 
conditional on being executed,\1217\ are fully executed within one 
second or less from the time of submission between Q4 2012 and Q1 2023. 
The figure shows that this percentage has increased over time across 
different market capitalization groups, and that in Q1 2023 nearly half 
(48.0%) of executed NMLOs are executed in less than one second in large 
market cap stocks. Therefore, while timestamps expressed in seconds may 
have been appropriate for the markets when Rule 605 was first adopted, 
they are likely to miss variation in time-to-execution across market 
centers in today's markets.\1218\
---------------------------------------------------------------------------

    \1215\ The data used in this analysis have been updated since 
the Proposing Release to include a more recent time period. See 
Proposing Release, 88 FR 3786 at 3851 (fig. 10) (Jan. 20, 2023), 
which presents the same analysis for Q4 2012 through Q1 2022. The 
percentage of NMLOs executed within one second has decreased 
slightly since Q1 2022. However, these differences due to updates to 
the dataset did not affect the Commission's conclusions from this 
analysis relative to the Proposing Release, namely that the 
percentage of NMLOs executed within one second has generally 
increased over time.
    \1216\ See Conditional Cancel and Trade Distributions (Dec. 
2023), 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 (last visited Jan. 30, 2024, 3 p.m.).
    \1217\ I.e., Figure 8 plots the number of fully executed NMLOs 
executed within one second relative to the total number of fully 
executed on-exchange NMLOs. In contrast, Figure 6 plots the number 
of executed NMLO shares divided by the total number of submitted 
NMLO shares.
    \1218\ See, e.g., Better Markets Letter at 3, stating that 
``there have been significant developments in trading since Rule 605 
was adopted. It is now done electronically with automated systems 
and the speeds have increased exponentially, measured in milli or 
microseconds, not mere seconds;'' and FIF Letter at 17, stating that 
``market centers, in particular, typically record trading events 
with greater precision than milliseconds.''
[GRAPHIC] [TIFF OMITTED] TR15AP24.017


[[Page 26530]]


    Second, given that many orders are executed on a sub-second basis, 
the time-to-execution buckets prescribed by preexisting Rule 605 are 
not able to fully capture variations in execution times across order 
types.\1219\ To illustrate this, Figure 12 \1220\ groups on-exchange 
NMLO executions collected from MIDAS for the period of Mar. 2023 \1221\ 
into time-to-execution buckets that correspond to those defined in 
preexisting Rule 605. The figure shows that, while away-from-the-quote 
and near-the-quote NMLOs are relatively evenly distributed across the 
time-to-execution categories, these categories do not capture much 
differentiation for other NMLO types, particularly for those that take 
place inside the quote. For inside-the-quote NMLOs, 66.6% to 86.9% of 
orders are grouped in the shortest time-to-execution bucket (from 0 to 
less than 10 seconds), depending on the distance to the midpoint, while 
the category corresponding to the longest time-to-execution bucket 
defined by preexisting Rule 605 (5 to 30 minutes) has 0.4% to 0.6% of 
inside-the-quote NMLO executions. Therefore, these time-to-execution 
categories likely did not fully capture variations in the execution 
times of these orders across reporting entities.
---------------------------------------------------------------------------

    \1219\ See supra note 1214 for a definition of these time-to-
execution categories.
    \1220\ The MIDAS data used in this analysis has been updated and 
corrected since the Proposing Release for the reasons described in 
supra note 1130. See Proposing Release, 88 FR 3786 at 3852 (fig. 11) 
(Jan. 20, 2023). The distributions of orders across time-to-
execution buckets for different NMLO categories are similar in the 
Proposing Release: for inside-the-quote NMLOs, 84.2% to 85.7% of 
orders were 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 (5 to 30 minutes) has only 1.1% to 1.3% of executions. 
Therefore, changes to the MIDAS dataset did not affect the 
Commission's conclusions from this analysis relative to the 
Proposing Release, namely that the time-to-execution categories in 
preexisting Rule 605 likely did not fully capture variations in the 
execution times of orders across reporting entities.
    \1221\ See supra note 1130 for data description. 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. Time-to-execution is 
calculated as the time for order receipt to the first time that one 
or more of the order's shares are executed. 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 1207 
and section IX.C.1.c)(2). However, it is not clear how a change in 
the distribution of orders into various NMLO categories will affect 
the average time-to-execution of these NMLO categories.
[GRAPHIC] [TIFF OMITTED] TR15AP24.018

    MIDAS data include only orders and quotes that are posted on 
national securities exchanges' limit order books and trades that are 
executed against those orders,\1222\ 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

[[Page 26531]]

Commission used the Tick Size Pilot B.I Market Quality data from April 
2016 until March 2019.\1223\ Figure 13 \1224\ shows the distribution of 
time-to-execution statistics for market and marketable limit orders, 
along with the three categories of non-marketable limit orders required 
in Rule 605 reports prior to these amendments (i.e., inside-the-quote, 
at-the-quote, and near-the-quote). Note that the time-to-execution 
categories defined in the Tick Size Pilot dataset are more granular 
than those in preexisting Rule 605.
---------------------------------------------------------------------------

    \1222\ See supra note 1130. MIDAS data include 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.
    \1223\ See supra note 1115 for data description. 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 dataset (Apr. 2016 until 
Mar. 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 
preexisting 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 include only 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 1207 and section IX.C.1.c)(2). 
However, it is not clear how a change in the distribution of orders 
into various NMLO categories will affect the average time-to-
execution of these NMLO categories.
    \1224\ The same figure can be found in the proposing release. 
See Proposing Release, 88 FR 3786 at 3853 (Figure 12) (Jan. 20, 
2023).
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[GRAPHIC] [TIFF OMITTED] TR15AP24.019

BILLING CODE 8011-01-C
    Echoing the results using MIDAS data in Figure 12, Figure 13 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 preexisting Rule 605 and the 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 preexisting Rule 605 category of shares executed 
from 0 to 9 seconds. Likewise, the longer time-to-execution buckets 
that are included in both preexisting Rule 605 and the Tick Size Pilot 
categorizations are virtually empty. Therefore, as with inside-the-
quote NMLOs, preexisting Rule 605 time-to-execution categories were 
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 has limited the usefulness of 
time-to-execution information for investors.\1225\
---------------------------------------------------------------------------

    \1225\ 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 et al., 
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 et al., Trading Fast and Slow: 
Colocation and Liquidity, 28 Rev. Fin. Stud. 3407 (2015).

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

[[Page 26532]]

(5) Realized Spreads
    Because of the increase in the speed at which markets 
operate,\1226\ as well as the diversity of size and liquidity 
characteristics across stocks, the requirement in preexisting Rule 605 
to use a single five-minute benchmark to calculate realized spreads 
\1227\ may have limited the ability of market participants to use this 
measure to control for adverse selection risk when evaluating execution 
quality metrics, such as realized spreads.
---------------------------------------------------------------------------

    \1226\ See supra section IX.C.3.c)(4) for a discussion of 
evidence of increased market trading speeds.
    \1227\ See prior 17 CFR 242.600(b)(9). Prior to these 
amendments, for buy orders, realized spread was 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 was double the amount of difference between the 
midpoint of the NBBO five minutes after the time of order execution 
and the execution price.
---------------------------------------------------------------------------

    Realized spreads are calculated by comparing an order's transaction 
price to the NBBO midpoint (i.e., an estimate of the average expected 
trade price) at some later time interval. Realized spreads can be 
decomposed into the difference between the effective spread, which 
captures how much a trader has to pay for (and thus how much a 
liquidity provider earns from) the immediate execution of an order, and 
the movement in market prices some time interval after a trade (i.e., 
price impact).\1228\ 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 can unwind their positions.\1229\ Thus, 
price impact can be thought of as a measure of adverse selection. 
Liquidity providers will generally set effective spreads to compensate 
for this adverse selection risk. Realized spreads, as the residual 
between the effective spread and price impact, can thus be thought of 
as the portion of the spread that liquidity providers earn in excess of 
adverse selection.\1230\ Because of their inverse relationship with 
price impact, smaller (or even negative) realized spreads reflect that 
liquidity providers are earning less of the spread from their liquidity 
provision, which is usually a reflection of order flow with 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 less favorable conditions.
---------------------------------------------------------------------------

    \1228\ Denoting by pt the price of a trade, dt the direction of 
the trade, mt the midpoint at the time of trade, and mt+1 at the 
midpoint at time t+1 following a trade, the realized spread can be 
calculated as (effective spread-price impact) = 2*dt*(pt-mt)-2* dt 
*(mt+1-mt) = 2* dt *(pt-mt+1). In preexisting Rule 605, realized 
spreads were required to be measured using the price at the time of 
order execution, and effective spreads were required to be measured 
using the midpoint price at the time of order receipt. To the extent 
that there were significant differences in the time of order receipt 
and the time of order execution, the decomposition of realized 
spreads in preexisting Rule 605 reports into effective spreads and 
price impact was not exact. The decomposition of realized spreads 
into effective spreads and price impact will continue to not be 
exact in the amended rule; see infra note 1484 for further 
discussion.
    \1229\ 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 as a result of the realization of the 
informed trader's information, and the market maker will have to 
sell at a lower price than what it paid for the shares.
    \1230\ See, e.g., Conrad and Wahal, supra note 544, at 240, 
stating that the realized spread ``can be thought of as the residual 
profit to liquidity providers.'' Realized spreads do not measure the 
actual trading profits that liquidity providers earn from supplying 
liquidity. In order to estimate the trading profits that liquidity 
providers earn, we would need to know at what times and prices the 
liquidity provider executed the offsetting position for a trade in 
which it supplied liquidity (e.g., the price at which the liquidity 
provider later sold shares that it bought when it was supplying 
liquidity). If liquidity providers offset their positions at a price 
and time that is different from the NBBO midpoint at the time lag 
used to compute the realized spread measure, then the realized 
spread measure is an imprecise proxy for the profits liquidity 
providers earn supplying liquidity. Differences in inventory holding 
periods of different liquidity providers could also create 
differences in the trading profits that liquidity providers earn 
that would not be captured in the realized spread measure if it is 
estimated over the same time horizon for all liquidity providers. 
See Lingyan Yang & Ariel Lohr, The Profitability of Liquidity 
Provision (working paper Feb. 18, 2022), available at https://ssrn.com/abstract=4033802 (retrieved from SSRN Elsevier database). 
Additionally, realized spread metrics do not take into account any 
transaction rebates or fees, including PFOF, that a liquidity 
provider might earn or pay, which would also affect the profits they 
earn when supplying liquidity.
---------------------------------------------------------------------------

    Several commenters stated that realized spread is an imperfect 
proxy for revenue from liquidity provision.\1231\ The Commission does 
not claim that the realized spread is a measure of a firm's overall 
profitability.\1232\ The Commission stated in the Proposing Release and 
reiterates here that, to the extent realized spreads capture adverse 
selection costs faced by liquidity providers, they provide a measure of 
the potential profitability of trading for liquidity providers.\1233\ 
In addition, the usefulness of realized spreads as a control variable 
for adverse selection does not depend on their being a measure of 
profitability.\1234\
---------------------------------------------------------------------------

    \1231\ See, e.g., Rule 605 Citadel Letter at 8-9, stating that 
``the Commission's assertion that realized spread can serve as a 
proxy for liquidity provider profitability has been thoroughly 
discredited, including by academic research'' and Virtu Letter II at 
12, stating that ``there is a risk that such measurements are 
improperly used . . . as a proxy for liquidity providers' 
profitability.'' See also Conrad and Wahal, supra note 544, at 247.
    \1232\ For example, realized spreads do not account for other 
costs that liquidity providers may incur, such as fixed costs for 
setting up their trading infrastructure and costs for connecting to 
trading venues and receiving market data. See supra section 
III.B.4.a)(2) for further discussion. See also supra note 1230.
    \1233\ See Proposing Release, 88 FR 3786 at 3814 (Jan. 20, 
2023).
    \1234\ See, e.g., infra note 1506, discussing commenter support 
for the usefulness of realized spreads as a measure of order flow 
characteristics.
---------------------------------------------------------------------------

    Realized spreads vary significantly with the chosen time horizon. 
An academic study shows that realized spreads will generally decrease 
as the time horizon over which they are calculated is lengthened, 
highlighting that realized spreads are highly dependent on the time 
horizon over which they are calculated.\1235\ The same study also finds 
that different time horizons may be appropriate for different stocks, 
depending on the stock's market capitalization.\1236\ One way to 
interpret the decline in realized spreads as the time horizon increases 
is to consider that information is incorporated into market prices 
incrementally; a longer time horizon thus means that more of the price 
impact has been realized. The profitability of a market making strategy 
increases with the speed at which market makers are able to turn over 
their inventory before adverse movements in prices.
---------------------------------------------------------------------------

    \1235\ See Conrad and Wahal, supra note 544.
    \1236\ See id. Specifically, the authors recommend a horizon of 
no more than 15 seconds for large stocks and 60 seconds for small 
stocks.
    \1237\ While the analysis of realized spreads in the Proposing 
Release considered only six time horizons (1 second, 5 seconds, 10 
seconds, 15 seconds, 1 minute, and 5 minutes), this analysis 
considers an additional four time horizons (10 milliseconds, 50 
milliseconds, 100 milliseconds, and 500 milliseconds) in response to 
a commenter who recommended that realized spreads be calculated 
using shorter time frames (specifically, 50 milliseconds and 100 
milliseconds). See Healthy Markets Letter at 17; see also Figure 13 
in the Proposing Release, 88 FR 3786 at 3854 (Jan. 20, 2023).
---------------------------------------------------------------------------

    In order to examine how realized spreads vary with the chosen time 
horizon, the Commission analyzed realized spreads calculated over time 
horizons ranging from 10 milliseconds to five minutes,\1237\ as well as 
how they differ based on market capitalization size, using TAQ data 
from Q1 2023 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

[[Page 26533]]

over $10 billion).\1238\ Following the academic literature, results are 
presented separately for different market capitalization groups as a 
proxy for different liquidity variables, with high market 
capitalization correlating highly with higher liquidity.\1239\ The 
results are presented in Figure 14 \1240\ and show that realized 
spreads tend to decrease as the time horizon increases. One exception 
is the five-minute time horizon for the largest market capitalization 
group, for which realized spread begins to increase. This may be driven 
by the addition of noise at this longer time horizon for large-cap 
stocks.\1241\
---------------------------------------------------------------------------

    \1238\ This analysis uses data from intraday TAQ Consolidated 
Trade files for the period of Q1 2023 for a sample of 400 stocks. 
See supra note 1129 for a description of how the sample of stocks 
was selected.
    \1239\ See, e.g., Conrad and Wahal, supra note 544, at 242: ``We 
display many of our results separately for small- and large-
capitalization stocks because size is so strongly correlated with 
liquidity variables.''
    \1240\ The TAQ data used in this analysis have been updated 
since the Proposing Release to account for a more recent time 
period. In addition, the methodology has been updated to include 
additional time horizons. See Proposing Release, 88 FR 3786 at 3815 
(fig. 1) (Jan. 20, 2023), which presents a similar analysis that 
uses data from Feb. 2021 (see Proposing Release, 88 FR 3786 at 3854, 
n.706 (Jan. 20, 2023), for data description), and includes six time 
horizons (1 second, 5 seconds, 10 seconds, 15 seconds, 1 minute, and 
5 minutes); see supra note 1237. As the sample was from a different 
time period, the magnitudes of realized spreads are slightly 
different from those in the sample from Q1 2023. However, the 
updates to the dataset did not affect the Commission's conclusions 
from this analysis relative to the Proposing Release, namely that 
realized spreads tend to decrease, for each market capitalization 
group, as the time horizon increases.
    \1241\ Conrad and Wahal also find a slight increase in realized 
spreads at longer time intervals. See Conrad and Wahal, supra note 
544, figs. 1, 2.
---------------------------------------------------------------------------

    Figure 14 also shows that, except for the largest market 
capitalization group, realized spreads tend to decline as market 
capitalization size increases.\1242\ 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 not be appropriate for small 
cap stocks.\1243\
---------------------------------------------------------------------------

    \1242\ Using data from Feb. 2021, an analysis in the Proposing 
Release further found that this pattern of declining realized 
spreads across increasing time horizon also held across different 
market centers. See Proposing Release, 88 FR 3786 at 3854 (fig. 13) 
(Jan. 20, 2023). An analysis using the updated sample of data 
described in note 1238 supra confirms that this pattern across 
market centers holds in Q1 2023 as well.
    \1243\ See, e.g., results from Conrad and Wahal, discussed in 
note 1236. The Commission's 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 may be different 
under the MDI Rules than it was during out sample period, 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 IX.C.1.c)(2) 
for further discussion.
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BILLING CODE 8011-01-P

[[Page 26534]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.020

BILLING CODE 8011-01-C

[[Page 26535]]

(6) Effective Spreads
    Prior to these amendments, reporting entities were not required to 
include information about the effective spreads of NMLOs in Rule 605 
reports, including the effective spreads of midpoint-or-better 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.\1244\ 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. Like market and marketable limit 
orders, some at-the-midpoint and beyond-the-midpoint limit orders are 
submitted by traders with the intention of executing immediately, in 
this case against hidden or odd-lot inside-the-quote liquidity.\1245\ 
Therefore, for midpoint-or-better orders, effective spreads contain 
information that may also otherwise be useful to investors.
---------------------------------------------------------------------------

    \1244\ See, e.g., Bjorn Hagstr[ouml]mer, Bias in the Effective 
Bid-Ask Spread, 142 J. Fin. Econ. 314 (2021); see infra section 
IX.E.3.c)(3) discussing potential issues with using the midpoint to 
calculate effective spreads.
    \1245\ See supra section IX.C.3.c)(5) for further discussion.
---------------------------------------------------------------------------

(7) Notional Spreads (Effective and Realized)
    The fact that reports under preexisting Rule 605 contained 
information on average realized and average effective spreads only in 
terms of dollar amounts, and not in terms of percentages, made it 
difficult for market participants to account for differences in share 
prices when comparing across market centers.\1246\ While spreads in 
notional 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.\1247\ 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 have made 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.\1248\
---------------------------------------------------------------------------

    \1246\ 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.
    \1247\ 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 investor will have to pay about $0.40 to purchase 40 
shares of the stock. Now consider an investor 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 10 times more expensive for the investor to accumulate 
a position worth the same dollar amount in the lower-priced stock.
    \1248\ 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 amendment that requires reporting entities to 
prepare summary reports that aggregate execution quality information 
for S&P 500 stocks, along with all NMS stocks, will give market 
participants access to aggregate effective spreads for one commonly 
used basket of stocks. Meanwhile, per-stock percentage spread 
information will 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 account for 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 offered the better prices (a percentage 
effective spread of 0.04%) compared to Market Center A (a percentage 
effective spread of 0.4%).\1249\ 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.
---------------------------------------------------------------------------

    \1249\ 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.
---------------------------------------------------------------------------

(8) Price and Size Improvement
    The measure of price improvement required by preexisting Rule 605 
may not have always succeeded in capturing price improvement relative 
to the best available prices. Prior to these amendments, market centers 
were required to report price improvement only as the difference 
between the trade price and the NBBO. However, in cases where odd-lot 
volume is available at prices better than the NBBO, price improvement 
measured relative to the NBBO will not reflect the best available 
displayed prices.\1250\ This may have limited market participants' 
ability to compare these measures of price improvement across market 
centers. For example, if a market center internalizes an order with 
$0.05 of price improvement relative to the NBBO, but meaningful odd-lot 
liquidity is available on another market center at prices that are 
$0.10 better than the NBBO, the market center would have posted 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 available elsewhere 
instead of internalizing the order. As a result, in some cases, 
measures of price improvement in preexisting Rule 605 may not have 
accurately reflected the amount of price improvement offered by some 
market centers.\1251\
---------------------------------------------------------------------------

    \1250\ See, e.g., Bartlett et al. (2022), supra note 33, who 
found that odd-lots offer better prices than the NBBO 18% of the 
time for bids and 16% of the time for offers. 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.
    \1251\ One commenter stated that measures of price improvement 
in preexisting Rule 605 were incomplete because they did not include 
liquidity from odd-lot quotes at prices better than the NBBO. See 
Virtu Letter II at 7.
---------------------------------------------------------------------------

    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 required by preexisting Rule 605 do not necessarily

[[Page 26536]]

capture a market center's ability to fill orders beyond the liquidity 
available at the NBBO.\1252\ 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 would not be reflected in the market center's price improvement 
statistics. The handling of orders that exceed available NBBO depth may 
not be a rare occurrence: One academic study found that, in a 
proprietary database consisting of orders handled by wholesalers, over 
52% of the total shares executed in their data were from orders seeking 
to trade more shares than are available at the NBBO and that, of these 
trades, 83.61% received size improvement from wholesalers.\1253\
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    \1252\ One commenter similarly stated that ``price improvement 
figures reported under current Rule 605 substantially understate the 
benefits to retail investors provided by the current market 
structure.'' Virtu Letter II at 10; see also Robinhood Letter at 47, 
stating that the ``absence [of size improvement information] in 
Current Rule 605 reports means that execution quality is 
significantly undercounted.'' 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 Apr. 2016 and Mar. 2019; see infra note 1545 for 
data 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. 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 
IX.C.1.c)(2) for further discussion.
    \1253\ See Robert H. Battalio & Robert H. Jennings, Wholesaler 
Execution Quality (working paper Dec. 18, 2023), available at 
https://ssrn.com/abstract=4304124 (retrieved from SSRN Elsevier 
database) (``Battalio & Jennings''). As a result, the authors 
estimate that incorporating information about size improvement into 
Rule 605 price improvement statistics would more than double 
estimates of price improvement for internalized orders. See Battalio 
& Jennings at 4. A previous version of this study was referenced by 
several commenters in support of the inclusion of size improvement 
information in Rule 605 reports (see, e.g., Citadel Letter at 11); 
as well as in general support of updates to Rule 605 (see, e.g., 
McHenry et al. Letter at 2; SIFMA Letter II at 20); see also Virtu 
Petition at 3, stating that approximately 45% of shares (and 54% of 
the value traded) filled by Virtu in 2020 were from orders that 
outsized the NBBO, and that industry-wide retail investors received 
approximately $7 billion in size improvement in 2020.
---------------------------------------------------------------------------

    As the Commission stated in the Rule 11Ac1-5 Adopting Release, the 
average effective spread captures some information about size 
improvement.\1254\ 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).\1255\ 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.\1256\ Therefore, investors that 
particularly value the ability of market centers to offer size 
improvement, such as investors trading in larger order sizes, would not 
have been able to use the metrics contained in reports under 
preexisting Rule 605 to easily discern which market center would have 
better handled their order according to this dimension of execution 
quality.\1257\
---------------------------------------------------------------------------

    \1254\ See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75425 
(Dec. 1, 2000).
    \1255\ 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.
    \1256\ To illustrate, consider the example in supra note 1255, 
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.
    \1257\ Compare the example of Market Center B offering size 
improvement to a 200-share order in note 1255, supra, to the example 
of Market Center B offering price improvement to a 100-share order 
in note 1256, 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.
---------------------------------------------------------------------------

(9) IOCs
    Under preexisting Rule 605 requirements, grouping IOCs together 
with other orders may have skewed the execution quality metrics of 
reporting entities that handle a large number of IOCs,\1258\ which may 
have hindered market participants' ability to accurately compare 
execution quality across reporting entities.
---------------------------------------------------------------------------

    \1258\ See, e.g., Rule 605 Citadel Letter at 7, stating that 
``[a]t the moment, depending on the structure of the broker-dealer, 
these IOC orders [executed on SDPs] may be aggregated with retail 
orders for reporting purposes, even though the execution profile is 
very different and could negatively skew a wholesale broker-dealer's 
execution quality metrics.''
---------------------------------------------------------------------------

    In an analysis in the Proposing Release, the Commission found that 
including IOCs along with other types of market and marketable limit 
orders may skew the execution quality of these other order types, 
particularly since IOCs make up more than 90% of market and marketable 
share volume.\1259\ In addition, several commenters stated that 
grouping non-marketable IOCs together with other non-marketable limit 
orders could skew execution quality statistics for these orders, since 
non-marketable IOCs also have different execution profiles.\1260\
---------------------------------------------------------------------------

    \1259\ See Proposing Release, 88 FR 3786 at 3857 (tbl. 6) (Jan. 
20, 2023). The analysis in the Proposing Release was based on the 
Tick Size Pilot B.II Market and Marketable Limit Order dataset. This 
dataset includes information only about market and marketable limit 
orders, and furthermore collected data only for small cap stocks.
    \1260\ See, e.g., FIF Letter at 13.

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[[Page 26537]]

To test the concern raised by these commenters, the Commission uses a 
sample of CAT data for 400 stocks for the period of Q3 2023 to refine 
its analysis of IOC orders to include non-marketable order types in 
addition to marketable order types.\1261\ The results are presented in 
Table 5,\1262\ and show that IOCs are a significant percentage of order 
flow across multiple different order types, including a large 
percentage of marketable limit order shares (92.6% for exchanges and 
ATSs, and 62.9% for wholesalers), as well as beyond-the-midpoint and 
at-the-midpoint shares (for exchanges and ATSs, 35.8% and 37.9%, and, 
for wholesalers, 90.8% and 84.2%, respectively). This reflects that IOC 
orders are a significant component of order flow across both marketable 
and non-marketable order types. In addition, IOCs indeed may have 
different execution quality, as, with the exception of market orders on 
exchanges and ATSs, a higher percentage of IOC orders execute in under 
one millisecond as compared to non-IOC orders. Furthermore, at 
wholesalers, IOC orders tend to have higher effective spreads and lower 
fill rates than non-IOC orders. This result supports the Commission's 
understanding 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,\1263\ and that commingling SDP 
activity with other market center activity under preexisting Rule 605 
requirements may have obscured differences in execution quality or 
distorted the general execution quality metrics for the market 
center.\1264\ Similarly, grouping together IOC orders along with other 
types of market and marketable orders could have imposed a significant 
skew on execution quality metrics, particularly since IOCs make up a 
significant percentage of order flow. This may have impacted market 
centers' incentives to achieve better execution quality for these 
orders prior to these amendments.\1265\
---------------------------------------------------------------------------

    \1261\ This analysis uses CAT data for 400 stocks for the period 
Q1 2023. See supra note 1181 for information about how the 400-stock 
sample was selected and supra note 1182 for more information about 
the CAT data.
    \1262\ 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 
will affect the average fill rates of these NMLO categories. See 
supra section IX.C.1.c)(2).
    \1263\ See, e.g., Rule 605 Citadel Letter at 7, stating that 
``[m]any wholesale broker-dealers execute immediate-or-cancel 
(`IOC') orders for non-retail investors (including pension plans, 
insurance companies, and other asset managers), particularly through 
the use of a single-dealer platform (`SDP').''
    \1264\ See supra section IX.C.3.a)(2) for further discussion of 
commingling SDP activity with other market center activity.
    \1265\ For example, if, prior to these amendments, a market 
center's Rule 605 reports revealed low fill rates for market orders 
simply because it handled a large amount of marketable IOCs, it may 
not have been 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.

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[[Page 26538]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.021


[[Page 26539]]


(10) Riskless Principal Orders
    The preexisting Rule 605 reporting requirements for riskless 
principal transactions \1266\ has led to the duplicative reporting of 
these orders and has created uncertainty about how many orders are 
internalized by off-exchange market centers, particularly wholesalers.
---------------------------------------------------------------------------

    \1266\ 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. See 
Securities Exchange Act Release No. 47364 (Feb. 13, 2003), 68 FR 
8686 at 8690, 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'').
---------------------------------------------------------------------------

    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. Both prior to and after these 
amendments, the second (executing) market center in this example will 
be required to report this transaction as having been executed at the 
market center under Rule 605(a)(1)(i)(D). However, prior to these 
amendments, the first (routing) market center will also report the 
riskless principal transaction under prior Rule 605(a)(1)(i)(D), rather 
under Rule 605(a)(1)(i)(E) (cumulative number of shares of covered 
orders executed at any other venue) \1267\
---------------------------------------------------------------------------

    \1267\ See supra note 684 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, FINRA, available at https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq (last updated 2024).
---------------------------------------------------------------------------

    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 prior Rule 605(a)(1)(i)(D) has obscured 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 inventory, or they execute orders on a 
riskless principal basis.\1268\ 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. Prior 
to these amendments to Rule 605, both types of orders would be 
categorized together as orders executed at the market center under 
prior 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 \1269\) when interpreting and 
comparing information about wholesalers' execution quality has not been 
available from Rule 605 reports.
---------------------------------------------------------------------------

    \1268\ See infra section IX.C.4.b) for further discussion of the 
market for trading services, which includes wholesalers.
    \1269\ See, e.g., Proposing Release, 88 FR 3786 at 3839, n.614 
(Jan. 20, 2023), describing a Commission analysis of Rule 606 
reports that showed that, in Q1 2022, a sample of 46 retail 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.
---------------------------------------------------------------------------

(d) Accessibility of Rule 605 Reports
    Rule 605 requires market centers to post their monthly reports on 
an internet website that is free of charge and readily accessible to 
the public.\1270\ 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 may incur search costs.\1271\ 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.\1272\ 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.\1273\ There is no system or requirement, and the Commission is 
not adopting such a requirement, for the centralized posting of Rule 
605 reports.\1274\
---------------------------------------------------------------------------

    \1270\ See prior 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. 
. ..'').
    \1271\ One commenter stated that the current system for 
accessing Rule 605 reports is difficult. See BlackRock Letter at 4, 
stating that ``[c]urrently, accessing Rule 605 reports can be an 
onerous and time-consuming process for investors because it is 
widely dispersed across numerous market center websites where 
reports can be difficult to locate and retrieve.''
    \1272\ See Section VIII of the Rule 605 NMS Plan. For a 
description of ``Designated Participant'' as defined in the Plan, 
see supra note 869.
    \1273\ See, e.g., Disclosure of SEC--Required Order Execution 
Information, S&P Global, available at https://vrs.vista-one-solutions.com/sec605rule.aspx (last visited Jan. 30, 2024, 4:22 
p.m.).
    \1274\ In May 2023, FINRA requested comment on whether to 
require its members to provide Rule 605 reports to FINRA for 
centralized publication. See FINRA Regulatory Notice 23-10 (May 31, 
2023) (``Regulatory Notice''). FINRA stated in the Regulatory Notice 
that the proposed requirement to provide Rule 605 reports to FINRA 
would supplement, not replace, firm's current obligations under Rule 
605. See Regulatory Notice at 3. Comments received on FINRA 
Regulatory Notice 23-10 are available at https://www.finra.org/rules-guidance/notices/23-10#comments.
---------------------------------------------------------------------------

    Rule 605 reports are designed to be machine readable, rather than 
human readable. While machine-readable data are useful for facilitating 
further processing and analysis, they are not easily consumable by 
market participants who do not have the access to necessary software or 
programming skills. Prior to these amendments, this may have limited 
the accessibility of Rule 605 reports, particularly for those 
individual investors who may be less likely to have access to these 
resources.\1275\
---------------------------------------------------------------------------

    \1275\ See supra section IX.C.2 for further discussion.
---------------------------------------------------------------------------

4. Markets for Brokerage and Trading Services for NMS Stocks Under 
Preexisting 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 3,494 registered broker-dealers as of Q2 
2023.\1276\ A

[[Page 26540]]

portion of these broker-dealers focus their business on individual and/
or institutional investors in the market for NMS stocks.\1277\ 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.\1278\ The 
Commission estimates that there are approximately 153 broker-dealers 
that carry at least one customer trading in NMS stocks,\1279\ and 1,092 
broker-dealers that introduce at least one customer trading in NMS 
stocks.\1280\
---------------------------------------------------------------------------

    \1276\ The Proposing Release, which used information from 
broker-dealers' FOCUS Report Form X-17A-5 Schedule II as of Q2 2022, 
found that there were 3,498 registered broker-dealers. See Proposing 
Release, 88 FR 3786 at 3858 (Jan. 20, 2023).
    \1277\ Some broker-dealers service only the accounts of other 
brokers, which are excluded from the definition of customers. See 
supra note 89 for a definition of ``customer.''
    \1278\ See supra note 98 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 at 51911, 51949, and 51968 (Aug. 21, 2013).
    \1279\ This number is based on the number of broker-dealers that 
report carrying at least one customer on their 2022 FOCUS Schedule I 
reports. The Proposing Release found the same number using 2021 
FOCUS Schedule I reports. See Proposing Release, 88 FR 3786 at 3858 
(Jan. 20, 2023).
    \1280\ This number is based on estimates using broker-dealers 
FDIDs identified in CAT data for NMS stocks during the 2022 calendar 
year. See infra note 1743 for a discussion of the data and 
methodology for identifying introducing broker-dealers. The 
Proposing Release, using CAT data for the 2021 calendar year, found 
that 1,110 broker-dealers introduced at least one customer trading 
in NMS stocks and options. See Proposing Release, 88 FR 3786 at 3858 
(Jan. 20, 2023).
---------------------------------------------------------------------------

    The high level of fragmentation of NMS stock trading \1281\ 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. 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.\1282\ The duty is established from ``common law agency 
obligations of undivided loyalty and reasonable care that an agent owes 
to [its] principal.'' \1283\ This obligation requires that a ``broker-
dealer seek to obtain for its customer orders the most favorable terms 
reasonably available under the circumstances.'' \1284\
---------------------------------------------------------------------------

    \1281\ See infra section IX.C.4.(b)(1) for a breakdown of 
trading in NMS stocks across various types of trading venues.
    \1282\ 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).
    \1283\ See id.
    \1284\ 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.'' SEC Report of the 
Special Study of Securities Markets, H.R. Doc. No. 95, 88th Cong., 
1st Sess. Pt. II, 624 (1963) (``Special Study'').
---------------------------------------------------------------------------

    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 2022, there were approximately 1,006 registered 
broker-dealers that originated orders on behalf of individual investors 
in the market for NMS stocks.\1285\ 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.\1286\ Competition among 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.\1287\ Instead of commissions on certain transactions, 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.
---------------------------------------------------------------------------

    \1285\ This number is estimated using the CAT data described 
infra in note 1743. 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 
``institution'' in FINRA Rule 4512(c) and are also not proprietary 
accounts. See supra note 1144 for more information about account 
types in CAT. A similar analysis in the Proposing Release found that 
there were 1,037 registered broker-dealers that originated 
individual customer account orders in the market for NMS stocks at 
the end of 2021. See Proposing Release, 88 FR 3786 at 3859 (Jan. 20, 
2023).
    \1286\ 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), 72 FR 55126 
at 55127, n.2, 55129, n.20 (Sept. 28, 2007).
    \1287\ 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.''
---------------------------------------------------------------------------

    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.\1288\ 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 will result in lower (or even zero) 
switching costs.\1289\
---------------------------------------------------------------------------

    \1288\ 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 (last visited Jan. 30, 2024, 4:30 p.m.).
    \1289\ See, e.g., Chad Morris, ACAT Fee: Account Transfer Fee in 
2024, Brokerage-Review.com, available at https://www.brokerage-review.com/discountbroker/acat-account-transfer-fees.aspx (last 
updated Nov. 16, 2023) (providing a list of fees for different 
brokers).
---------------------------------------------------------------------------

(b) Brokerage Services for Institutional Investors
    As of the end of 2022, there were approximately 837 registered 
broker-dealers that originated institutional orders in the market for 
NMS stocks.\1290\

[[Page 26541]]

One feature that distinguishes the market for institutional brokerage 
services is that a significant portion of institutional investor orders 
are generally ``not held'' orders.\1291\ 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.\1292\ 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 best execution for the parent 
order.\1293\ For example, a broker-dealer might 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.\1294\ 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.\1295\
---------------------------------------------------------------------------

    \1290\ This number is estimated using the CAT data described in 
infra note 1743. 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 1144 for more information about account 
types in CAT. A similar analysis in the Proposing Release found that 
there were 909 registered broker-dealers that originated 
institutional customer account orders in the market for NMS stocks 
at the end of 2021. See Proposing Release, 88 FR 3786 at 3859 (Jan. 
20, 2023).
    \1291\ See supra note 1002 discussing an analysis showing that 
institutional investors are more likely than individual investors to 
use not held orders.
    \1292\ See 2018 Rule 606 Amendments Release, 83 FR 58338 at 
58343 (Nov. 19, 2018). 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.
    \1293\ 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) 
(``Beason & Wahal'').
    \1294\ Some child orders may be held orders and thus will be 
required to be included in Rule 605 reports. See supra note 4 
(discussing held and not held orders).
    \1295\ See supra note 1003 and accompanying text discussing 
broker-dealer requirements under Rule 606(b)(3) to provide 
individualized reports of execution quality upon request for not 
held orders.
---------------------------------------------------------------------------

    The Commission understands that some investors, particularly some 
institutional investors, are likely to use multiple broker-
dealers,\1296\ which could lead to lower switching costs. For example, 
a customer that is unhappy with one broker-dealer could use one of its 
other broker-dealers to handle those orders, providing that this does 
not raise other costs.
---------------------------------------------------------------------------

    \1296\ 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).
---------------------------------------------------------------------------

(2) Competition Among Broker-Dealers on the Basis of Execution Quality
    Broker-dealers compete with one another along a variety of 
dimensions,\1297\ 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,\1298\ and furthermore some broker-dealers disclose 
their own execution quality metrics on their websites.\1299\ 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.
---------------------------------------------------------------------------

    \1297\ 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.
    \1298\ See supra note 973.
    \1299\ See id. for examples.
---------------------------------------------------------------------------

    When making routing decisions, some broker-dealers may face 
conflicts of interest that arise when their interests are not aligned 
with their customers' interest in receiving better execution 
quality.\1300\ 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 may 
present a possible conflict of interest relative to their customers' 
interests if these broker-dealers 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. One academic study found 
that certain broker-dealers that route more orders to their affiliated 
ATSs are associated with lower execution quality.\1301\ Similarly, the 
presence of liquidity fees and rebates at 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.\1302\ For example, a recent research paper analyzed the 
relationship between maker-taker fee schedules and order routing, and 
found a negative relation between take fees and limit order execution 
quality.\1303\ 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.\1304\
---------------------------------------------------------------------------

    \1300\ See supra section IX.C.3.(a)(1).
    \1301\ See Amber Anand et al., Institutional Order Handling and 
Broker-Affiliated Trading Venues, 34 Rev. Fin. Studies 3364 (2021).
    \1302\ See, e.g., Robert H. Battalio et al., Can Brokers Have It 
All? On the Relation Between Make-Take Fees and Limit Order 
Execution Quality, 71 J. Fin. 2193 (2016).
    \1303\ 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.''
    \1304\ The study by Schwarz et al. (2023), supra note 1064, does 
not find a relationship between the amount of PFOF a retail broker 
receives and the amount of price improvement its customers' orders 
receive. However, the authors stated 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. Lynch (2022) reports a 
broker deriving high PFOF revenues provides small price improvements 
to customer orders, while a broker deriving low PFOF revenue offers 
large price improvement. See supra note 1064.
---------------------------------------------------------------------------

    If information asymmetries, such as those resulting from 
insufficient public information about broker-dealer execution 
quality,\1305\ prevent investors from observing differences in 
execution quality across broker-dealers, this limits the extent to 
which broker-dealers need to compete on the basis of execution quality.
---------------------------------------------------------------------------

    \1305\ See supra section IX.C.3.(a)(1) discussing broker-
dealers' execution quality reporting requirements prior to these 
amendments to Rule 605.
---------------------------------------------------------------------------

(b) Trading Services for NMS Stocks
(1) Current Structure of the Market for Trading Services

[[Page 26542]]

    Trading services for NMS stocks are highly fragmented among 
different types of market centers.\1306\ Table 6 \1307\ shows that in 
Q1 of 2023, NMS stocks were traded on 16 national securities exchanges 
and off-exchange at 33 NMS Stock ATSs and at 228 other FINRA members, 
including 6 wholesalers that internalize the majority of individual 
investor marketable orders.\1308\ During Q1 of 2023, an average of over 
11.7 billion shares ($522 billion notional) were traded daily in NMS 
stocks.\1309\ National securities exchanges executed approximately 56% 
of total share volume in NMS stocks (59% of total notional volume), 
while off-exchange market centers executed approximately 44% of total 
share volume (41% of total notional volume).\1310\ The majority of off-
exchange volume is executed by wholesalers, who execute over one 
quarter of total share volume (26.9%) and about 61% 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.\1311\ SDPs accounted for approximately 4% of total 
trading volume in Q1 2023.\1312\ As of June 2023, the Commission 
estimates that there are currently 228 market centers to which Rule 605 
applies.\1313\
---------------------------------------------------------------------------

    \1306\ 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 et al., 
Trading Rules, Competition for Order Flow and Market Fragmentation, 
115 J. Fin. Econ. 330 (2015).
    \1307\ The data used in this analysis have been updated from the 
Proposing Release for a more recent time period. See Proposing 
Release, 88 FR 3786 at 3861 (tbl. 7) (Jan. 20, 2023), which presents 
the same statistics for Q1 2022. They are comparable to those for Q1 
2023. Therefore, changes to the MIDAS dataset did not affect the 
Commission's conclusions from this analysis.
    \1308\ See Concept Release on Equity Market Structure, 75 FR 
3594 at 3598-3600 (Jan. 21, 2010) (for a discussion of the types of 
trading centers); see also Form ATS-N Filings and Information 
(Modified Jan. 18, 2024), 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.
    \1309\ Average daily share and notional trading volume in NMS 
stocks 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/.
    \1310\ 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 IX.C.1.c)(2) for further discussion.
    \1311\ See Rosenblatt Securities, US Equity Trading Venue Guide 
(2023). 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.
    \1312\ See Rosenblatt Securities, US Equity Trading Venue Guide 
(2023).
    \1313\ See supra section VIII.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.
[GRAPHIC] [TIFF OMITTED] TR15AP24.022

    Market centers' primary customers are the broker-dealers that route 
their own orders or their customers' orders for execution at the 
trading venue, and market centers compete with each other for their 
members' customers' flow 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 arrangements to route orders to 
specific market centers could hamper their ability to switch trading 
venues.\1314\ Incentives related to the common practice across national 
securities exchanges of setting fee and rebate schedules where specific 
tiers are determined by execution volume \1315\

[[Page 26543]]

may also make it difficult for broker-dealers to transfer order flow 
between market centers,\1316\ particularly intra-month as exchange 
volume-based transaction pricing is assessed on a monthly basis. 
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.
---------------------------------------------------------------------------

    \1314\ In addition, one commenter stated that switching costs 
for broker-dealers ``could be for the time and cost of monitoring, 
limits imposed on maximum or minimum market share, technology 
limitations, and so forth.'' Huang et al. Letter at 7.
    \1315\ 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 
(Adopted Feb. 3, 2020), 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 
(Effective Jan. 2, 2024), 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).
    \1316\ The Commission recently proposed to prohibit national 
securities exchanges from offering volume-based transaction pricing 
in connection with the execution of agency-related orders in certain 
stocks. See Securities Exchange Act Release No. 98766, 88 FR 76282 
(Nov. 6, 2023) (Volume-Based Exchange Transaction Pricing for NMS 
Stocks).
---------------------------------------------------------------------------

    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 either for institutional or 
for 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.\1317\ Meanwhile, SDPs are mainly used for the execution of 
institutional orders, to potentially reduce the order's price impact 
and avoid triggering significant reactions by other market 
participants.\1318\
---------------------------------------------------------------------------

    \1317\ See Proposing Release, 88 FR 3786 at 3861, n.772 (Jan. 
20, 2023) and accompanying text.
    \1318\ See, e.g., Yashar H. Barardehi, et al., Internalized 
Retail Order Imbalances and Institutional Liquidity Demand (working 
paper revised Jan. 2, 2023), 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.\1319\ As discussed above, Rule 605 reports have been 
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,\1320\ 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 among market centers, which improved the 
execution quality that they offered in order to attract more order 
flow.\1321\ 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.
---------------------------------------------------------------------------

    \1319\ 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 has also allowed national 
securities exchanges to compete with each other and with off-
exchange market centers for order flow. Specifically, to the extent 
that the liquidity rebates facilitate more competitive quotes by 
liquidity providers (which may or may not occur for stocks that are 
neither tick-constrained nor thinly traded, but rather are priced at 
a level where a rebate of approximately $0.0030 could influence a 
displayed quote), these rebates can make it more expensive to offer 
price improvement over the displayed NBBO. See Transaction Fee Pilot 
for NMS Stocks, 84 FR 5202 at 5255 (Feb. 20, 2019).
    \1320\ See supra section IX.C.2.
    \1321\ See Zhao & Chung, supra note 16.
---------------------------------------------------------------------------

    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 limits the extent to 
which broker-dealers need to compete on the basis of execution 
quality.\1322\ 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. 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,\1323\ or to the extent that Rule 605 does not include some 
relevant order sizes or types.\1324\
---------------------------------------------------------------------------

    \1322\ See supra section IX.C.2.a).
    \1323\ 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 
IX.C.3.c)(4) for further discussion.
    \1324\ 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 were previously not required to be 
included in Rule 605 reports. See supra section IX.C.3.b)(1)(a) for 
further discussion.
---------------------------------------------------------------------------

D. Economic Effects

    The amendments expanding and modifying the reporting requirements 
under Rule 605 will result in numerous beneficial economic effects. 
These economic effects will mainly derive from improvements in the 
transparency of execution quality of broker-dealers and market centers, 
which will promote competition among these reporting entities on the 
basis of execution quality. These amendments to Rule 605 will also 
result in initial and ongoing compliance costs to reporting entities.
    This section measures the economic effects of these amendments to 
Rule 605 relative to a regulatory baseline that includes the 
implementation of the MDI Rules \1325\ and reflects the Commission's 
assessment of the anticipated economic effects, including potentially 
countervailing or confounding economic effects from the MDI 
Rules.\1326\ However, given that the MDI Rules have not yet been 
implemented, they have not affected market practice and therefore data 
required for a 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 can 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.
---------------------------------------------------------------------------

    \1325\ See supra section IX.C.1.(c)(2).
    \1326\ See supra section IX.C.1.(c)(2) for a discussion of the 
Commission's anticipated economic effects of the MDI Rules as stated 
in the MDI Adopting Release.
---------------------------------------------------------------------------

1. Benefits
    These amendments to Rule 605 will promote increased transparency of 
order execution quality, particularly for larger broker-dealers who 
were not required to disclose execution quality information under 
preexisting Rule 605, but also for all reporting entities, whose 
execution quality information will be more relevant and easier to 
access because of improvements to existing Rule 605 disclosure 
requirements.
    This increased transparency, together with increased competition 
resulting from this transparency, will result in improvements in 
execution quality, for several reasons. First, investors and their 
broker-dealers will be able to make

[[Page 26544]]

better informed decisions about where to route their orders to achieve 
better quality execution. Second, these amendments are expected to 
increase the extent to which broker-dealers compete on the basis of 
execution quality in order to attract and retain customers, as well as 
the extent to which market centers must compete on the basis of 
execution quality to attract and retain order flow.\1327\ The 
Commission expects that this increase in competition will lead to 
improvements in execution quality as a result of improvements to 
broker-dealer routing practices and improvements to market centers' 
execution practices. These economic mechanisms will lead to 
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.\1328\
---------------------------------------------------------------------------

    \1327\ Several commenters stated that enhancing Rule 605 
reporting requirements would generally lead to increased competition 
on the basis of execution quality. See, e.g., Better Markets Letter 
at 1-2; NASAA Letter at 5; Fidelity Letter at 7; Healthy Markets 
Letter at 5; see also infra note 1330 and corresponding text for 
additional statements from commenters on the impact of the expansion 
of Rule 605 reporting requirements to include larger broker-dealers 
on competition among broker-dealers.
    \1328\ As discussed in the Proposing Release, the magnitude of 
improvements in order execution quality that individual and 
institutional investors experience under the amended rule may be 
lower after the MDI Rules are implemented, relative to the pre-
implementation baseline. The availability of faster consolidated 
market data with more data on odd-lot information and depth of book 
information from competing consolidators could result in improved 
execution quality for customers' 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 the benefits of the amended rule will be changed. 
Specifically, there is uncertainty regarding the magnitude of price 
improvement that wholesalers will provide to retail investors when 
the MDI Rules are implemented, as well as uncertainty regarding how 
the NBBO midpoint will change for stocks with prices above $250 when 
the MDI Rules are implemented. These amendments to Rule 605 will 
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. See 
Proposing Release, 88 FR 3786 at 3872 (Jan. 20, 2023).
---------------------------------------------------------------------------

    The following sections will discuss the expected benefits of these 
amendments for transparency, competition, and execution quality, 
including those expected from expanding the scope of reporting 
entities, modernizing the required information, and improving 
accessibility. The Commission acknowledges that there may be 
limitations to these benefits and discusses these below, though none 
will significantly reduce the benefits of the amended rule.
(a) Expanding the Scope of Reporting Entities
(1) Expanding Requirements for Larger Broker-Dealers
    As a primary effect, the adopted amendment expanding the scope of 
Rule 605 reporting entities to include larger broker-dealers \1329\ 
will increase transparency into the differences in execution quality 
achieved by these broker-dealers when they route customer orders to 
execution venues.\1330\ This increase in transparency will increase the 
extent to which both broker-dealers and market centers compete on the 
basis of execution quality, which will result in improvements in 
execution quality.
---------------------------------------------------------------------------

    \1329\ See supra section II.A for further discussion of the 
amendments related to the expansion of Rule 605 reporting entities 
to include larger broker-dealers.
    \1330\ These effects will principally accrue to larger broker-
dealers, who will be required to prepare Rule 605 reports, but may 
spill over to effect smaller broker-dealers as well. See discussion 
in infra section IX.D.1.d)(1). Several commenters stated that 
expanding the scope of Rule 605 reporting requirements to include 
larger broker-dealers will benefit transparency. See, e.g., Nasdaq 
Letter at 43. One commenter, while generally agreeing that expanding 
the scope to broker-dealers will improve transparency, described the 
importance of ``enabl[ing] retail brokers to provide background 
information contextualizing how their obligations are different from 
those of wholesalers or other market centers that currently report 
under Rule 605.'' Virtu Letter II at 3-4. As stated in the Proposing 
Release and repeated infra this section, while 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, the Commission 
understands that these differences are well-known and are taken into 
account by market participants when evaluating execution quality 
statistics. See Proposing Release, 88 FR 3786 at 3800 (Jan. 20, 
2023).
---------------------------------------------------------------------------

    First, as a result of the adopted amendment, customers of larger 
broker dealers, along with other market participants, will no longer 
need to make inferences about their broker-dealers' execution quality 
based on routing information from Rule 606 data combined with market 
centers' execution quality information from Rule 605 data, but will 
instead have access to direct information about the aggregate execution 
quality achieved by their broker-dealers.\1331\ Customers will then be 
able to 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 will give market participants and other 
interested parties access to key information that will facilitate their 
ability to evaluate how these payment relationships may affect 
execution quality. The flow of customers to the broker-dealers that 
provide better execution quality will improve the execution quality of 
customers that route their orders to those broker-dealers.
---------------------------------------------------------------------------

    \1331\ This effect will 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 will allow investors to 
access execution quality information that is exclusively related to 
the firm's broker-dealer operations. See supra section II.A.2.b) for 
further discussion.
---------------------------------------------------------------------------

    This increase in market participants' ability to compare execution 
quality across broker-dealers will increase the extent to which broker-
dealers compete on the basis of execution quality when making their 
order routing decisions.\1332\ Broker-dealers will 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.\1333\ For example, broker-dealers that face 
conflicts of interest that arise when their interests are not aligned 
with their customers' interests may be better incentivized to manage 
these conflicts as a result of an increase in their need to compete on 
the basis of execution quality.\1334\ Specifically, to the extent that 
broker-dealers lose customer order flow as a result of their offering 
lower execution quality, these broker-dealers are expected to 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). This is expected 
to promote the flow of orders to market centers that provide better 
execution quality. The flow of orders to those market centers offering 
better

[[Page 26545]]

execution quality may also result in further improvements in execution 
quality for those customers, as liquidity externalities and the 
consolidation of orders onto high-quality market centers will increase 
the liquidity of these venues.\1335\
---------------------------------------------------------------------------

    \1332\ Several commenters stated that expanding the scope of 
Rule 605 reporting requirements to include larger broker-dealers 
would increase competition among broker-dealers. See, e.g., Fidelity 
Letter at 7-8; Rule 605 Citadel Letter at 4; CCMR Letter at 14-15; 
NASAA Letter at 6.
    \1333\ The magnitude of the improvements in order routing 
practices under the final rule may be lower when the MDI Rules are 
implemented. See supra note 1328.
    \1334\ See supra section IX.C.3.(a)(1) for a discussion of 
potential conflicts of interest in broker-dealer routing decisions.
    \1335\ However, liquidity externalities may have adverse effects 
on the competition among market centers if they result in the exit 
of some market centers. See infra section IX.D.1.(d)(4) for a 
discussion.
---------------------------------------------------------------------------

    These amendments will require larger broker-dealers to report the 
same execution quality information as market centers, including 
information about execution prices, execution speeds, and fill 
rates,\1336\ as well as, under these amendments, information about size 
improvement.\1337\ By requiring larger brokers-dealers to report stock-
by-stock order execution information in a uniform manner, these 
amendments will 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. By allowing market participants and other interested parties 
to conduct their own analysis based on alternative categorizations of 
the underlying data, requiring larger broker-dealers to produce more 
detailed execution quality data will also help ameliorate potential 
concerns about overly general statistics as well as the specific 
categorization of orders and selection of metrics in the newly required 
summary reports.
---------------------------------------------------------------------------

    \1336\ See supra section IX.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.
    \1337\ See final 17 CFR 242.605(a)(1)(ii)(R) and (S) and 
discussion in supra section III.B.4.(e).
---------------------------------------------------------------------------

    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. 
Should certain market participants not have the means to directly 
analyze the detailed statistics,\1338\ 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.\1339\ Furthermore, requiring larger broker-dealers, along with 
market centers, to prepare summary reports with aggregated execution 
quality information,\1340\ in addition to the more detailed Rule 605 
reports, will furnish more direct access to useful data for some market 
participants.
---------------------------------------------------------------------------

    \1338\ See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75419 
(Dec. 1, 2000) (stating that most individual investors likely would 
not obtain and digest the reports themselves); see also discussion 
infra section IX.D.1.(b)(3).
    \1339\ See, e.g., supra notes 1076-1077, describing the use of 
Rule 605 data in academic literature, in comment letters related to 
Commission and SRO rulemaking, and the financial press. One 
commenter stated that ``even though a certain percentage of retail 
investors may not read the Rule 605 reports, they will still benefit 
indirectly as the enhanced disclosure will . . . facilitate use by 
third-party researchers and academics, who in turn can extract 
information from the reports and use it to expose issues and 
problems with today's order routing and execution practices.'' 
Better Markets Letter at 9-10.
    \1340\ See final 17 CFR 242.605(a)(2).
---------------------------------------------------------------------------

    The adopted amendment requiring 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 \1341\ will help 
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 will likely 
be categorized as away-executed shares in the Rule 605 reports 
associated with its broker-dealer operations.\1342\ While these shares 
will 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.
---------------------------------------------------------------------------

    \1341\ See final 17 CFR 242.605(a)(1)(i)(E) and (F). As 
discussed herein, the Commission is amending the rule to also cover 
the number of shares executed at the receiving broker or dealer.
    \1342\ To the extent that a broker-dealer also acts as a market 
center, any executions that it handles will be required to be 
published in the Rule 605 report(s) that it files in its capacity as 
a market center. See supra section II.A.2.(b) for further 
discussion.
---------------------------------------------------------------------------

    Several commenters did not support expanding the scope of Rule 605 
reporting entities to include larger broker-dealers.\1343\ One 
commenter disagreed that the expansion of scope would increase 
competition among broker-dealers, because ``[d]ifferences in execution 
quality could be the result of a myriad of factors, including the 
customers the two different brokers serve and the equities the 
customers trade.'' \1344\ This commenter stated that ``if differences 
in reported execution quality statistics are reflective of different 
business models rather than actual differences in execution quality . . 
. producing Rule 605 statistics (particularly in the summary reports 
most likely to be used by retail investors) without accounting for 
different broker-dealer business models could lead investors to make 
incorrect decisions regarding broker-dealer selection.'' \1345\
---------------------------------------------------------------------------

    \1343\ See, e.g., Schwab Letter II at 34-35; Schwab Letter III 
at 2; and SIFMA Letter II at 30. One commenter did not support 
expanding the scope of Rule 605 to include larger broker-dealers 
because it instead supported expanding the reporting requirements 
under Rule 606 to included broker-dealer execution quality 
information. See Robinhood Letter at 39; see infra section 
IX.E.5.(b) for a discussion of this as a reasonable alternative.
    \1344\ See SIFMA Letter II at 30.
    \1345\ See SIFMA Letter II at 30; see also Schwab Letter II at 
35, stating that ``[i]f differences in E/Q are a result of different 
business models employed across firms rather than actual differences 
in E/Q among comparable business models, providing this information 
in a way that appears to be--but is not--an apples-to-apples 
comparison would create investor confusion rather than provide 
useful information on which to base decisions,'' and Cambridge 
Letter at 7, stating that requiring larger retail broker-dealers to 
produce execution quality reports ``is likely to lead to misaligned, 
misleading comparisons between totally different entities.''
---------------------------------------------------------------------------

    First, the Commission agrees that, as a result of different 
business models, a particular broker-dealer's order flow may be made up 
of a different mixture of securities, order types, and order sizes, 
which may impact or constrain that broker-dealer's overall execution 
quality level.\1346\ For example, Figure 15, which uses a sample of CAT 
data from Q1 2023 \1347\ 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.\1348\
---------------------------------------------------------------------------

    \1346\ See Proposing Release, 88 FR 3786 at 3831 (Jan. 20, 
2023); see also supra note 984 for an example of how differences in 
order flow characteristics may impact inferences about execution 
quality.
    \1347\ See supra note 1182 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 section IX.C.1.(c)(2).
    \1348\ This CAT data used in this analysis have been updated 
from the Proposing Release for a longer and more recent time period, 
as well as to include a larger sample of broker-dealers. The 
methodology has also been updated to include only those NMLOs that 
are immediately executable upon receipt (i.e., NMLOs priced at the 
quote or better). The analysis in the Proposing Release used a week 
of CAT data[thinsp]from Jan. 2022 to break down orders from 58 
retail broker-dealers into different order types and similarly 
showed 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. See Proposing 
Release, 88 FR 3786 at 3863 (fig. 14) (Jan. 20, 2023). The 
distribution of order flows across order types is somewhat different 
in the analysis in the Proposing Release, including a much lower 
rate of market orders, particularly for individual customer 
accounts. This is likely because of the difference in order flow 
characteristics between the 58 retail broker-dealers in the 
Proposing Release sample, and the larger sample of 85 broker-dealers 
with 100,000 or more customer in the present analysis. These changes 
did not affect the Commission's conclusions from this analysis 
relative to the Proposing Release, namely 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.

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[[Page 26546]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.023

    However, under these amendments, larger broker-dealers will be 
required to categorize the execution quality information required by 
Rule 605 by individual security, different types of orders, and 
different order sizes. Larger broker-dealers will also be required to 
report realized spread, which is a measure of adverse selection.\1349\ 
Giving market participants access to this information in Rule 605 
reports will help ensure that they are able to control for these 
differences in order flow characteristics and make apples-to-apples 
comparisons when assessing and comparing execution quality information 
across broker-dealers.\1350\ Furthermore, customers that primarily rely 
on broker-dealers' summary reports will also be able to use information 
from the summary reports to control for differences in broker-dealer 
order flow in terms of order sizes, average stock price and realized 
spreads.\1351\ Second, to the extent that customers value and emphasize 
execution quality when deciding among broker-dealers, a decision to 
switch broker-dealers based on execution quality information as 
contained in Rule 605 reports will not be an ``incorrect'' one as 
stated by a commenter.\1352\ Customers will continue to be able to 
evaluate their broker-dealers across a range of services, including 
those other than execution quality, such as commissions or user-
friendliness,\1353\ though they will be better able to factor execution 
quality into their decisions.\1354\
---------------------------------------------------------------------------

    \1349\ See supra note 1229 and corresponding text for a 
discussion of realized spreads as a measure of adverse selection 
risk.
    \1350\ That some of the information contained in the summary 
execution quality report will be useful for controlling for 
differences across differences in order flow characteristics of 
broker-dealer was supported by comment. See, e.g., comments in 
support of including average notional order size and average 
realized spreads in the summary reports, discussed in notes 1592-
1593 infra.
    \1351\ See supra section IV.B.1.(b) for a discussion of the 
statistics that will be required to be reported in Rule 605 summary 
execution quality reports.
    \1352\ See SIFMA Letter II at 30.
    \1353\ See supra section IX.C.4.(a)(1) for further discussion of 
the additional services offered by broker-dealers.
    \1354\ At the same time, the Commission acknowledges that the 
expected benefits from the amendments to Rule 605, such as increased 
competition among broker-dealers, may be lessened to the extent that 
there are dimensions of execution quality not captured by Rule 605 
reports which drive order handling decisions. See infra section 
IX.D.1.(d)(5) for a discussion.
---------------------------------------------------------------------------

    One commenter stated that ``it is not apparent that [requiring 
larger brokers to report on order execution quality] would improve 
retail execution quality, as the retail broker market is highly

[[Page 26547]]

competitive.'' \1355\ The commenter went on to state that ``to the 
extent that there are unexploited opportunities to improve execution 
quality for retail investors, as the Commission has claimed in its 
release, empowering investors to compare execution quality across 
retail brokers (and consequently to switch brokers based on this 
information) could be the most efficient and effective way to address 
concerns about execution quality.'' Routing decisions affect the 
execution quality that broker-dealer customers' orders receive, leading 
to significant variations in execution quality across broker-dealers, 
and studies have documented a large variation in retail broker-dealer 
execution quality, even for identical orders.\1356\ Another commenter 
stated that recent academic findings ``emphasize the need for further 
price execution disclosure at the broker level.'' \1357\
---------------------------------------------------------------------------

    \1355\ See Virtu Letter II at 57.
    \1356\ See supra note 1064 and corresponding text for a 
discussion.
    \1357\ See Huang et al. Letter at 1 (attaching Xing Huang, 
Philippe Jorion, Jeongmin Lee & Christopher Schwarz, Who Is Minding 
the Store? Order Routing and Competition in Retail Trade Execution 
(Nov. 19, 2023)).
---------------------------------------------------------------------------

    One commenter stated that, absent investor education on how to 
interpret Rule 605 summary reports, ``investors may misinterpret the 
data and make suboptimal decisions as a result.'' \1358\ The amended 
rule does not preclude larger broker-dealers from disclosing additional 
information concerning their order execution practices that they 
believe would provide useful context concerning the quality of their 
services on their websites or through other means of 
communication.\1359\ For example, individual broker-dealers can provide 
their own educational resources directly to their customers and other 
market participants. The commenter also referenced a statement from the 
Commission in the Proposing Release that ``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,'' and disagreed with the 
Commission that ``differences are well-known and are taken into account 
by market participants when evaluating execution quality statistics.'' 
\1360\ These statements from the Commission in the Proposing Release 
were made in specific reference to market participants' use of Rule 605 
reports to make a hypothetical comparison between a market center and a 
broker-dealer, and not to their ability to compare broker-dealers with 
one another. Notwithstanding the commenter's interpretation of the 
Commission's statements in the Proposing Release, the Commission agrees 
with the commenter that differences between broker-dealer business 
models may not be ex ante well-known to market participants. However, 
for the reasons described above, market participants will be able to 
use the information in Rule 605 reports and the Rule 605 summary 
reports to account for differences in broker-dealer order flow, and 
broker-dealers are not precluded from separately providing their 
customers with information that can be used to contextualize the 
information in the Rule 605 reports.
---------------------------------------------------------------------------

    \1358\ See SIFMA Letter II at 30.
    \1359\ See supra note 137 and corresponding text for further 
discussion.
    \1360\ See SIFMA Letter II at 29-30, citing the Proposing 
Release, 88 FR 3786 at 3800 (Jan. 20, 2023); see also Schwab Letter 
at 34, referencing the same statement in the Proposing Release to 
support its statement that, ``[i]f differences in E/Q are a result 
of different business models employed across firms rather than 
actual differences in E/Q among comparable business models, 
providing this information in a way that appears to be--but is not--
an apples-to-apples comparison would create investor confusion 
rather than provide useful information on which to base decisions.''
---------------------------------------------------------------------------

    Meanwhile, it is unlikely that market participants will use 
information in Rule 605 reports to compare broker-dealers to market 
centers. 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 
relationship described in the Market Failure section,\1361\ information 
about execution quality for broker-dealers will be used to address 
different information asymmetries than information about execution 
quality for market centers. Broker-dealers' Rule 605 reports will be 
most likely used by broker-dealers' customers to compare execution 
quality across broker-dealers to address information asymmetries that 
exists between broker-dealers and their customers. In contrast, market 
centers' Rule 605 reports will continue to be more useful for broker-
dealers to compare execution quality across market centers to address 
the information asymmetries that exist between broker-dealers and the 
market centers to which they route their customers' orders.
---------------------------------------------------------------------------

    \1361\ See supra section IX.B.
---------------------------------------------------------------------------

(2) Specifying and Expanding Requirements for Market Centers
    In addition to expanding the scope of Rule 605 reporting entities 
to include larger broker-dealers, these amendments promote greater 
transparency by specifying that broker-dealers post separate Rule 605 
reports for their ATSs \1362\ and requiring that market centers 
operating SDPs post separate reports for each market center.\1363\ By 
requiring firms that operate multiple market centers to report 
separately for each market center, the final rule will prohibit the 
commingling of multiple reporting entities' information, which, to the 
extent that it occurred prior to the final rule, may have added noise 
to or skewed Rule 605 reports. For example, requiring market centers 
that operate SDPs to report statistics separately for each line of 
business will increase the transparency of the operating market 
centers' fill rates, by eliminating downward skew associated with the 
inclusion of ``pinging'' orders submitted to the SDP.\1364\ Reducing 
the skew of Rule 605 statistics will allow market participants to 
better assess differences in execution quality across different types 
of market centers, helping to enhance market centers' incentive to 
compete on the basis of execution quality to attract orders.
---------------------------------------------------------------------------

    \1362\ See final 17 CFR 242.605(a)(1).
    \1363\ See id.; see also supra section II.C.
    \1364\ See supra section IX.C.3.a)(2) for a discussion of why 
the commingling of wholesaler and SDP orders for the purposes of 
Rule 605 reporting prior to these amendments would have effected a 
downward skew on the fill rates derived from the wholesalers' Rule 
605 reports.
---------------------------------------------------------------------------

    One commenter stated that ``certain Rule 605 metrics,'' such as 
fill rates, ``may be unduly impacted by differences in SDP business 
models,'' such as whether they send out indications of interest or 
solely receive IOCs.\1365\ First, as amended, Rule 605 reports will add 
an IOC order type category,\1366\ which will allow market participants 
to differentiate between SDPs that receive more or fewer IOCs, which 
should address the commenter's specific concern. More generally, and as 
stated by another commenter, users of SDPs tend to be sophisticated 
entities.\1367\ As a result, it is likely that users of SDPs are 
knowledgeable about the differences in various SDP business models and 
the relationship of those differences to variations in execution 
quality statistics across SDPs. Lastly, the commenter's statement that 
there may be systematic differences between some SDP business models 
also applies to

[[Page 26548]]

systematic differences between SDPs and market centers with other 
business models, and the relationship between these business models and 
execution quality is obscured to the extent that the execution quality 
information from these different execution venues is commingled. 
Requiring separate reporting for SDPs will provide market participants 
with transparency regarding the relationship between SDP business 
models and execution quality.
---------------------------------------------------------------------------

    \1365\ See Rule 605 Citadel Letter at 7.
    \1366\ See supra section III.B.2.(c)(2).
    \1367\ See Virtu Letter II at 12.
---------------------------------------------------------------------------

    Another commenter stated that, because ``users of SDPs are all 
sophisticated entities capable of carrying out their own execution 
quality measurements and, in fact, do carry out these measurements on 
their own,'' requiring separate reporting ``imposes an additional cost 
on SDPs without any clear benefit.'' \1368\ As stated in the Market 
Failure section, even for those market participants that have access to 
alternative sources of information about the execution quality of their 
orders, this information is typically highly individualized and 
nonpublic, and thus cannot be used to evaluate the execution quality of 
market centers with which the market participants do not do 
business.\1369\ Furthermore, as stated in the Proposing Release, in 
addition to allowing users of SDPs to separately view the execution 
quality of SDPs, requiring wholesalers to report their SDP executions 
separate from their other executions will benefit the non-SDP user 
customers, the majority of which are individual investors.\1370\
---------------------------------------------------------------------------

    \1368\ See Virtu Letter II at 12-13.
    \1369\ See supra note 1094 and corresponding text.
    \1370\ See Proposing Release, 88 FR 3786 at 3864 (Jan. 20, 
2023).
---------------------------------------------------------------------------

(b) Modifications to Rule 605 Disclosure Requirements
    As a result of the amendments expanding and modernizing Rule 605 
disclosure requirements, the metrics used for the required Rule 605 
disclosures will be more informative about execution quality, which 
will increase transparency into the differences in execution quality 
achieved by reporting entities. This increase in informativeness and 
transparency will enhance the benefits of expanding the scope of 
reporting entities, including the expansion to larger broker-
dealers.\1371\ In addition, as a result of the increase in transparency 
with respect to market center execution quality, broker-dealers will 
have the opportunity to be better informed when making their routing 
decisions. The flow of orders to those market centers that provide 
better execution quality will improve the execution quality of those 
broker-dealers (and their customers) that route their orders to these 
higher-quality market centers, and is expected to 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.\1372\ Execution quality is expected to improve as 
a result.
---------------------------------------------------------------------------

    \1371\ See supra section IX.D.1.a) for a discussion of the 
benefits of expanding the scope of reporting entities under these 
amendments.
    \1372\ 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 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. See supra section 
IX.C.1.c)(2) for further discussion. However, these amendments are 
expected to lead to improvements in execution practices over and 
above the improvements that might result from the implementation of 
the MDI Rules.
---------------------------------------------------------------------------

    These benefits will 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.
(1) Expanding the Definition of Covered Orders
    The amendments expanding the definition of ``covered order'' to 
include additional order types will increase transparency about the 
execution quality that reporting entities achieve for these additional 
order types, including orders submitted with stop prices, non-exempt 
short sale orders, and orders submitted outside of regular trading 
hours.
(a) Orders Submitted Pre-Opening/Post-Closing
    First, the adopted amendment expanding the definition of ``covered 
order'' to include NMLOs submitted outside of regular trading hours 
that become executable during regular trading hours \1373\ will lead to 
a more complete picture of reporting entities' execution 
characteristics. 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 represent a 
relatively higher percentage of order flow associated with individual 
customer accounts.\1374\ Individual investors will 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 will 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.
---------------------------------------------------------------------------

    \1373\ See final 17 CFR 242.600(b)(27); see also supra section 
III.A.1.b).
    \1374\ See analysis described in supra section IX.C.3.b(4).
---------------------------------------------------------------------------

    While several commenters supported the inclusion of NMLOs submitted 
outside of regular trading hours into Rule 605 reports,\1375\ one 
commenter stated that the inclusion of these orders would ``likely skew 
the statistics'' \1376\ and ``lead to difficult comparisons between 
brokers'' because ``the first quote after opening is wide and not 
representative of the quote when the primary exchange opens.'' \1377\ 
The commenter's specific concern will be addressed by the adopted 
amendment specifying that orders that are received during regular 
market hours but execute before the primary listing market has 
disseminated its first firm, uncrossed quotations will be treated in 
the same manner as any other order received pre-open or post-
close.\1378\ More generally, while some NMLOs submitted outside of 
market hours likely have characteristics that differ from those 
submitted during regular hours,\1379\ these NMLOs make up only a very 
small percentage of order volume, representing only around 1.3% of 
total submitted share volume.\1380\ Therefore, it is unlikely that the 
inclusion of these orders along with other order types will 
significantly skew execution quality statistics.
---------------------------------------------------------------------------

    \1375\ See, e.g., Nasdaq Letter at 43-44; Virtu Letter II at 5.
    \1376\ See Schwab Letter at 32.
    \1377\ See Schwab Letter II at 7.
    \1378\ See discussion in supra section III.A.1.b). Specifically, 
any order that executes during this intervening time period will be 
excluded from Rule 605 reports; any NMLO (including an order 
submitted with a stop price) will not be considered executable until 
after the first firm, uncrossed quotations in the security are 
disseminated by the primary listing market; and any determination of 
whether a limit order received prior to or during that period is a 
marketable limit order, a beyond-the-midpoint limit order, or an 
NMLO will not occur until after the first firm, uncrossed quotations 
in the security are disseminated by the primary listing market.
    \1379\ For example, an analysis of the sample of CAT data 
described in note 1182 supra showed that pre-open executable NMLOs 
have somewhat lower fill rates than the full sample of executable 
NMLOs (0.18% vs. 0.42%).
    \1380\ See supra note 1182 and corresponding text for more 
information about this analysis.
---------------------------------------------------------------------------

(b) Orders Submitted With Stop Prices
    Second, the adopted amendment removing the exclusion of orders with

[[Page 26549]]

stop prices from the definition of ``covered order'' \1381\ will 
increase transparency about the execution quality of this type of 
order.\1382\ This will be particularly beneficial, as the handling of 
stop orders can vary significantly across broker-dealers and across the 
market centers to which they route, and the execution prices of stop 
orders are highly sensitive to handling and execution practices.\1383\ 
As broker-dealers will be incentivized to improve their handling of 
stop orders, they will 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.\1384\
---------------------------------------------------------------------------

    \1381\ See final 17 CFR 242.600(b)(27) (eliminating the express 
carve out of orders submitted with stop prices from the definition 
of ``covered order''); see also supra section III.A.2.(b).
    \1382\ Several commenters generally agreed that the inclusion of 
information about stop orders in Rule 605 reports will make the data 
more useful and complete. See, e.g., Nasdaq Letter at 44; Virtu 
Letter II at 5; and SIFMA AMG Letter at 6.
    \1383\ See supra note 1158 and accompanying text for a 
discussion of differential treatment of stop orders.
    \1384\ As discussed in supra section IX.C.3.(b)(2), the 
Commission understands that the handling of stop orders can vary 
significantly across market centers.
---------------------------------------------------------------------------

    The amendment to include stop orders within separate order type 
categories rather than grouping them together with other order types 
\1385\ also will prohibit them from skewing the execution quality of 
other orders downwards, since stop orders are more likely to execute in 
adverse market conditions.\1386\ In addition, including separate 
categories for executable market orders submitted with stop prices, 
executable stop marketable limit orders, and executable stop NMLOs will 
help market participants distinguish between orders with different 
execution profiles. For example, the risk of large losses is 
particularly acute for stop orders that use market orders, which 
represent the majority of stop orders submitted by individual investors 
according to Table 3, 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.\1387\ As a result, the 
execution quality of these orders is highly sensitive to handling and 
execution practices, such that market participants will benefit from 
transparency regarding reporting entities' handling of these orders.
---------------------------------------------------------------------------

    \1385\ See final 17 CFR 242.600(b)(19) (defining ``categorized 
by order type'' to include a category for ``executable orders 
submitted with stop prices'') (emphasis added); see also discussion 
in supra section III.A.2.(b).
    \1386\ See supra note 1159 and corresponding text for further 
discussion.
    \1387\ 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.
---------------------------------------------------------------------------

    One commenter stated that the inclusion of stop orders ``will 
create increased complexity with little benefit for the individual 
investor,'' and that therefore ``the Commission should consider 
excluding stop orders from the report entirely.'' \1388\ The Commission 
disagrees that there will be little benefit for individual investors 
from the inclusion of stop orders in Rule 605 reports. As shown in 
Table 3, individual account holders are more likely than institutional 
account holders to submit stop orders (i.e., 4.91% of individual 
account holders' market orders are submitted with stop prices vs. 0.25% 
of those of institutional account holders). Therefore, information 
about the execution quality of stop orders will be particularly useful 
for individual investors, who can 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. Such information is especially useful given that stop orders 
are more likely to execute in adverse market conditions.
---------------------------------------------------------------------------

    \1388\ See Schwab Letter II at 5.
---------------------------------------------------------------------------

(c) Non-Exempt Short Sale Orders
    The Commission is adopting its position that non-exempt short sales 
orders will not be considered special handling orders unless a price 
test restriction is in effect for the security.\1389\ This will 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.\1390\ An analysis of short volume data found that, between Aug. 
2009 and Mar. 2023, short selling was an average of 39.6% of trading 
volume for non-financial common stocks.\1391\ 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 will 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 \1392\ 
could be attributed to retail traders, and 10.92% of retail trading was 
made up of short sales.\1393\ Meanwhile, evidence suggests

[[Page 26550]]

that short selling by institutional investors is largely the purview of 
hedge funds,\1394\ which are estimated to make up around 85% of the 
short selling market.\1395\ One academic paper finds that short 
sellers' choice of trading venue is highly dependent on its market 
design and that short sellers prefer trading venues that offer high 
execution speeds over those that offer low trading costs.\1396\ Another 
academic study shows that wholesalers frequently offer price 
improvement to short sales and that including short sales in estimates 
of price improvement increases the total dollar value of net price 
improvement provided by more than 6%.\1397\ Therefore, including 
information about the execution quality that reporting entities achieve 
for non-exempt short sale orders into Rule 605 disclosures will be 
relevant for a variety of investors who engage in short selling.
---------------------------------------------------------------------------

    \1389\ See supra section III.A.3.(b).
    \1390\ Several commenters supported including short sales in 
Rule 605 reports. See, e.g., Nasdaq Letter at 43; Virtu Letter II at 
5.
    \1391\ Short volume data are collected from 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/ (last visited Apr. 2023) (CBOE data, which became 
available for purchase at https://datashop.cboe.com/us-equity-short-volume-and-trades on June 1, 2023); 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. CRSP share codes, SIC codes, trading 
statuses, and daily trading volumes are derived based on data from 
CRSP 1925 U.S. Stock Database, Ctr. Rsch. Sec. Prices, U. Chi. Booth 
Sch. Bus. (2023). 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 (Aug. 3, 2009 to Mar. 31, 2023). 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. The Proposing 
Release stated that short selling was an average of 47.3% of trading 
volume for non-financial common stocks between Aug. 2009 and Feb. 
2021. See Proposing Release, 88 FR 3786 at 3806 (Jan. 20, 2023). 
This is higher than the estimate above partially because, while the 
analysis in the Proposing Release included in the denominator only 
trading volume of those trading venues from which the Commission 
collected short volume data, the analysis above includes in the 
denominator all trading volume from CRSP in order to provide a more 
conservative estimate of short selling volume. Regardless of the 
methodology, both numbers reflect that short sales are a significant 
percentage of total trading volume.
    \1392\ 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 et al., Which Shorts are Informed?, 63 J. Fin. 491 
(2008).
    \1393\ See Ekkehart Boehmer & Wanshan Song, Smart Retail 
Traders, Short Sellers, and Stock Returns (working paper Oct. 23, 
2020) available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3723096 (retrieved from SSRN Elsevier 
database).
    \1394\ 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.'' 
Daniel Deli et al., Use Of Derivatives By Registered Investment 
Companies, SEC (2015), available at https://www.sec.gov/files/derivatives12-2015.pdf.
    \1395\ See Yawen Jiao et al., Short Selling Meets Hedge Fund 
13F: An Anatomy of Informed Demand, 122 J. Fin. Econ. 544 (2016) 
(citing a 2009 report from Goldman Sachs).
    \1396\ See Adam V. Reed et al., Shorting in Broad Daylight: 
Short Sales and Venue Choice, 55 J. Fin. Quantitative Analysis 2246 
(Nov. 2020).
    \1397\ See Battalio & Jennings, supra note 1253.
---------------------------------------------------------------------------

(2) Modernizing the Required Information
(a) Categorization by Order Size and Type
    By enabling investors to make better apples-to-apples comparisons 
across reporting entities with potentially different order flow,\1398\ 
the amendments expanding and modernizing order size and order type 
categories are expected to enhance competition among reporting entities 
on the basis of execution quality, resulting in improvements in 
execution quality for investors.\1399\ Furthermore, for a specific 
order size or type, as order flow accumulates to the reporting entities 
offering the highest execution quality for these sizes and types of 
orders, this will in turn translate into improved execution quality for 
investors who have orders of these sizes and use these types of orders. 
For example, as a result of the adopted amendment expanding the order 
size categories to include information about odd-lots, market 
participants will have improved access to information about a market 
center's offering of price improvement and timely execution of odd-
lots. The expected improvement in both the price and speed at which 
odd-lot orders are executed will benefit for both institutional and 
individual investors.\1400\
---------------------------------------------------------------------------

    \1398\ See supra note 984 for an example of how differences in 
order flow characteristics may impact inferences about execution 
quality.
    \1399\ The importance of being able to make apples-to-apples 
comparisons of execution quality in Rule 605 reports was referenced 
by some commenters. See, e.g., SIFMA Letter II at 30, stating that 
``Rule 605 data can present differently among firms with different 
customer bases and correspondingly different types of order flow,'' 
and Schwab Letter at 35, stating that ``providing [E/Q] information 
in a way that appears to be--but is not--an apples-to-apples 
comparison would create investor confusion rather than provide 
useful information on which to base decisions.''
    \1400\ See supra section IX.C.3.(b)(1)(a) for a discussion of 
the use of odd-lots by both individual and institutional investors.
---------------------------------------------------------------------------

(i) Order Size Categories
    The amendments modernizing the order size categories are expected 
to make Rule 605 reports more relevant by showing more meaningful 
differentiation in execution quality across different order sizes. This 
will allow consumers of Rule 605 reports to control for potential 
differences in order sizes across different reporting entities, while 
also increasing the extent to which reporting entities compete on the 
basis of execution quality across order sizes.
    First, the amendments defining order size categories in terms of 
notional values \1401\ will increase transparency regarding 
distribution of order sizes that a reporting entity handles, 
particularly for higher-priced stocks.\1402\ Continuing the example 
from section IX.C.3.b)(1)(a), for a $500 stock, all orders for $100,000 
(i.e., 200 shares) or less will no longer be grouped into a single 
order size category (100 to 499 shares \1403\) or, if they are for less 
than 100 shares, excluded altogether from reporting requirements.\1404\ 
Instead, these orders will be distributed across a number of order size 
buckets.\1405\ To include larger-sized orders into Rule 605 reporting 
requirements while remaining consistent with Regulation NMS rules that 
exclude orders or trades that are sized above $200,000,\1406\ these 
orders will be grouped into a separate category. This will facilitate 
market participants' ability to use these categories to compare across 
orders of different sizes in higher-priced stocks, while controlling 
for potential differences in the treatment of larger-sized orders. As a 
result, market participants will 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.
---------------------------------------------------------------------------

    \1401\ See final 17 CFR 242.600(b)(18).
    \1402\ Several commenters agreed that a change from order size 
buckets defined in terms of share counts to notional order size 
buckets would be beneficial. See, e.g., Fidelity Letter at 9; Rule 
605 Citadel Letter at 6; Schwab Letter at 33; Nasdaq Letter at 45-
46; and Angel Letter at 2. Many of these commenters compared the 
benefits of notional order size buckets to those of order size 
buckets defined in terms of number of round lots, as was proposed. 
See infra section IX.E.3.a)(1) for a discussion of these comments in 
the context of the Commission's consideration of a reasonable 
alternative that would define order size buckets in terms of number 
of round lots.
    \1403\ See prior 17 CFR 242.605(a)(1); see also supra note 1121 
and corresponding text for a definition of the order size categories 
included in prior Rule 605 reporting requirements.
    \1404\ 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 1191.
    \1405\ These order size categories include (i) less than $250; 
(ii) $250 to less than $1,000; (iii) $1,000 to less than $5,000; 
(iv) $5,000 to less than $10,000; (v) $10,000 to less than $20,000; 
(vi) $20,000 to less than $50,000; and (vii) $50,000 to less than 
$200,000. An additional order size category includes orders for 
(viii) $200,000 or more. The order size categories provide 
additional differentiation for orders of less than a share, odd-lot 
orders, and orders of at least a round lot.
    \1406\ See, e.g., the examples discussed in supra note 1187.
---------------------------------------------------------------------------

    Figure 16 shows the distribution of orders across the adopted 
notional size buckets for stocks with different price levels, using a 
sample of CAT data for 400 stocks for Q1 2023.\1407\ The results show 
that while, as expected, orders for lower-priced stocks tend to cluster 
in the smaller size buckets and orders for higher-priced stocks tend to 
cluster in the larger size buckets, in aggregate order flow appears 
reasonably well-distributed across the various order size buckets. Two 
exceptions are the smallest size bucket (orders for less than $250) and 
the largest size bucket (orders for $200,000 or more), both of which 
have little order flow. However, while there is relatively little order 
flow associated with the smallest notional size bucket (orders for less 
than $250),

[[Page 26551]]

a further look at the data shows that a large portion of these orders 
are likely associated with individual investors.
---------------------------------------------------------------------------

    \1407\ This analysis uses CAT data for 400 stocks for the period 
Q1 2023. See supra note 1211 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 section IX.C.1.c)(2).
---------------------------------------------------------------------------

    Figure 17 shows the distribution across the notional order size 
buckets of orders associated with individual customer accounts as 
compared to those from institutional customer accounts,\1408\ and shows 
that nearly 14.9% of orders from individual customer accounts are for 
less than $250. Therefore, including a separate order size category for 
these small-sized orders will be particularly beneficial for individual 
investors. Meanwhile, for the largest order size bucket, grouping these 
orders together and separately from other orders is consistent with 
Regulation NMS rules that exclude block orders or trades, which may 
result in different execution profiles for these orders.\1409\ 
Furthermore, while these orders make up a small percentage of orders, 
they make up a significant percentage of share volume.\1410\
---------------------------------------------------------------------------

    \1408\ See supra note 1144 for a definition of account types in 
CAT.
    \1409\ See supra note 1187 for examples.
    \1410\ Specifically, an analysis of the CAT data in supra note 
1211 finds that orders priced $200,000 or higher make up 18.0% of 
order flow in terms of share volume.
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BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TR15AP24.024


[[Page 26552]]


[GRAPHIC] [TIFF OMITTED] TR15AP24.025

    Second, as a result of the new order size categories, amended Rule 
605 reports will contain information about some orders that were 
missing from preexisting Rule 605 reports, including orders less than a 
share, orders less than 100 shares, and larger-sized orders of 10,000 
or more shares.\1411\ The new order size categories will also help 
ensure that round lots for stocks with prices greater than $250 are not 
excluded from Rule 605 reports following the implementation of the MDI 
Rules.\1412\ Analyses showed that the inclusion of odd-lot orders into 
Rule 605 reporting requirements will include up to an additional 16.9% 
of NMLOs (0.99% of NMLO share volume),\1413\ and the inclusion of 
fractional shares will include up to an additional 16.4% of executions 
received by individual investors into Rule 605 reports.\1414\ In 
addition, expanding Rule 605 coverage to include larger-sized orders 
\1415\ will include up to an additional 30% of NMLO share volume,\1416\ 
which will likely mostly be relevant for institutional investors, to 
the extent that some of these orders may not be split into smaller 
child orders.\1417\ Including these order sizes within the scope of 
Rule 605 will help ensure that market participants are able to compare 
the execution quality of these orders across reporting entities,\1418\ 
which will encourage reporting entities to compete for these orders on 
the basis of execution quality.
---------------------------------------------------------------------------

    \1411\ Because final Rule 605 reports will not define order size 
buckets in terms of share numbers, these orders will be distributed 
across the notional order size buckets described in note 1405 supra, 
according to their respective notional values.
    \1412\ See supra note 1190-1191 and corresponding text for 
further discussion.
    \1413\ See Figure 6, in supra section IX.C.3.b)(1)(a). As 
discussed in this section, odd-lots are submitted by both individual 
and institutional investors.
    \1414\ See analysis in supra section IX.C.3.b)(1)(b).
    \1415\ See final 17 CFR 242.600(b)(18). Furthermore, see supra 
section III.B.1.b) for a discussion of the Commission's decision to 
rescind the exemptive relief for orders of 10,000 or more shares and 
include these orders within the scope of Rule 605 reports.
    \1416\ See analysis in supra section IX.C.3.b)(1)(c).
    \1417\ The benefits of including larger-sized orders may be 
limited if most large institutional orders are not held orders and 
will thus be excluded from Rule 605 reporting requirements, and/or 
are broken up into smaller child orders that are likely to be 
smaller and have already been included in Rule 605 reporting 
requirements prior to these amendments. See supra sections IX.C.1.b) 
and IX.C.4.a)(1)(b).
    \1418\ For example, one academic study found that odd-lot orders 
often receive price improvement from wholesalers, and that 
incorporating information about price improvement received by odd-
lots would increase dollar estimates of price improvement by 9.6%, 
even after adjusting the NBBO to incorporate the best displayed 
price. See Battalio & Jennings, supra note 1253, at 17.

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

[[Page 26553]]

    Commenters generally supported the inclusion of odd-lots,\1419\ 
fractional shares,\1420\ and larger-sized orders \1421\ into Rule 605 
reporting requirements. However, one commenter did not support the 
inclusion of fractional shares, stating that, ``[g]iven the de minimis 
quantity of shares . . . this information is of limited value to 
investors.'' \1422\ While the Commission agrees that, as a percentage 
of shares, fractional shares represent a small part of order 
flow,\1423\ it disagrees that this means that information about these 
orders is of limited value to investors. Fractional orders less than a 
share represent a relatively high percentage (16.4%) of executions 
received by individual account holders in terms of number of 
trades.\1424\ Furthermore, the execution quality received by fractional 
orders less than a share may be very different from that of full-share 
orders, which increases the relevance of execution quality metrics for 
these types of orders.\1425\ Another commenter suggested that notional 
order size buckets be ``capped at block size'' so as to ``ensur[e] that 
statistics cover most retail trades.'' \1426\ As discussed in the 
Baseline, while institutional investors likely have alternative sources 
of information about the execution quality of their orders, Rule 605 
reports are likely still useful for institutional investors, for 
example, to assess the execution quality of the broker-dealers with 
which they do not currently do business, or to assess the execution 
quality of market centers to which their broker-dealers do not 
currently route orders.\1427\ Therefore, information about larger-sized 
orders will be useful for consumers of Rule 605 reports.
---------------------------------------------------------------------------

    \1419\ See, e.g., SIFMA Letter at 25; SIFMA AMG Letter at 6; and 
Nasdaq Letter at 44.
    \1420\ See, e.g., Professor Schwarz et al. Letter at 4.
    \1421\ See, e.g., Virtu Letter II at 9.
    \1422\ See SIFMA Letter at 31.
    \1423\ See supra note 1145, showing that executed fractional 
orders for less than one share made up about 0.001% of total 
executed share volume.
    \1424\ See supra note 1145 and corresponding text.
    \1425\ See, e.g., infra note 1434 and corresponding text for 
evidence of differences in execution quality for fractional orders 
less than a share.
    \1426\ See Nasdaq Letter at 44. This commenter also suggested 
increasing the block size threshold to $400,000.
    \1427\ See supra section IX.C.2.c) for a discussion of the 
current usage of Rule 605 reports by institutional investors.
---------------------------------------------------------------------------

    Third, to further facilitate the comparison of execution quality 
across similar orders, these amendments will require information within 
each notional order size category to be separated according to whether 
the orders were odd-lots, round-lots, or fractional orders less than 
one share. Requiring information to be reported separately for round-
lot orders and odd-lot orders within each notional order size category 
addresses a potential issue with notional order size buckets, namely, 
that while such categories remain in the spirit of distinguishing 
between ``small'' and ``large'' orders, they no longer produce a 
meaningful distinction between orders that may or may not be at quotes 
protected under Rule 611.\1428\ Figure 18 shows the distribution of 
round lots and odd-lots across the notional order size buckets using 
the sample of CAT data described above.\1429\ As expected, odd-lots 
tend to be clustered in the smaller notional size buckets, while round 
lots are clustered in the larger size buckets. However, the results 
show that most notional buckets will contain a mix of both round-lot 
and odd-lot orders, which supports the benefit of including separate 
information for each lot type within each notional size bucket.\1430\
---------------------------------------------------------------------------

    \1428\ This issue was discussed as one of the potential 
disadvantages of using notional order size buckets in the Proposing 
Release. See Proposing Release, 88 FR 3786 at 3891 (Jan. 20, 2023).
    \1429\ This analysis uses CAT data for 400 stocks for the period 
Q1 2023. See supra note 1211 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 section IX.C.1.c)(2) and infra note 1430.
    \1430\ Within a given notional order size bucket, the 
distribution of orders across round-lot and odd-lot categories may 
change following the implementation of the MDI Rules, particularly 
for those stocks whose round-lot size will be reduced. See supra 
section IX.C.1.c)(2). However, the distribution of orders across 
notional order size buckets will not be directly affected, as the 
notional size of an order is irrespective of its categorization as a 
round-lot or odd-lot. See also supra note 375 for further discussion 
of the interaction between the round lot definition under MDI and 
the order size categories under these amendments.

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

[[Page 26554]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.026

    Including separate execution quality information for fractional 
orders less than one share will provide greater insight into an 
important segment of individual investor order flow.\1431\ This is 
particularly important given that the execution quality of orders for 
less than one share may vary across broker-dealers, who have different 
ways to handle these orders, such as internalizing such orders or 
aggregating them together for the purpose of rerouting to market 
centers.\1432\ It is likely that the vast majority of fractional orders 
for less than one share will be captured within the smallest order size 
bucket; however, to the extent that there is fractional volume in other 
order size buckets, market participants will benefit from being able to 
differentiate fractional volume within these buckets. An analysis of 
CAT data \1433\ found that, while 99.7% of fractional orders for less 
than one share are for $250 or less, four out of the eight notional 
size buckets contained at least one fractional order for less than a 
share.
---------------------------------------------------------------------------

    \1431\ Fractional orders less than a share represent a 
relatively high percentage (16.4%) of executions received by 
individual account holders in terms of number of trades. See supra 
note 1145 and corresponding text.
    \1432\ See supra section IX.C.3.b)(1)(b) for further discussion.
    \1433\ This analysis uses CAT data for 400 stocks for the period 
Q1 2023. See supra note 1211 for dataset description.

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

[[Page 26555]]

    One commenter stated that, based on their trading experience, 
``fractional market orders also receive widely different price 
improvement across brokers,'' and that ``full share price improvement 
statistics are not informative for the execution quality of our 
fractional trades.'' \1434\ This implies that information about how 
well a reporting entity executes full-share orders is not necessarily 
useful for inferring how well that reporting entity will perform when 
executing a fractional order. The Commission agrees with the commenter 
that ``these results justify the need for fractional trades to have 
their own category in the Rule 605 disclosures,'' \1435\ because these 
orders are especially likely to benefit from an increase in competition 
among reporting entities on the basis of execution quality.
---------------------------------------------------------------------------

    \1434\ See Professor Schwarz et al. Letter at 4. Specifically, 
the commenter found that E/Q ranged from 0.127 to 0.915 for 
fractional trades and ranged from 0.056 and 0.624 for full-share 
trades. See Professor Schwarz et al. Letter, Table 2. The commenter 
does not state whether these statistics include only fractional 
trades less than one share, or all trades that have fractional 
components.
    \1435\ See Professor Schwarz et al. Letter at 4.
---------------------------------------------------------------------------

    Lastly, requiring order size categories under Rule 605 to include 
information about fractional orders less than one share \1436\ will 
expand the number of reporting entities to include an estimated 20 
market centers \1437\ that exclusively execute fractional orders less 
than one share. Prior to these amendments, these market centers were 
not required to file Rule 605 reports due to their orders falling below 
the smallest order size category in preexisting Rule 605. This will 
increase transparency about the execution quality achieved by these 
market centers.\1438\
---------------------------------------------------------------------------

    \1436\ See final 17 CFR 242.600(b)(18).
    \1437\ See infra note 1659 for further discussion of this 
estimate.
    \1438\ One commenter stated that, because much of today's market 
infrastructure does not yet support fractional share trading 
(including that ``FINRA does not currently have a mechanism to 
report fractional share trades''), ``the costs to fully modify [the 
reporting] infrastructure would be high compared to the minimal 
benefit of including fractional share reporting.'' SIFMA Letter at 
31; see infra note 1673 and corresponding text for a discussion of 
and the Commission's response to this commenter.
---------------------------------------------------------------------------

(ii) Order Type Categories
    The amendments to Rule 605 modifying the order type categories 
required by Rule 605, including modifications to the coverage of NMLOs, 
and separate order type categories for marketable, midpoint-or-better, 
and other non-marketable IOCs, will improve the relevance of the 
information in Rule 605 reports regarding execution quality across 
different order types. This will facilitate comparisons and competition 
among reporting centers on the basis of execution quality for these 
orders.
    The amendment modifying Rule 605's coverage of NMLOs so that 
reporting entities are required to disclose execution quality 
information only for those NMLOs that become executable \1439\ (i.e., 
eventually touch the NBBO) will facilitate comparisons between 
reporting entities, 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. 
This will be achieved because Rule 605 reports will more accurately 
exclude 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, while including 
those NMLOs that investors could expect to have a reasonable chance of 
executing.\1440\
---------------------------------------------------------------------------

    \1439\ See final 17 CFR 242.600(b)(39) (defining ``executable'') 
and final 17 CFR 242.600(b)(19) (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 sections III.A.2.b) and 
III.B.2.a)(2).
    \1440\ Several commenters generally supported a new requirement 
to report information about executable NMLOs. See, e.g., Rule 605 
Citadel Letter at 11; Nasdaq Letter at 44; SIFMA AMG Letter at 6; 
and SIFMA Letter at 25.
---------------------------------------------------------------------------

    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.\1441\ 
Results are presented in Figure 19.\1442\ While the fill rates of all 
near-the-quote and away-from-the-quote NMLOs are very low (0.27% and 
0.02%, 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 32.5%, the average fill rate of executable 
away-from-the-quote NMLOs is relatively high, and actually higher than 
the average fill rate of executable near-the-quote orders 
(2.71%).\1443\ This

[[Page 26556]]

reflects that even away-from-the-quote orders are likely to execute if 
prices move in a direction such that they have a meaningful opportunity 
to execute. Therefore, the execution quality statistics resulting from 
the amendments to Rule 605 better reflect a market center's performance 
in handling NMLOs, by including NMLOs with a meaningful opportunity to 
execute and excluding NMLOs without a meaningful opportunity to 
execute.
---------------------------------------------------------------------------

    \1441\ See supra note 1130 for a description of the dataset. The 
Commission found that only a small percentage of NMLOs eventually 
touch the NBBO: only 13.7% of near-the-quote NMLOs and 0.92% of 
away-from-the-quote NMLOs were executable during their lifespan. 
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 will affect the 
average fill rates of these NMLO categories. See supra section 
IX.C.1.c)(2). Also, by definition, all at-the-quote and inside-the-
quote NMLOs are executable because they have 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 at-
the-quote and inside-the-quote NMLOs presented in Figure 9 supra.
    \1442\ The MIDAS data used in this analysis have been updated 
and corrected since the Proposing Release for the reasons described 
in supra note 1130. See Proposing Release, 88 FR 3786 at 3867 
(Figure 15), 3842, n.634 (Jan. 20, 2023) (for data description). 
Results from Figure 19 are similar to those in Figure 15 in the 
Proposing Release after taking into account these updates and 
corrections. As discussed in supra note 1199, the analysis may 
overestimate fill rates due to the exclusion of orders with multiple 
submission messages. However, even in the alternative analysis 
without this exclusion described in supra note 1199, fill rates for 
executable away-from-the-quote NMLOs are still comparatively high, 
at 10.5%. While this alternative analysis, by assigning to the total 
submitted volume the price at the time of submission, tended to 
overestimate the number of executable NMLOs, it is unclear that this 
would systematically overestimate fill rates for executable NMLOs, 
as fill rates are calculated as the sum of executed shares divided 
by the sum of submitted shares and are thus indifferent to the 
distribution of shares across multiple submissions. For example, 
consider that a NMLO that consists of four separate submissions of 
100 shares each, 100 shares of which execute, will have the same 
fill rate as an order for 400 shares, 100 shares of which executes 
(25%). Therefore, the Commission considers 10.5% to be an 
approximate lower bound for the fill rate of executable away-from-
the-quote NMLOs. The results from both analyses show that many 
executable away-from-the-quote NMLOs have a meaningful opportunity 
to execute and many do. Therefore, changes to the MIDAS dataset did 
not affect the Commission's conclusions from this analysis relative 
to the Proposing Release, namely that removing near-the-quote NMLOs 
that are not executable results in a set of NMLOs with a more 
meaningful opportunity to execute, and that there are benefits to 
including executable away-from-the-quote NMLOs and to excluding 
near-the-quote NMLOs that are never executable.
    \1443\ This is likely because executable near-the-quote NMLOs 
are more likely than away-from-the-quote NMLOs to be cancelled after 
their limit prices are reached but before they execute. This could 
be the case, for example, because near-the-quote orders are more 
likely to be submitted by market participants such as market makers, 
who are more likely to actively monitor their limit orders and may 
cancel them to adjust them for changes in the market. Examining the 
distribution of cancellations of these orders reveals that a higher 
percentage of executable near-the-quote NMLOs are cancelled within a 
short period of time, as compared to executable away-from-the-quote 
NMLOs. Specifically, 14.2% of executable near-the-quote NMLO shares 
are cancelled within 100 milliseconds, vs. 7.7% of executable away-
from-the-quote NMLOs, and that 36.7% of executable near-the-quote 
NMLO shares are cancelled within 1 second, vs. 13.9% of executable 
away-from-the-quote NMLOs. A similar analysis in the Proposing 
Release looked at the distribution of the cancellations of all 
(i.e., both executable and non-executable) away-from-the-quote and 
near-the-quote NMLOs, and similarly found that a larger percentage 
of near-the-quote NMLOs have execution times below 100 milliseconds. 
See Proposing Release, 88 FR 3786 at 3867, n.841 (Jan. 20, 2023). To 
the extent that near-the-quote NMLOs are submitted by traders that 
are more likely to cancel these orders before they are executed, 
this could explain why executable near-the-quote NMLOs have lower 
fill rates than executable away-from-the-quote NMLOs.
[GRAPHIC] [TIFF OMITTED] TR15AP24.027

BILLING CODE 8011-01-C
    The adopted amendment to include a separate order type category for 
midpoint-or-better orders \1444\ will 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. Several commenters stated that the proposed amendment should not 
create a separate category for beyond-the-midpoint limit orders, since 
it is not a large category of orders.\1445\ One commenter additionally 
stated that the order category ``will become de minimis with the Market 
Data Infrastructure (``MDI'') round lot definitions.'' \1446\ The 
Commission confirms that, while the adopted amendment to include both 
at-the-midpoint and beyond-the-midpoint orders into the new category 
will increase the size of the category, this category will still remain 
a relatively small percent of total orders.\1447\ The Commission also 
acknowledges that 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.\1448\ 
However,

[[Page 26557]]

since some market centers treat these NMLOs more like marketable limit 
orders in certain contexts, it will be beneficial for market 
participants who use these orders as part of their trading strategies 
to have separate information about the execution quality of these 
orders,\1449\ and thus the Commission has included them in the amended 
rule.
---------------------------------------------------------------------------

    \1444\ See final 17 CFR 242.600(b)(19) (defining ``categorized 
by order type'' to include a category for midpoint-or-better limit 
orders); see also supra section III.B.2.b)(2).
    \1445\ See, e.g., FIF Letter at 13; Schwab Letter II at 6; and 
Schwab Letter at 32.
    \1446\ See Schwab Letter II at 6.
    \1447\ As shown in Table 5, increasing the scope of this 
category to include at-the-midpoint NMLOs in addition to beyond-the-
midpoint NMLOs will increase its size from 2.1% to 3.9% of shares 
submitted to exchanges at ATSs, and from 3.2% to 5.5% to shares 
submitted to wholesalers.
    \1448\ See supra section VII.C.1.d)(2) for further discussion. 
An analysis of the CAT data sample described in note 1182 supra 
shows that, in the quartile of stocks with the lowest quoted spreads 
(an average quoted spread of around $0.026), midpoint-or-better 
orders still compromise a non-negligible percent of order flow, 
representing 5.15% of submitted orders (4.32% of submitted shares). 
This is compared to the quartile with the highest quoted spreads (an 
average quoted spread of $20.28), where midpoint-or-better orders 
are 9.66% of submitted orders (8.62% of submitted shares). 
Therefore, it is likely that midpoint-or-better orders will be a 
non-negligible percent of order flow, even if spreads narrow after 
the implementation of MDI.
    \1449\ See also supra section III.B.4.a)(2) for further 
discussion.
---------------------------------------------------------------------------

    First, the high percentage of midpoint-or-better NMLOs submitted 
with IOC designations shown in Table 4 implies that a significant 
portion of these orders have the expectation of executing immediately, 
for example, against hidden or odd-lot liquidity inside of the spread. 
Therefore, these orders are likely to have different execution profiles 
than other types of NMLOs, such as faster time-to-execution. 
Furthermore, the Commission understands that different reporting 
entities treat beyond-the-midpoint 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. 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 will be highly dependent on 
which type of market center to which the broker-dealer routes such 
orders.\1450\ Requiring reporting entities to report execution quality 
statistics separately for midpoint-or-better orders will reveal 
differences in reporting entities' handling of these types of order.
---------------------------------------------------------------------------

    \1450\ See Table 4, showing both beyond-the-midpoint and at-the-
midpoint orders tend to have higher fill rates and faster execution 
time relative to other types of NMLOs.
---------------------------------------------------------------------------

    Lastly, the adopted amendment assigns marketable, midpoint-or-
better, and other non-marketable IOCs to separate order type categories 
so that they no longer will be commingled with other order types.\1451\ 
This will increase transparency about the execution quality that 
reporting entities achieve both for IOCs and for other order 
types.\1452\ Supporting the idea that IOCs tend to have different 
execution quality profiles than other orders, an analysis showed that 
IOCs on average have faster execution times and higher effective 
spreads than other orders, and that fill rates vary across market 
centers and according to order characteristics such as size.\1453\ 
Information about the execution quality of IOCs will 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 can thus make more informed 
decisions about where to route these orders. Furthermore, due to their 
different execution profiles, removing IOCs from other order categories 
will cause the execution quality metrics for other types of orders to 
more accurately reflect reporting entities' handling of other types of 
orders.\1454\ The effect on the execution quality metrics of other 
types of orders will likely be significant, as an analysis of IOCs 
found that they make up more than 90% of marketable limit and midpoint-
or-better share volume.\1455\
---------------------------------------------------------------------------

    \1451\ To implement this change, the Commission is modifying the 
definition of ``categorized by order type'' to add midpoint-or-
better limit orders that are immediate-or-cancel and executable non-
marketable limit orders that are immediate-or-cancel, as well as to 
exclude IOCs from the order types for midpoint-or-better limit 
orders and executable NMLOs. See final 17 CFR 242.600(b)(19).
    \1452\ Commenters agreed that the separate reporting of IOC 
orders would make Rule 605 data more useful. See, e.g., SIFMA AMG 
Letter at 6; SIFMA Letter at 25.
    \1453\ For example, exchanges and ATSs tend to have higher fill 
rates for IOC marketable limit orders (14.3%) than non-IOC 
marketable limit orders (11.6%), the opposite is true for 
wholesalers (18.3% compared to 74.3%). See Table 5 in supra section 
IX.C.3.c)(9).
    \1454\ See supra note 1265 and accompanying text for an example 
of how commingling IOCs with other order types can lower marker 
centers' incentives to improve execution quality for other 
marketable orders.
    \1455\ See Table 5 in supra section IX.C.3.c)(9) and 
corresponding discussion.
---------------------------------------------------------------------------

(b) Timestamp Conventions and Time-to-Execution
    Several of these amendments will increase the relevance of time-to-
execution information in Rule 605 reports, which in turn will improve 
market participants' ability to compare time-to-execution across 
reporting entities. For those investors that value fast executions, 
this is expected to lead to improved execution times, as investors will 
be better able to identify and route orders to reporting entities 
offering faster execution speeds.
    First, the adopted amendment increasing the granularity of the 
timestamp conventions used for the time of order receipt and time of 
order execution from seconds to milliseconds, as well as requiring 
millisecond granularity for the time of executability,\1456\ will make 
the time-to-execution statistics in Rule 605 more informative about the 
execution speeds achieved by a reporting entity.\1457\ These statistics 
include the average share-weighted time-to-execution of shares executed 
with positive price improvement, without price improvement and with 
negative price improvement. Given that execution speeds measured in 
seconds are likely to miss much of the variation in execution times 
across reporting entities in today's markets, particularly for market 
and marketable orders,\1458\ adding granularity to the timestamps used 
to calculate the time-to-execution speed measures included in Rule 605 
reports will benefit market participants in their efforts to compare 
execution times across reporting entities.\1459\
---------------------------------------------------------------------------

    \1456\ See final 17 CFR 242.600(b)(39), (102), and (103).
    \1457\ One commenter stated that more granular time-to-execution 
statistics would allow for more meaningful points of comparison. See 
Better Markets Letter at 8.
    \1458\ See supra section IX.C.3.c)(4) for a discussion of how 
the granularity of the time-to-execution categories previously 
defined in Rule 605 has lost relevance over time.
    \1459\ One commenter stated that the minimum granularity of 
milliseconds is ``the best approach at this time,'' stating that it 
is ``consistent with the Consolidated Audit Trail, which requires 
firms to report all order events with a minimum granularity of 
milliseconds.'' FIF Letter at 17.
---------------------------------------------------------------------------

    One commenter, while generally recognizing benefits of smaller 
increments for time to execution statistics, stated that ``the more 
granular a timestamp needs to be, the more subject it is to variances 
across reporting entities,'' and that this has ``the potential to 
distort statistics.'' \1460\ The commenter stated that such distortions 
derive from different practices around when to mark order receipt and 
from different geographic latencies in the receipt of market data, such 
as SIP data and exchange proprietary data feeds, used to assign 
quotation information to an event according to its timestamp. However, 
evidence suggests that geographic latencies, which may account for the 
majority of latency differences associated with the SIP data, are 
currently below a millisecond.\1461\

[[Page 26558]]

Therefore, the distortions related to latencies are likely to be 
smaller than the timestamp granularity. Furthermore, it is likely that 
distortions may actually be reduced under these amendments. Under 
preexisting Rule 605, though many market centers timestamp to the 
millisecond or lower, market centers only had to look at timestamps at 
the second level, and match each order with the NBBO within that 
second. Matching to the second when there are multiple quotes per 
second can create distortions. Under preexisting Rule 605, when there 
are multiple quotes within a second, the market center would have 
needed to use a neutral method to assign the NBBO to an order. Of 
course, prior to these amendments, some market centers could have 
chosen to match to the millisecond as its neutral method. Under the 
final rule, reporting entities will be required to match to the 
millisecond. With latencies of under a millisecond and even with 
multiple quotes per millisecond, the distortions should be lower when 
matching to a millisecond than when matching to a second. In 
particular, the NBBO that is matched to a particular order is more 
likely to be closer to the actual time of order receipt.
---------------------------------------------------------------------------

    \1460\ See Robinhood Letter at 47.
    \1461\ See, e.g., Letter from Patrick Sexton, EVP, General 
Counsel Corporate Secretary, Cboe Global Markets, Inc. on the MDI 
Proposal, (May 26, 2020) (stating that ``geographic latency accounts 
for the vast majority of the latency experienced by the SIPs 
today,'' and referencing geographic latency of around 416 
microseconds between Carteret, NJ and Secaucus, NJ); see also Letter 
to Brent J. Fields, Secretary, Commission, from Michael Blaugrund, 
Head of Transactions, New York Stock Exchange (Oct. 24, 2018) 
(stating that, as ``processing time approaches zero, it is clear 
that the time required for trade and quote data to travel from 
Participant datacenter -> SIP datacenter -> Recipient datacenter, or 
`geographic latency,' is a larger portion of the total latency.''). 
In addition, see MDI Adopting Release, 86 FR 18596 at 18732 (Apr. 9, 
2021), stating that ``[t]he record in this rulemaking suggests that 
the geographic latency of SIP data may be up to a millisecond.''
---------------------------------------------------------------------------

    Second, the amendments increasing the granularity of time-to-
execution buckets \1462\ will increase the relevance of the time-to-
execution information in Rule 605, as the categories prior to these 
amendments have not been granular enough with respect to variations in 
execution times across reporting entities. One commenter stated that 
the inclusion of updated time-to-execution buckets in amended Rule 605 
reports would provide greater granularity.\1463\
---------------------------------------------------------------------------

    \1462\ See prior 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). These will be replaced by the 
following buckets: less than 100 microseconds; 100 microseconds to 
less than 1 millisecond; 1 millisecond to less than 10 milliseconds; 
10 milliseconds to less than 1 second; 1 second to less than 10 
seconds; 10 seconds to less than 30 seconds; 30 seconds to less than 
5 minutes; and 5 minutes or more. See supra section III.B.3.b) and 
final 17 CFR 242.605(a)(1)(i)(G) through (N).
    \1463\ See Healthy Markets Letter at 17. Specifically, the 
commenter stated that, ``[b]y creating buckets for timestamp, rather 
than average time to execution [as proposed], the reports would 
provide much greater granularity while still allowing a user of the 
data to recreate average time to execution.'' See the Proposing 
Release, 88 FR 3786 at 3812-3813 (Jan. 20, 2023), for a discussion 
of the proposed amendment to replace time-to-execution buckets with 
time-to-execution statistics; see also infra section IX.E.3.b)(1) 
for further discussion of adopting time-to-execution statistics as 
proposed as a reasonable alternative.
---------------------------------------------------------------------------

    Figure 20 plots the distribution of share volume across the adopted 
time-to-execution buckets, using a sample of CAT data for 400 stocks 
for the period of Q1 2023.\1464\ Since whether an order is submitted 
with an IOC designation can have a significant effect on its 
execution,\1465\ results are presented separately for IOC and non-IOC 
orders. The results show that non-IOC shares are reasonably well 
distributed across the various buckets. While the majority of IOC 
orders (91.1%) are clustered in the shortest time bucket, some IOC 
volume is also distributed across longer time buckets. This shows that 
these time-to-execution buckets will also allow market participants to 
separate out IOC orders that are outliers in terms of time-to-
execution.
---------------------------------------------------------------------------

    \1464\ This analysis uses CAT data for 400 stocks for the period 
Q1 2023. See supra note 1211 for dataset description.
    \1465\ See, e.g., the results in Table 5.

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

[[Page 26559]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.028

    Figure 21 also plots the distribution of share volume across the 
adopted time-to-execution buckets, this time breaking the result down 
by order type.\1466\ The results show that the time-to-execution 
buckets are also able to capture variation in execution times across 
different order types, with most market and marketable limit orders 
clustered at the faster time buckets, and most at-the-quote NMLOs 
clustered in the longer time buckets.
---------------------------------------------------------------------------

    \1466\ This analysis uses CAT data for 400 stocks for the period 
Q1 2023. See supra note 1211 for dataset description. 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 1204 
and section IX.C.1.c)(2). However, it is not clear how a change in 
the distribution of orders into various NMLO categories will affect 
the average time-to-execution of these NMLO categories.

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

[[Page 26560]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.029

    The amendments requiring time-to-execution information to be 
reported for all order types will help ensure that all order types 
benefit from increased transparency.\1467\ However, commenters stated 
that, because marketable limit orders that exceed the consolidated 
quote size may be only partially executed or take longer to execute, 
time-to-execution information for this order type ``would be difficult 
to interpret'' \1468\ and ``would be impacted by factors that do not 
reflect a true comparison of the execution performance across firms.'' 
\1469\ The Commission recognizes that execution times will be longer 
for marketable limit orders that do not fully execute and are partially 
posted to the limit order book, and that this may in some cases be the 
result of factors that are not directly within a reporting entity's 
control, such as the size of the order. However, other information 
contained in Rule 605 reports, such as information about order size, 
will allow consumers of Rule 605 data to control for such factors, 
which will facilitate consumers' ability to interpret time-to-execution 
information for marketable limit orders and to make apples-to-apples 
comparisons across reporting entities.\1470\
---------------------------------------------------------------------------

    \1467\ One commenter supported the inclusion of time-to-
execution information for all order types. See Nasdaq Letter at 45: 
``We concur with the SEC that requiring average time-to-execution 
for all order types . . . would offer more consequential 
information.''
    \1468\ See Rule 605 Citadel Letter at 10.
    \1469\ See FIF Letter II at 3. Specifically, the commenter 
stated ``that firms that receive marketable orders that are larger 
relative to the opposite-side displayed NBBO quantity would show a 
longer time to execution as compared with firms that receive 
marketable orders that are smaller relative to the opposite-side 
displayed NBBO quantity.'' FIF Letter II at 3. Similarly, another 
commenter stated that ``the execution speed metric for marketable 
limit orders should be limited to the size available at the best 
protected quote at the far touch. This will ensure that orders 
larger than the quoted size that take out the best price and then 
are reflected for the balance don't skew statistics.'' Schwab Letter 
II at 32.
    \1470\ See supra section III.B.3.b) for further discussion.
---------------------------------------------------------------------------

    Finally, these amendments will require NMLO execution times to be 
measured from the time that the order becomes executable rather than 
from the time of order receipt.\1471\ This will help ensure that this 
metric is more likely to capture the portions of execution speed that 
are within a reporting entity's

[[Page 26561]]

control, rather than dependent on market conditions.\1472\
---------------------------------------------------------------------------

    \1471\ See final 17 CFR 242.605(a)(1)(i)(G) through (N).
    \1472\ 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 from the time of order receipt is less 
reflective of execution quality than of prevailing market 
conditions.
---------------------------------------------------------------------------

    For those investors that value fast executions, these amendments 
are expected to lead to improved execution times, as the increased 
transparency around reporting entities' execution times will increase 
these investors' ability to identify and route orders to reporting 
entities offering faster execution speeds.\1473\ The Commission expects 
these benefits to mainly accrue to investors that value faster 
executions, as these investors (and their broker-dealers) will 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 will result in an increase in market centers' 
incentives to offer faster executions, e.g., by investing in faster 
trading technology, this may result in a market-wide increase in 
trading speeds for all investors.
---------------------------------------------------------------------------

    \1473\ See supra section IX.C.3.c)(4) for a discussion of 
current executions speeds.
---------------------------------------------------------------------------

    One individual investor stated that focusing on the speed of 
execution only benefits high-frequency traders, and that the commenter 
is more concerned as a retail investor with getting a fair price for 
their trades than with the speed of execution.\1474\ The Commission 
recognizes that different investors benefit from faster execution times 
for different reasons, and that some investors will not always benefit 
from faster execution under all circumstances.\1475\ However, 
individual investors will benefit from faster executions in 
circumstances where the faster execution of their orders results in 
better prices. For example, time-to-execution is an important metric 
for market orders submitted with stop prices, which an analysis finds 
constitute 4.91% of market orders submitted by individual 
investors.\1476\ Since these orders tend to be triggered during 
volatile markets, any delay in execution can result in worse price if 
prices are increasing (for buy orders) or decreasing (for sell orders). 
For IOCs, a faster routing time reduces 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.\1477\
---------------------------------------------------------------------------

    \1474\ See Gillmore Letter.
    \1475\ See, e.g., Ekkehart Boehmer, Dimensions of Execution 
Quality: Recent Evidence for US Equity Markets, 78 J. Fin. Econ. 553 
(2005) (``Boehmer (2005)''), which documents a negative relationship 
between execution speed and price.
    \1476\ See Table 3 in supra section IX.C.3.b)(2).
    \1477\ See, e.g., Matteo Aquilina et al., Quantifying the High-
Frequency Trading ``Arms Race,'' 137 Q. J. Econ. 493 (2021) 
(``Aquilina et al.''), who find that traders with failed attempts to 
trade or cancel orders, such as submitters of IOC orders that fail 
to execute, lose about half a tick as a result of the failure. While 
the per-trade cost is small, the cost of these failures adds up to 
around $5 billion annually in global equity markets.
---------------------------------------------------------------------------

    For institutional investors, the benefits of fast execution may be 
different.\1478\ 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.\1479\ However, the academic 
literature suggests that institutional investors with short-lived 
private information may benefit from faster execution times, as they 
are able to profit from trading against other, slower 
institutions.\1480\ On the same note, faster execution times benefit 
slower institutional investors by reducing their exposure to adverse 
selection as much as possible.\1481\ Institutional investors may also 
care about the execution speed of their child orders.\1482\
---------------------------------------------------------------------------

    \1478\ 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 nonpublic and highly individualized, and 
therefore limited to the execution quality obtained from broker-
dealers with which the institutional investors currently do 
business. Since 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. See supra section IX.C.2.c) for further discussion.
    \1479\ See supra section IX.C.4.a)(1)(b) for a discussion of the 
handling of institutional orders by broker-dealers as not held 
orders.
    \1480\ See, e.g., Kadan et al., supra note 1225.
    \1481\ See, e.g., Brogaard et al., supra note 1225.
    \1482\ See, e.g., Beason and Wahal at 17, who examine the time-
to-fill of algorithmic child orders, and find that the time-to-
execution and time-to-cancellation of these orders ``indicate a 
clear price-time tradeoff in the data.''
---------------------------------------------------------------------------

(c) Execution Quality Metrics
    The amendments to Rule 605 will improve the relevance of the 
information contained in Rule 605 reports by increasing the granularity 
of time-to-execution buckets; modifying the calculations of average 
realized spreads; expanding existing requirements to report average 
effective spreads to midpoint-or-better orders; 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.
(i) Realized Spread
    The adopted amendment modifying the time horizon used to calculate 
the realized spread from a single horizon of five minutes to a range of 
horizons between 50 milliseconds and 5 minutes \1483\ will increase the 
relevance and usability of this measure. One of the uses of realized 
spread is to derive a measure of price impact of the order flow,\1484\ 
which, depending on the horizon of the liquidity provider, can measure 
the adverse selection risk that the liquidity provider faces.\1485\ 
Adverse

[[Page 26562]]

selection risk of order flow can vary over time and across stocks and 
entities. Therefore, realized spreads provide context for other 
measures of execution quality. The preexisting requirement to use a 
single five-minute time horizon to calculate realized spreads for the 
purposes of Rule 605 disclosures has likely limited market 
participants' ability to use realized spreads to control for adverse 
selection, particularly for larger and more liquid stocks.\1486\
---------------------------------------------------------------------------

    \1483\ See final 17 CFR 242.605(a)(1)(i)(O) through (X); see 
also supra section III.B.4.a)(2).
    \1484\ See supra note 1228, describing how realized spreads can 
be decomposed into the difference between the effective spread and 
price impact. As discussed in note 1228, supra, differences between 
the times at which realized spreads and effective spreads are 
measured can cause this decomposition to be inexact. After the 
implementation of these amendments, the realized spread will 
continue to be measured using the price at the time of order 
execution, while effective spreads will be measured using the 
midpoint price at the time of order receipt (or order executability, 
in the case of midpoint-or-better orders). To the extent that there 
are significant differences in the time of order receipt (or 
executability) and the time of order execution, the decomposition of 
realized spreads in the amended Rule 605 reports into effective 
spreads and price impact will continue to not be exact. This effect 
is likely to vary depending on the order type. For example, Figure 
21 shows that 37.5% of marketable limit orders are executed within 
10 milliseconds after order receipt, while only 7.2% of at-the-quote 
NMLOs are executed within 10 milliseconds after order executability 
(which, for these orders, is the same as the time of order receipt). 
Therefore, for example, this effect is expected to be greater for 
at-the-quote NMLOs than for marketable limit orders.
    \1485\ See supra note 1229 and accompanying text for a 
discussion of price impact as a measure of the adverse selection 
risk faced by liquidity providers. In some cases, market 
participants will be able to use the data in amended Rule 605 
reports to estimate price impact using effective and realized 
spreads. These estimates of price impact measures may be subject to 
the time asynchronies, and, as described in supra note 1484, the 
extent to which these asynchronies lead to inexact measures of price 
impact is likely to vary along with the order type. In addition, 
because the effective spread is required to be reported only for 
market and marketable order types as well as midpoint-or-better 
orders, the ability of market participants to estimate price impact 
will only be possible for these order types. See supra section 
III.B.4.b)(2) for further discussion. However, for those order types 
for which effective spreads are not available, or for which the time 
asynchronies are expected to lead to inexact measures of price 
impact, market participants will still be able to use the fact that 
amended Rule 605 reports will contain a broad range of realized 
spread time horizons to gain insights into adverse selection risk. 
Specifically, since price impact will increase as the time horizon 
increases (see supra note 1235 for further discussion), while the 
effective spread remains constant, examining how realized spreads 
change as the time horizon increases will give market participants 
insight into the rate at which the price impact, and therefore 
adverse selection risk, increases as the time horizon increases. 
Market participants could use this information to determine, for 
example, whether adverse selection risk increases at a rapid pace as 
the time horizon increase, which could signal more adverse market 
conditions.
    \1486\ A number of academic studies argue that the five-minute 
horizon is too long for a high-frequency environment. See, e.g., 
O'Hara 2015; O'Hara et al.; Conrad and Wahal, supra note 544.
---------------------------------------------------------------------------

    Selecting an appropriate time horizon to calculate the realized 
spread must strike a balance between too short, which could fail to 
incorporate the realization of the price impact, and too long, which 
could include additional noise \1487\ or the cumulative impact of 
subsequent market changes which are unrelated to the order's execution 
quality.
---------------------------------------------------------------------------

    \1487\ 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.
---------------------------------------------------------------------------

    Referencing the Commission's analysis of realized spread time 
horizons in the Proposing Release, one commenter stated that ``the 
Commission has not appropriately analyzed inventory turnover, which is 
necessary to convey relevant meaning to the analysis.'' \1488\ The 
Commission acknowledges that 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. As 
discussed in the Proposing Release, the amount of time an average 
liquidity provider holds onto the inventory positions established from 
providing liquidity is not easily observable.\1489\ Instead, the 
Commission's analysis of realized spreads in the Proposing Release 
\1490\ was based on the theoretically motivated and empirically 
observed decline in realized spreads over increasing time horizons, 
similar to the academic literature.\1491\
---------------------------------------------------------------------------

    \1488\ See SIFMA Letter at 32.
    \1489\ See Proposing Release, 88 FR 3786 at 3854 (Jan. 20, 
2023). For example, while it would be theoretically possible to use 
CAT data to estimate market maker turnover, it would not be possible 
to estimate inventory levels, as starting inventory levels 
accumulated prior to the availability of CAT data are not 
observable.
    \1490\ See Table 1 of the Proposing Release, 88 FR 3786 at 3815 
(Jan. 20, 2023).
    \1491\ See Conrad and Wahal, supra note 544. As described in 
supra note 1235, one way to interpret the decline in realized spread 
is as a function of the realization of price impact. An optimal time 
horizon would be one that is long enough to capture most of the 
realization of price impact, but not long enough to incorporate 
noise.
---------------------------------------------------------------------------

    Table 7 \1492\ replicates this analysis using an updated sample of 
TAQ data for 400 stocks for the period of Q1 2023,\1493\ and shows that 
the cumulative decline in realized spread captured at different time 
horizons varies by market capitalization. Approximately 90% of the 
cumulative decline in realized spread is captured by the 15-second 
horizon for the largest market capitalization group, compared to only 
about 50% for the smaller market capitalization groups. At the one-
minute horizon, approximately 75% of the realized spread is captured 
for the smaller market capitalization groups. This echoes the results 
from the Proposing Release,\1494\ and also supports results from the 
academic literature, as one paper similarly recommends a shorter time 
horizon for large stocks and a longer time horizon for small 
stocks.\1495\
---------------------------------------------------------------------------

    \1492\ The TAQ data used in this analysis have been updated 
since the Proposing Release to account for a more recent time 
period. In addition, the methodology has been updated to include 
additional time horizons. See Proposing Release, 88 FR 3786 at 3815 
(fig. 1) (Jan. 20, 2023), which presents a similar analysis that 
uses data from Feb. 2021 (see Proposing Release, 88 FR 3786 at 3854, 
n.706 (Jan. 20, 2023), for data description), and includes six time 
horizons (1 second, 5 seconds, 10 seconds, 15 seconds, 1 minute, and 
5 minutes); see supra note 1237. Also, while Table 1 of the 
Proposing Release similarly presented the additional (i.e., non-
cumulative) variation at each time interval, for clarity, the 
analysis in Table 7 presents the cumulative decline in average 
realized spreads at each time horizon. However, despite these 
updates, this analysis continues to show that time horizons of 15 
seconds and one minute capture most of the realized spread 
information for larger stocks, for the two smaller-stock groups, a 
sizeable proportion of the overall decline does not occur until the 
5-minute horizon.
    \1493\ See supra note 1238 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 supra section 
IX.C.1.c)(2)IX.C.1.c)(2). 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.
    \1494\ See Table 1 of the Proposing Release, 88 FR 3786 at 3815 
(Jan. 20, 2023).
    \1495\ See Conrad and Wahal, supra note 544.
    [GRAPHIC] [TIFF OMITTED] TR15AP24.030
    

[[Page 26563]]


    Echoing the Commission's statements in the Proposing Release, Table 
7 also shows that, for smaller stocks, a sizeable proportion of the 
overall decline in realized spreads (around 23-26%) does not occur 
until the five-minute horizon. Therefore, retaining the five-minute 
horizon will be useful in capturing additional information about 
realized spreads, particularly for the smallest stocks.\1496\
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    \1496\ In the Proposing Release, the Commission stated that 
``requiring an additional specification of realized spreads would 
entail adding another data item, which would also increase the 
complexity of Rule 605 reports.'' Proposing Release, 88 FR 3786 at 
3892 (Jan. 20, 2023). For this reason, the Commission is requiring 
only two of the five realized spread horizons to be included in the 
Summary Reports (see supra section IV.B.1.b). However, for the full 
Rule 605 reports, the Commission agrees with a commenter that the 
detailed Rule 605 reports are ``intended to be machine-readable, not 
human-readable,'' and that ``[a]dding rows and columns to the Rule 
605 report, within reason, would not materially increase the costs 
of processing these reports and storing the relevant data.'' FIF 
Letter at 16.
---------------------------------------------------------------------------

    Other commenters similarly stated that the Commission did not 
provide a basis for its selection of realized spread time 
horizons.\1497\ In response to commenters and to add robustness to its 
analysis, the Commission has expanded its analysis of optimal realized 
spread time horizons in this Adopting Release to include two additional 
empirical approaches.
---------------------------------------------------------------------------

    \1497\ See, e.g., Virtu Letter II at 14, stating that ``it is 
unclear what the basis is for bluntly measuring realized spreads at 
15 seconds and one minute;'' and SIFMA Letter at 32, stating that 
``The Commission also has not provided a rational basis for its 
method of calibrating the realized spread time frames (i.e., 15 
seconds and one minute).''
---------------------------------------------------------------------------

    First, as described in section IX.C.3.(c)(5), realized spreads can 
be decomposed into effective spreads and price impact. Price impact is 
designed to measure the change in a stock's fundamental value following 
a trade; if a market maker is trading against a more informed trader, 
price impact will capture the adverse price movement for the market 
maker resulting from the incorporation of the informed trader's private 
information into prices.\1498\ If the time horizon is too short, this 
change in the fundamental value will not yet be fully realized, and 
thus the measure of price impact (and thus the measure of realized 
spreads) will be deficient. On the other hand, if the time horizon is 
too long, measures of price impact and realized spread will incorporate 
too much noise. Therefore, an ideal time horizon for calculating the 
realized spread would be one that incorporates the lowest amount of 
noise into the measurement of the price impact component of realized 
spreads. To examine how the noise evolves over different time horizons, 
the Commission used the sample of TAQ data described above to examine 
the noisiness of measurements of price impact at different time 
intervals for different market capitalization groups,\1499\ measuring 
noise using the coefficient of variation (ratio of the standard 
deviation to the mean). The results are presented in Figure 22, which 
shows that the coefficient of variation of price impact decreases as 
the time horizon increases for smaller stocks, but increases as the 
time horizon increases for larger stocks. In other words, the time 
horizon that minimizes noise and best captures the inventory risk of 
liquidity providers varies depending on the market capitalization and 
liquidity of the stock. As a result, including multiple time horizons 
for realized spreads will make this measure more relevant across a 
wider range of stocks.
---------------------------------------------------------------------------

    \1498\ See supra note 1229 for an example.
    \1499\ Following the academic literature, results are presented 
separately for different market capitalization groups as a proxy for 
different liquidity variables, with high market capitalization 
correlating closely with higher liquidity. See supra note 1239 and 
corresponding text.

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[[Page 26564]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.031

    Second, as an additional method for measuring the time horizon that 
minimizes the noise embedded in the price impact component of realized 
spread measures, the Commission used the sample TAQ data described 
above \1500\ to estimate the signal-to-noise ratio in price impact 
estimates using an Ordinary Least Squares (OLS) regression.\1501\ The 
regression is estimated separately for each time interval 
considered.\1502\ Subsequently, for each time interval, the signal-to-
noise ratio is measured as the ratio of the variation in price impact 
that is explained by the explanatory variables of the regression (the 
``signal'') to the standard deviation of the residual from the 
regression, i.e., the variation in price impact that is uncorrelated 
with the explanatory variables (the ``noise'').\1503\ A higher signal-
to-noise ratio corresponds to a more informative measure of price 
impact, and therefore a more informative measure of realized 
spread.\1504\
---------------------------------------------------------------------------

    \1500\ See supra note 1238 for dataset description.
    \1501\ We regress price impact on explanatory variables 
identified as key drivers of price impact. Specifically, we include 
the (inverse of) trade price, logarithms of market capitalization 
and total trade volume, intra-day volatility and order imbalance, as 
well as the (logarithm of) share volume of retail trades and order 
imbalance of retail trades. These variables are similar to those in, 
e.g., A. Anand, P. Irvine et al., Performance of Institutional 
Trading Desks: An Analysis of Persistence in Trading Costs, 25 Rev. 
Fin. Studs. 557 (2012) and G.W. Eaton et al., Measuring 
Institutional Trading Costs and the Implications for Finance 
Research: The Case of Tick Size Reductions, 139 J. Fin. Econ. 832 
(2021). The regression is estimated using daily estimates at the 
stock level.
    \1502\ These time intervals are constructed using the following 
time horizons: 10 milliseconds, 50 milliseconds, 100 milliseconds, 
500 milliseconds, 1 second, 5 seconds, 10 seconds, 15 seconds, 1 
minute, and 5 minutes.
    \1503\ The underlying assumption is that the systematic 
variation in price impact is fully explained by the explanatory 
variables described in note 1501, supra. It is possible that there 
are variables, not included in the regression and not sufficiently 
correlated with the included variables, that are systematically 
driving the variation in price impact. These variables would be 
captured in the regression residual, which would inflate the 
estimate of the noise. However, to the extent that the effects of 
these omitted variables are relatively constant across time 
horizons, this should not drive the patterns in the signal-to-noise 
ratios across time horizons observed in Figure 19 infra.
    \1504\ See, e.g., G.P. Swann, Is Precise Econometrics An 
Illusion?, 50 J. Econ. Educ. 343-355 (2019).
---------------------------------------------------------------------------

    Figure 23 presents these ratios over all the time intervals for 
four market capitalization groups and shows clear differences between 
smaller and larger stocks. First, it is clear from the figure that 
larger, more liquid stocks have more informative measures of price 
impact than smaller, less liquid stocks. Second, for the two smaller 
stock groups, the results show a small but steady increase in the 
signal-to-noise ratio as the time horizon increases, implying that 
realized spread measures are becoming more informative as the noise in 
the price impact component decreases. This result supports

[[Page 26565]]

including a longer time horizon, i.e., 5 minutes, which maximizes the 
signal-to-noise ratio for these stocks.\1505\ Meanwhile, the largest 
stock group shows a different pattern: for these stocks, the signal-to-
noise ratio is largely decreasing in the time horizon, meaning that 
realized spreads are less informative at longer intervals. This result 
supports including a shorter time horizon, i.e., 10 or 50 milliseconds. 
The fact that the analysis for the smallest market capitalization 
stocks supports the inclusion of the longest time horizon examined, 
while the analysis for the largest market capitalization group points 
to the inclusion of the shortest time horizon examined, supports the 
inclusion of multiple time horizons across a broad range.
---------------------------------------------------------------------------

    \1505\ Figure 23 also shows a slight and temporary increase in 
the signal-to-noise ratio between 1 to 10 seconds for the largest 
market capitalization group, which could imply that a 1-second 
horizon is as informative as a 10 or 50 millisecond horizon. 
However, Figure 18 shows a monotonic increase in noise as the time 
horizon increases for the largest market capitalization group, 
implying that a shorter time horizon is always less noisy than a 
longer time horizon for these stocks. For this reason, there is 
additional value in including a time horizon that is shorter than 
one second.

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[[Page 26566]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.032


[[Page 26567]]


    While some commenters supported the usefulness of realized spreads 
as a measure of order flow characteristics,\1506\ several commenters 
opposed the inclusion of realized spread statistics in amended Rule 605 
reports.\1507\ One commenter stated that they ``[do] not believe a one-
size-fits-all metric can work'' because ``market participants all have 
different views as to what time period(s) is appropriate to measure 
realized spread, and this can also vary based on the specific symbol 
and type of order flow involved.'' \1508\ The Commission agrees, and 
this is why the Commission is adopting a range of realized spread 
metrics, each with a different time horizon, such that consumers of 
Rule 605 reports will be able to use different realized spread 
according to their potentially different needs or preferences. Another 
commenter stated realized spreads ``become largely useless when 
attempting to compare different types of order flow or market 
centers,'' such as between on-exchange and off-exchange trading.\1509\ 
While the commenter did not clarify why realized spreads are not able 
to be used to compare different types of order flow, offering market 
participants a range of time horizons will help market participants 
control for differences in order flow and market conditions, as they 
will be able to choose the time horizons that best suit their needs and 
the reporting entities' mix of stocks in terms of size and liquidity. 
Offering a range of realized spread time horizons is also consistent 
with industry practice among market participants, who often use ``mark-
out curves'' to compare across a range of time horizons, including at 
time horizons less than one second.\1510\ In addition, the Commission 
understands that the one-second time horizon is often used in 
industry,\1511\ and so including the one-second horizon in Rule 605 
reports will help bring reported realized spreads in line with industry 
practice.
---------------------------------------------------------------------------

    \1506\ These commenters discussed the usefulness of realized 
spreads within the context of advocating for their inclusion in Rule 
605 summary reports. In particular, one commenter stated that, when 
combined with effective spread statistics to calculate price impact, 
realized spreads ``provide better transparency regarding the 
distinct characteristics of order flow among brokers.'' Schwab 
Letter II at 3. Another commenter stated that ``the impact of . . . 
order flow characteristics [such as whether orders are classified by 
market participants as more or less informed or the size of orders 
relative to a stock's average daily value] can be measured, at least 
in part, through statistics such as realized spread and price 
impact.'' FIF Letter at 31-32.
    \1507\ See, e.g., SIFMA Letter at 32; Virtu Letter at 12; Rule 
605 Citadel Letter at 8. In addition, one commenter stated that they 
``do not believe realized spread is a key execution quality metric 
for retail investors.'' Robinhood at 46. The Commission agrees that 
realized spread is not a measure of execution quality. As stated in 
the Proposing Release and elsewhere in this release, realized 
spreads are useful for allowing market participants to control for 
differences in adverse selection risk across different market 
centers. See, e.g., Proposing Release, 88 FR 3786 at 3853, n.701 
(Jan. 20, 2023) and corresponding text.
    \1508\ See SIFMA Letter at 32.
    \1509\ See Citadel Letter at 8.
    \1510\ See, e.g., Bringing the Power of Signal V6 to D-Limit, 
IEX (Oct. 31, 2023), available at https://www.iex.io/article/bringing-the-power-of-signal-v6-to-d-limit (looking at mark-outs 
ranging from 1 millisecond to 1 minute); What Markouts Are and Why 
They Don't Always Matter, supra note 551 (looking at mark-outs 
ranging from 0 milliseconds to 1 minute); Securities Exchange Act 
Release No. 98625 (Sept. 28, 2023), 88 FR 68711 at 68713 (Oct. 4, 
2023) (SR-IEX-2023-10) (looking at mark-outs ranging from 1 
millisecond to 1 second); The Midpoint Extended Life Order (M-ELO): 
M-ELO Holding Period, NASDAQ (Feb. 13, 2020, 3:57 p.m. EST), 
available at https://www.nasdaq.com/articles/the-midpoint-extended-life-order-m-elo%3A-m-elo-holding-period-2020-02-13 (looking at 
mark-outs ranging from 0 milliseconds to 1 minute); MatchIt ATS 
Monthly Execution Metrics, Virtu, available at https://www.virtu.com/about/transparency/ (last visited Feb. 1, 2024, 1:34 
p.m.) (looking at mark-outs ranging from 500 milliseconds to 1 
minute); and How Periodic Auctions Enhance Trading in Europe and the 
U.S., CBOE (Sept. 13, 2023), available at https://www.cboe.com/insights/posts/how-periodic-auctions-enhance-trading-in-europe-and-the-u-s/ (looking at mark-outs ranging from 0 milliseconds to 1 
second).
    \1511\ See, e.g., All-in Economics to Trade Are What Matters 
Most, supra note 551; Proof's Public-facing TCA: Latest Results Over 
One Year of Data, ProofTrading (Mar. 23, 2023), available at https://prooftrading.com/docs/tca-202303.pdf; and Securities Exchange Act 
Release No. 81484 (Sept. 28, 2023), 88 FR 68711 at 68713 (Oct. 4, 
2023) (SR-IEX-2023-10); Sean Spector & Tori Dewey, Minimum 
Quantities Part I: Adverse Selection, IEX (Nov. 11, 2020), available 
at https://www.iex.io/article/minimum-quantities-part-i-adverse-selection; and Diana Kafkes et al., Applying Artificial Intelligence 
& Reinforcement Learning Methods Towards Improving Execution 
Outcomes (working paper Oct. 10, 2022), available at https://ssrn.com/abstract=4243985 (retrieved from SSRN Elsevier database).
---------------------------------------------------------------------------

(ii) Effective Spread
    The adopted amendment to require reporting entities to include 
information about average effective spreads for midpoint-or-better 
NMLOs,\1512\ in addition to market and marketable limit order types, 
will increase transparency about the availability of favorable 
executions for these types of orders.
---------------------------------------------------------------------------

    \1512\ See final 17 CFR 242.605(a)(1)(ii)(B); see also supra 
section III.B.4.(b)(2).
---------------------------------------------------------------------------

    For midpoint-or-better NMLOs, the high percentage of these orders 
submitted with IOC designations shown in Table 4 implies that a 
significant portion of these orders have the expectation of executing 
immediately, for example, against hidden or odd-lot liquidity inside of 
the spread. By definition, midpoint-or-better NMLOs will have an 
effective spread that is either zero (if at-the-midpoint) or positive 
(if beyond-the-midpoint), reflecting that the more aggressive of these 
orders are paying a higher percentage of the spread for this 
immediacy.\1513\ If a market center is offering lower effective spreads 
for midpoint-or-better NMLOs on average, that means that the market 
center is able to execute these orders closer to the midpoint, e.g., 
because the market center has liquidity available within the spread, 
or, in the case of wholesalers, the market center is willing to offer 
price improvement to beyond-the-midpoint orders and execute them at the 
midpoint. Therefore, information about effective spreads for midpoint-
or-better NMLOs will allow traders that use these orders as part of 
their trading strategies (and their broker-dealers) to make comparisons 
across market centers based on the profitability of these strategies.
---------------------------------------------------------------------------

    \1513\ By contrast, NMLOs that are priced worse than the 
midpoint will tend to have negative effective spreads (i.e., a 
gain). The Commission proposed including effective spreads for all 
NMLOs, and stated that effective spreads for NMLOs can be negative. 
Further, the Commission characterized the effective spread for NMLOs 
as a measure of ``how much customers can expect to be compensated 
for providing liquidity.'' Proposing Release, 88 FR 3786 at 3869 
(Jan. 20, 2023). One commenter stated that ``[t]he effective spread 
is not widely accepted as a meaningful measure of execution quality 
for NMLOs,'' and that ``[f]or orders submitted outside of the NBBO, 
the metric essentially amounts to negative one times the quoted 
spread at the moment the order becomes executable.'' Virtu Letter at 
14. The Commission agrees that this is the case. Furthermore, this 
will also be the case for orders submitted at the NBBO as well. 
Thus, for these orders, effective spread is a less meaningful 
measure of execution quality than for midpoint-or-better NMLOs, and 
thus is not adopting a requirement for effective spreads to be 
reported for NMLOs submitted at or below the NBBO.
---------------------------------------------------------------------------

    One commenter disagreed that price improvement information for 
beyond-the-midpoint orders will be useful for comparing across market 
centers because some of the price improvement of these orders is driven 
by the order's limit price, which is controlled by the investor, and 
not the market center.\1514\ The Commission agrees with the commenter 
that some of the price improvement for midpoint-or-better NMLOs, 
including the average effective spread, will be driven by the average 
limit prices of these orders received by a market center.\1515\ This 
may make it so

[[Page 26568]]

that a reporting entity that consistently handles more aggressively 
priced midpoint-or-better NMLOs reflects higher effective spreads on 
average. However, the Commission disagrees that this will make it so 
that these measures will not be comparable across reporting entities. 
To the extent that a market center is able to improve upon a midpoint-
or-better order's limit price by, e.g., offering better-priced 
liquidity within the spread and/or by offering the order price 
improvement, this will be reflected in and result in a better effective 
spread measure for that market center.
---------------------------------------------------------------------------

    \1514\ See Schwab Letter at 32.
    \1515\ This is true of all inside-the-quote NMLOs that are 
posted to the limit order book. For these orders, since the 
effective spread is measured using the midpoint as of the time of 
order executability (see final 17 CFR 242.600(b)(8)), the effective 
spread will simply be equal to the signed difference between the 
limit price and the midpoint at the time of executability, which, 
for inside-the-quote NMLOs, will be equivalent to the time of order 
submission.
---------------------------------------------------------------------------

    One commenter stated that ``the effective spread is not widely 
accepted as a meaningful measure of execution quality for NMLOs,'' and 
``does not measure a dimension of execution quality that is likely to 
differ across market centers'' because ``the NBBO midpoint at the 
moment the NBBO first touches the limit price . . . mechanically must 
be the same on every market center.'' \1516\ The commenter also states 
that ``[f]or orders submitted outside of the NBBO, the metric 
essentially amounts to negative one times the quoted spread at the 
moment the order becomes executable.'' \1517\ The Commission agrees 
that the distance between a NMLO's limit price and the NBBO will be the 
same across any market center, and also agrees that effective spreads 
may not be a meaningful measure of execution quality for NMLOs 
submitted outside of the NBBO for the reason referenced by the 
commenter. However, since midpoint-or-better NMLOs are able to transact 
at prices better than their limit prices (e.g., if there is liquidity 
available inside the quote), effective spreads for midpoint-or-better 
NMLOs will differ according to a market centers' ability to offer 
inside-the-quote liquidity or to execute beyond-the-midpoint orders at 
the midpoint. Therefore, while the Commission agrees with the commenter 
that effective spreads may not be a meaningful measure of execution 
quality NMLOs submitted at or outside of the NBBO, there are benefits 
to including information about effective spreads narrowly for midpoint-
or-better NMLOs.
---------------------------------------------------------------------------

    \1516\ See Virtu Letter II at 14.
    \1517\ See Virtu Letter II at 14.
---------------------------------------------------------------------------

(iii) Percentage Spreads (Effective and Realized)
    The adopted amendment requiring reporting entities to report 
average effective spreads and average realized spreads in percentage 
terms,\1518\ in addition to the preexisting requirement to report them 
in dollar terms,\1519\ will 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.\1520\ 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.\1521\ Percentage 
average spread measures, on the other hand, will better account for 
these differences in stock prices.\1522\ As different reporting 
entities handle and/or transact in different mixes of stocks with 
varying prices, including information about average percentage spreads 
will make it possible for market participants who want to compare 
reporting entities' overall spread measures or their spread measures 
for baskets of stocks to aggregate average spreads for a variety of 
stocks with varying prices.\1523\ This will facilitate a more apples-
to-apples comparison of both average effective and average realized 
spreads across reporting entities. Requiring information on the average 
percentage effective spread in addition to the average effective spread 
will 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.
---------------------------------------------------------------------------

    \1518\ See final 17 CFR 242.605(a)(1)(i)(P), (R), (T), (V), and 
(X).
    \1519\ See prior 17 CFR 242.605(a)(1)(i)(K) and (a)(1)(ii)(A).
    \1520\ This was supported by a commenter, who stated that 
``percentage-based spread measures would provide additional 
information at the individual stock level where there is a 
significant price change during a month.'' Better Markets Letter at 
9.
    \1521\ See supra note 1247 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.
    \1522\ See example in supra note 1247. 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.
    \1523\ 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 adopted amendment to require reporting entities to 
prepare summary reports that aggregate execution quality information 
for S&P 500 stocks, along with all NMS stocks, will give market 
participants access to aggregate effective spreads for one commonly 
used basket of stocks. Meanwhile, per-stock percentage spread 
information will enhance market participant's ability to aggregate 
effective spread information across baskets of stocks other than the 
S&P 500.
---------------------------------------------------------------------------

(iv) Effective Over Quoted Spread (E/Q)
    The adopted amendment requiring reporting entities to include 
information on effective over quoted spreads \1524\ will 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.\1525\ Therefore, including 
this measure will 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.\1526\ This is expected to result in increased 
competition on the basis of execution prices, which is expected to 
result in improved execution prices.
---------------------------------------------------------------------------

    \1524\ See final 17 CFR 242.605(a)(1)(ii)(D); see also supra 
section III.B.4.(d)(2).
    \1525\ See, e.g., About Us: Brokerage Built for You, Vanguard, 
available at https://investor.vanguard.com/about-us/brokerage-order-execution-quality (last visited Feb. 1, 2024, 1:41 p.m.). This was 
also confirmed by one commenter; see Schwab Letter at 3, stating 
that E/Q is a ``very common metric used within the industry to judge 
execution quality.''
    \1526\ Several commenters supported the idea that E/Q is a 
useful measure of price improvement. See, e.g., Better Markets 
Letter at 9; Vanguard Letter at 4; Schwab Letter at 31.
---------------------------------------------------------------------------

    Consistent with commenters' suggestions,\1527\ the Commission is 
adopting a spread-weighted average E/Q statistic, which is equivalent 
to the average effective spread divided by the average quoted spread, 
expressed as a percentage.\1528\ As stated by commenters, a key benefit 
of spread-weighted average E/Q statistics is that this method of 
weighting avoids the possibility that a market center could improve its 
E/Q statistics simply by reallocating its price improvement away from 
wide-spread stocks and to stocks

[[Page 26569]]

with narrower spreads.\1529\ To see this, consider a market center that 
executes 100-share trades in two stocks with very different spreads: 
Stock A with a quoted spread of $0.02, and Stock B with a quoted spread 
of $1.00. The market center offers both trades $0.01 of price 
improvement per share. Using a weighting scheme other than spread-
weighting, such as share-weighting,\1530\ the market center's average 
E/Q would be 0.5 * ($0.00/$0.02) + 0.5 * ($0.98/$1.00) = 49%. The 
market center could lower its average E/Q by simply reallocating the 
$0.01 of price improvement it offered to Stock B to Stock A; in this 
case, its average E/Q would be 0.5 * (-$0.02/$0.02) + 0.5 * ($1.00/
$1.00) = 0%.\1531\ This illustrates that share-weighting would allow a 
market center to improve its E/Q substantially by reallocating price 
improvement from wide-spread stocks to narrow-spread stocks, even 
though the dollar amount of price improvement that it offered to market 
participants did not change. With spread-weighting, however, the market 
center's E/Q after offering $0.01 to each stock would be 94.2%; after 
the reallocation of price improvement from Stock B to Stock A, the 
spread-weighted average E/Q would also be 94.2%.\1532\ In other words, 
the market center will not be able to improve its E/Q simply by 
reallocating its dollar price improvement among stocks with different 
spreads. This will lead to a more accurate measure of execution quality 
that is better able to facilitate comparisons of E/Q across market 
centers.
---------------------------------------------------------------------------

    \1527\ See, e.g., FIF Letter at 23-24; Rule 605 Citadel Letter 
at 5; Schwab Letter at 31; and Schwab Letter II at 4.
    \1528\ To see this, consider that the formula for calculating 
the spread-weighted average E/Q in the case of two trades of size s1 
and s2 with per-share effective spreads E1 and 
E2 and per-share quoted spreads Q1 and 
Q2, would be [s1Q1/(s1Q1 + s2Q2) x (s1E1/s1Q1)] + [s2Q2/
(s1Q1 + s2Q2) x (s2E2/s2Q2)]. This simplifies to (s1E1 + s2E2)/(s1Q1 
+ s2Q2), which is equivalent to the average effective spread divided 
by the average quoted spread. This result holds irrespective of the 
number of trades.
    \1529\ See, e.g., FIF Letter at 23-24; Rule 605 Citadel Letter 
at 5; Schwab Letter at 31; and Schwab Letter II at 4.
    \1530\ The formula for calculating the share-weighted average E/
Q in the case of two trades of sizes s1 and 
s2, with per-share effective spreads E1 and 
E2 and per-share quoted spreads Q1 and 
Q2, would be [s1/(s1 + s2) x (E1/Q1)] + [s2/(s1 + s2) x 
(E2/Q2)].
    \1531\ A lower E/Q corresponds to a better execution quality, as 
the trader whose order is being executed is paying a smaller 
percentage of the spread.
    \1532\ See supra note 1528 for the formula for calculating 
spread-weighted E/Q in the case of two trades.
---------------------------------------------------------------------------

    Several commenters suggested that Rule 605 reports not include E/Q 
and leave it to users of the report to calculate E/Q from other 
statistics.\1533\ In the Proposing Release, the Commission stated that, 
while E/Q can already be calculated from data that are already required 
by preexisting Rule 605,\1534\ calculating a share-weighted monthly 
average E/Q as the ratio of average effective spread to average quoted 
spread produces a noisier E/Q measure than one calculated on a per 
transaction basis.\1535\ The Commission made this statement in 
reference to the use of this ratio as an approximation of a share-
weighted measure of E/Q, as was proposed. For spread-weighted measures 
of E/Q, the formula for aggregating per-transaction measures of E/Q 
simplifies to precisely the ratio of average effective spreads to 
average quoted spreads.\1536\ Therefore, this issue of the usage of 
existing Rule 605 data producing a ``noisy'' approximation of E/Q is 
not relevant to the adopted amendment. Nevertheless, requiring a 
separate field for E/Q will increase the ability of market participants 
to access and utilize E/Q.\1537\ Furthermore, the Commission agrees 
with a commenter that adding rows and columns to the Rule 605 report 
will not substantially increase the costs to data users of processing 
these reports and storing the relevant data.\1538\ The added rows and 
columns will be part of the same machine-readable file using the same 
pipe-delimited ASCII format as the existing rows and columns, so data 
users will not incur any costs associated with converting between 
formats in order to store and use the newly reported information. 
Therefore, the marginal cost to data users of including E/Q as an 
additional column should be minimal. Because of the amended rule 
requiring the reporting of average quoted spread,\1539\ market 
participants will also be able to compare the spread-weighted average 
E/Q column directly to the columns containing average quoted spreads 
and average effective spreads.\1540\
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    \1533\ See FIF Letter at 20-21 (stating that for marketable 
order types, it is not necessary to include E/Q in the detailed 
reports required by Rule 605(a)(1) because E/Q can be derived from 
other data that are already included and these data, specifically, 
are found in the price improvement, price dis-improvement, and 
effective spread statistics); Schwab Letter at 31 (suggesting that 
the reports include effective and quoted spread and then allow 
individuals to compute E/Q).
    \1534\ See Proposing Release, 88 FR 3786 at 3817, n.399 (Jan. 
20, 2023): ``[Share-weighted] 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).''
    \1535\ To see this, consider a market center that, in a given 
month, executes two orders of sizes s1 and s2, 
with per-share effective spreads E1 and E2 and 
per-share quoted spreads Q1 and Q2. The 
formula for the share-weighted average E/Q is given in supra note 
1530. Approximating the share-weighted 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].
    \1536\ See supra note 1528 for the formula for calculating 
spread-weighted E/Q in the case of two trades.
    \1537\ See supra section III.B.4.d)(2) for further discussion.
    \1538\ See supra note 1496 and corresponding text for further 
discussion.
    \1539\ See final 17 CFR 242.605(a)(1)(ii)(A).
    \1540\ See, e.g., Professor Spatt et al. Letter, stating that 
``quoted spreads, for example, are critical for understanding and 
weighting both effective spreads and EFQ ratios.''
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(v) Size Improvement
    The adopted amendment expanding Rule 605 reporting requirements to 
include measures of size improvement will provide market participants 
with more information about an additional dimension of execution 
quality that has not been not fully captured by preexisting Rule 605 
statistics.\1541\ We expect this to be beneficial for evaluating 
execution of larger-sized orders, as these orders are the most likely 
to exceed the liquidity available at the best quotes and are therefore 
in a position to benefit the most from size improvement.
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    \1541\ This was also supported by one commenter, who stated that 
``[i]ncluding size improvement metrics will provide market 
participants with important information about an additional 
dimension of execution quality that is not currently captured by 
current Rule 605 statistics.'' Rule 605 Citadel Letter at 11. 
Another commenter stated that, along with other enhancements, the 
inclusion of the size improvement metric would ``improve order 
execution information available for market participants to make 
trading and order routing decisions . . .'' SIFMA Letter II at 25.
---------------------------------------------------------------------------

    The adopted amendment will 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 at 
the time of order receipt (or order executability in the case of 
marketable stop orders and midpoint-or-better orders) (``order size 
benchmark'').\1542\ Subtracting the order size benchmark from number of 
submitted shares yields ``outsized share count''--a measure of the 
opportunity to provide size

[[Page 26570]]

improvement.\1543\ In response to a commenter, Rule 605 reports as 
amended will also include a size improvement metric that will measure 
the level of size improvement in those instances in which the order 
presents an opportunity for size improvement (the ``size improved 
outsized shares'').\1544\ Dividing size-improved outsized shares by 
outsized share count yields the number of shares that receive size 
improvement (on orders in which size improvement is possible) as a 
fraction of the number of shares for which there is an opportunity to 
provide size improvement.
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    \1542\ See final 17 CFR 242.605(a)(1)(ii)(R). As discussed in 
supra section III.B.4.e)(2), this metric is designed 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 to fully execute. Since size improvement is 
measured using NBBO depth at the time of order receipt, a marketable 
limit order that partially executes, is posted to the limit order 
book, and then fully executes later, will be reflected in size 
improvement statistics. For example, assume that a market center 
receives a 500-share marketable limit order when there are 300 
shares available at the NBBO. The market center executes 300 of the 
500 shares against the available depth and posts the remaining 200 
shares to the limit order book, which becomes the new NBBO. A market 
order subsequently executes against those 200 shares. Since size 
improvement is based on order receipt time, the market center would 
record an order size benchmark of 300, 500 shares executed at the 
NBBO or better, and thus a size-improved outsized share count of 200 
shares.
    \1543\ Outsized Share Count = Number of Submitted Shares-Order 
Size Benchmark. Continuing the example from supra note 1557, while 
both Market Centers A and B would show a size improvement share 
count of 0, Market Center A will show an outsized share count of 
500-500 = 0, while Market Center B will show an outsized share count 
of 500-300 = 200.
    \1544\ See final 17 CFR 242.605(a)(1)(ii)(S), requiring the 
reporting of ``the sum of, for each execution of a covered order, 
the greater of: the total number of shares executed with price 
improvement plus the total number of shares executed at the quote 
minus the order size benchmark, or zero.'' The ``total number of 
shares executed with price improvement plus the total number of 
shares executed at the quote minus the order size benchmark'' (``net 
size improvement'') will only be a strictly positive number for 
those orders that are both eligible to receive size improve and 
receive size improvement, and thus is equivalent to a measure of 
shares that are eligible to and that received size improvement. To 
see this, consider that an order (``Order A'') whose size is less 
than the available NBBO depth will have a net size improvement of 0, 
an order (``Order B'') that is not executed despite available depth 
(or is executed as prices worse than the NBBO) will have a negative 
net size improvement, and an order (``Order C'') whose size exceeds 
the available NBBO depth by 300 shares and receives price 
improvement on those 300 shares will have a net size improvement of 
300 shares. Capping the net size improvement for these three orders 
at zero and then summing then would only capture the net size 
improvement for that order that was eligible to receive size 
improvement and that received size improvement, i.e., 0 + 0 + 300 
shares. A substantively similar measure (``the number (or 
percentage) of shares within the outsized orders that received size 
improvement (i.e., were executed at or better than the NBBO price, 
in excess of the amount of aggregate displayed liquidity at the 
NBBO)'') was suggested by a commenter. See Virtu Letter at 10. To 
the extent that the metric suggested by the commenter could capture 
size dis-improvement (i.e., negative values of net size 
improvement), this metric may not be equivalent to the size improved 
outsized share count.
---------------------------------------------------------------------------

    If information about size improvement were already captured by 
preexisting Rule 605 statistics, the addition of the order size 
benchmark and information about size improved outsized shares would not 
increase transparency. To examine the extent to which size improvement 
measures calculated using these metrics will contain information that 
is different from measures required by preexisting Rule 605, data from 
the Tick Size Pilot B.II Market and Marketable Limit Order dataset 
\1545\ were analyzed to calculate the average correlation \1546\ 
between price improvement, effective spreads, and the size improved 
outsized shares divided by the outsized share count (``outsized size 
improvement rate'').\1547\ As national securities exchanges and off-
exchange market centers differ in the extent to which they can offer 
size and price improvement, the Commission performed this analysis 
separately for these two different types of market centers.
---------------------------------------------------------------------------

    \1545\ See Tick Size Pilot Plan, supra note 1115. This dataset 
contains information for approximately 2,400 small cap stocks for a 
period from Apr. 2016 to Mar. 2019. Orders with special handling 
codes are discarded, as are orders marked as short sales (``SS''). 
As the Tick Size Pilot collected data only for small cap stocks, 
these execution times are not necessarily representative of all 
stocks. The Commission limited this analysis to a randomly selected 
sample of 100 stocks and for the time period of Mar. 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 IX.C.1.c)(2). However, it is unclear whether or how these 
effects would impact the correlations between these measures 
documented in this analysis.
    \1546\ 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 Pearson correlation 
coefficient is first calculated for each pair of execution quality 
metrics, for each market center-stock combination. Then value-
weighted average correlation coefficient across all stocks for each 
market center is constructed, using dollar volume as weights. The 
resulting correlation coefficients are then averaged across market 
centers using an equal-weighted average.
    \1547\ See final 17 CFR 242.605(a)(1)(ii)(S), requiring the 
reporting of the greater of the net size improvement rate and zero. 
See also supra note 1544. The size improved outsized shares are 
divided by the outsized share count to control for differences in 
size improvement opportunities at different market centers. For 
example, if Market Centers A and B both have 200,000 size improved 
outsized share counts, but Market Center A has an outsized share 
count of 800,000, and Market Center B has an outsized share count of 
1,800,000, Market Center A will be offering a higher rate of size 
improvement since it had fewer opportunities to provide size 
improvement. To capture this, the size improved outsized share count 
is divided by the outsized share count, such that Market Center A 
will have an outsized size improvement rate of 200,000/800,000 = 25% 
and Exchange B will have an outsized size improvement rate of 
200,000/1,800,000 = 11%. This difference recognizes that Exchange A 
and Exchange B provided size improvement to the same number of 
shares, but Exchange A gave size improvement to a larger percentage 
of its orders for which there was an opportunity to provide size 
improvement.

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[[Page 26571]]

    Results are presented in Table 8 \1548\ 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. However, this correlation is 
nearly zero for the outsized size improvement rate, implying that 
effective spreads are a poor measure of size improvement.
---------------------------------------------------------------------------

    \1548\ This analysis has been updated from the Proposing 
Release; see Proposing Release, 88 FR 3786 at 3871 (Jan. 20, 2023). 
In the Proposing Release, the measure of size improvement used in 
the analysis was constructed as the net size improvement divided by 
the order size benchmark. In response to commenters, the measure of 
size improvement used in the analysis in Table 8 has been updated in 
two ways. First, the size improvement measure has been updated to 
include outsized share count in the denominator, rather than the 
order size benchmark. As pointed out by commenters, since the order 
size benchmark contains information about the volumes of orders that 
do not have an opportunity to receive size improvement, dividing 
size improvement metrics by this number will dilute measures of size 
improvement. See supra note 1555 and corresponding text for further 
discussion. Second, the size improvement measure has been updated to 
use the size improved outsized share count in the numerator, rather 
than net size improvement. This is because net size improvement 
contains information about size dis-improvement, which can be 
negative even for orders that do not have an opportunity to receive 
size improvement. See supra note 1544 for further discussion. Using 
the size improved outsized share count focuses the analysis on those 
orders that are eligible to receive size improvement and receive 
size improvement. The Commission is amending Rule 605 to include the 
size improved outsized share count in response to a commenter, who 
suggested a similar measure. See Virtu Letter at 10; see also supra 
note 1544. However, both size improvement measures lead to similar 
average correlations, and thus these changes did not affect the 
Commission's conclusions from this analysis relative to the 
Proposing Release, namely that price improvement and size 
improvement each convey different information about execution 
quality.
[GRAPHIC] [TIFF OMITTED] TR15AP24.033

    The correlation between price improvement and the outsized size 
improvement rate is comparatively low. The fact that price improvement 
and size improvement metrics are not strongly correlated implies that 
each of these measures to some degree conveys different information 
about execution quality. Therefore, including the order size benchmark 
and size improved outsized shares into Rule 605 reporting requirements 
will provide market participants with more information about an 
additional dimension of execution quality that was not fully captured 
by Rule 605 statistics prior to these amendments.
    The Commission expects that these amendments will improve execution 
quality in terms of size improvement by increasing the extent to which 
market centers and broker-dealers compete with one another on the basis 
of their ability to offer size improvement. In order to attract broker-
dealer order flow, market centers will 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, will be able to use this metric to discern which reporting 
entity might offer better size improvement to their orders, which will 
allow them to make better routing decisions and obtain increased size 
improvement as a result.\1549\ As a result, competition on the basis of 
size improvement among reporting entities is expected to increase in 
order to attract these customers and their orders.
---------------------------------------------------------------------------

    \1549\ See supra note 1257 for an example of how a size 
improvement measure might be useful for a trader when deciding 
between different market centers.
---------------------------------------------------------------------------

    One commenter stated that ``[to] accurately identify size 
improvement not only would proprietary depth of book feeds be required, 
the statistic would be misleading as it would not reflect . . . top of 
book across public quotes, nor would it reflect hidden or mid-point 
priced orders which are extremely prevalent in today's market if sole 
reliance was on the SIP.'' \1550\ The Commission acknowledges that the 
adopted measures of size improvement in some cases will not be as 
informative as a measure that incorporates full depth-of-book 
information.\1551\ The Commission also acknowledges that it might not 
reflect top of book across

[[Page 26572]]

public quotes,\1552\ or reflect hidden liquidity. However, the adopted 
measures will not be misleading as stated by the commenter,\1553\ but 
will be useful for investors for the reasons given above. For example, 
size improvement statistics for exchanges will account for hidden 
liquidity, and therefore, by comparing size improvement across exchange 
and off-exchange market centers, investors could account for the 
effects of hidden liquidity.\1554\
---------------------------------------------------------------------------

    \1550\ See Healthy Markets Letter at 18.
    \1551\ See infra sections IX.E.3.d)(1) and IX.E.3.d)(2) for a 
discussion of two reasonable alternatives related to including 
dollar size improvement relative to full depth-of-book in amended 
Rule 605 reports.
    \1552\ For example, if Exchange A's top-of-book is quoting 
$10.00-$10.01 and sets the NBBO, and Exchange B's top-of-book is 
quoting $9.99-$10.02, the adopted size improvement measures will 
only include volume quoting at $10.00-$10.01. Depth quoted at $9.99-
$10.02, while protected, will not be incorporated into the adopted 
size improvement metrics. See 17 CFR 242.600(b)(70) for the 
definition of a protected bid and protected offer.
    \1553\ See Healthy Markets Letter at 18.
    \1554\ Since information about hidden liquidity is not publicly 
available, even a size improvement measure that incorporate full 
depth-of-book information would not incorporate information about 
hidden liquidity. The Commission acknowledges that, to the extent 
that including measures of size improvement in Rule 605 reports 
incentivizes hidden liquidity at the cost of displayed orders, this 
represents a potential cost of the amendments, though the Commission 
does not believe that this scenario is likely. See infra section 
IX.D.2.b)(3) for a full discussion.
---------------------------------------------------------------------------

    One commenter stated that the proposed size improvement benchmark 
metric ``is not a useful measure of the actual size improvement,'' 
because the benchmark measure will ``include all orders in the 
calculation, even when there is no opportunity to provide size 
improvement,'' which ``dilutes the amount and obfuscates the value of 
size improvement provided when the need for size improvement actually 
exists.'' \1555\ The commenter suggested that the Commission consider 
requiring the reporting of several additional metrics that are ``not 
affected by orders in which there was no need to provide size 
improvement.'' \1556\
---------------------------------------------------------------------------

    \1555\ See Virtu Letter at 10.
    \1556\ See Virtu Letter at 10.
---------------------------------------------------------------------------

    The Commission agrees that whether there was an opportunity to 
provide size improvement is an important aspect of an analysis of size 
improvement.\1557\ The Commission is adopting a metric (the size-
improved outsized shares) that is substantively similar to the 
commenter's suggested metric, namely the number of shares within 
outsized orders that receive size improvement.\1558\ The Commission 
observes further that the opportunity to provide size improvement can 
be calculated using a combination of two metrics that will be available 
in the amended reports: number of submitted shares and benchmark order 
size. Subtracting the order size benchmark from number of submitted 
shares yields ``outsized share count''--a measure of the opportunity to 
provide size improvement.\1559\ Because the benchmark order size is 
capped at the order size, and thus will be equal to zero for orders 
sized below available NBBO depth, the outsized share count will be the 
same number regardless of whether it includes all orders or only all 
outsized orders. Dividing size-improved outsized shares by outsized 
share count yields the number of shares that receive size improvement 
(on orders in which size improvement is possible) as a fraction of the 
number of shares for which there is an opportunity to provide size 
improvement. It is thus a measure of size improvement diluted by orders 
for which there were no opportunities to provide size improvement.
---------------------------------------------------------------------------

    \1557\ To see this, consider two market centers, A and B, that 
both receive a market sell order for 500 shares. When Market Center 
A receives the order, there are 600 shares available at the NBB, and 
Market Center A executes the entire 500-share order at the NBB. 
Meanwhile, while Market Center B receives the order, there are 300 
shares available at the NBB. Market Center B executes 300 of the 500 
shares at the NBB, and the remaining 200 shares walk the book. Both 
market centers would similarly show a size improvement share count 
of 0. However, this would not capture the fact that Market Center A 
never had the opportunity to provide size improvement (because the 
NBB depth was sufficient to fill the order), and Market Center B did 
not provide size improvement, though it had the opportunity to do 
so.
    \1558\ See Virtu Letter at 10, stating ``the number (or 
percentage) of shares within the outsized orders that received size 
improvement (i.e., were executed at or better than the NBBO price, 
in excess of the amount of aggregate displayed liquidity at the 
NBBO).'' This measure is substantively similar to the measure of 
size improved outsized shares included in the amended rule. See 
final 17 CFR 242.605(a)(1)(ii)(S).
    \1559\ Outsized Share Count = Number of Submitted Shares-Order 
Size Benchmark. Continuing the example from supra note 1557, while 
both Market Centers A and B will show a size improvement share count 
of 0, Market Center A will show an outsized share count of 500-500 = 
0, while Market Center B will show an outsized share count of 500-
300 = 200.
---------------------------------------------------------------------------

    Another commenter was critical of the benefits of the proposed size 
improvement measure because ``it would indicate only whether and the 
number of shares for which size improvement was achieved,'' and ``it 
would not indicate whether and to what extent such size improvement 
increased the amount of price improvement.'' \1560\ The Commission 
acknowledges that the measures of size improvement included in the 
amended rule will measure size improvement in terms of numbers of 
shares, and not in terms of a dollar value of price improvement 
resulting from size improvement. The Commission considered but is not 
adopting several alternatives that would measure size improvement in 
terms of a dollar amount of price improvement.\1561\ Market 
participants will be able to assess some information about price 
improvement from the price improvement statistics included in the 
amended reports, though these measures of price improvement will not 
consider prices and depth beyond those at or inside of the NBBO.\1562\
---------------------------------------------------------------------------

    \1560\ See CCMR Letter at 12.
    \1561\ See infra sections IX.E.3.d)(1) and IX.E.3.d)(2).
    \1562\ This includes, for example, price improvement relative to 
the NBBO, price improvement relative to the best displayed price, 
and the effective spread. See final 17 CFR 242.605(a)(ii)(B), (F), 
and (M).
---------------------------------------------------------------------------

(vi) Riskless Principal Trades
    The adopted amendment requiring that market centers include 
riskless principal trades in the category of trades executed away from 
the market center \1563\ will increase transparency about 
internalization by wholesalers, as information on the extent to which 
wholesalers internalize order flow has been obscured by the preexisting 
Rule 605 requirement to include riskless principal trades into the 
category of trades executed at, rather than away from, the market 
center.\1564\ Market participants will 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.
---------------------------------------------------------------------------

    \1563\ See final 17 CFR 242.605(a)(1)(i)(F).
    \1564\ See supra section IX.C.3.c)(10) for a discussion of how 
classifying riskless principal trades in the category of executions 
taking place at the market center may have obscured the extent to 
which wholesalers internalize order flow prior to these amendments.
---------------------------------------------------------------------------

    One commenter stated that the statement in the Proposing Release 
that ``execution quality statistics would be more informative to market 
participants'' \1565\ as a result of the re-classification of riskless 
principal trades was ``misleading,'' because ``[t]he execution quality 
metrics reported under Rule 605 correctly take into account all orders 
routed to a wholesale broker-dealer (irrespective of where execution 
occurs)'' and ``[t]his would not change under the Proposal.'' \1566\ 
The Commission agrees that the calculation of execution quality metrics 
takes into account both executions at and away from the reporting 
center, and that this will not change after the re-classification of 
riskless principal trades. However, as the Commission stated in the 
Proposing Release, requiring the separate reporting of

[[Page 26573]]

riskless principal transactions from executions at the market center 
will be useful ``when interpreting and comparing information about 
wholesalers' execution quality.'' \1567\ For example, if market 
participants observe a persistent difference in execution quality 
between wholesalers that largely internalize order flow and wholesalers 
that execute most on a riskless principal basis, they may surmise that 
this difference in execution quality is driven at least in part by the 
levels of internalization. In this way, execution quality statistics 
will be more informative.
---------------------------------------------------------------------------

    \1565\ See Proposing Release, 88 FR 3786 at 3819 (Jan. 20, 
2023).
    \1566\ See Rule 605 Citadel Letter at 10.
    \1567\ See Proposing Release, 88 FR 3786 at 3858 (Jan. 20, 
2023).
---------------------------------------------------------------------------

(vii) Price Improvement
    The amendment to Rule 605 requiring, for marketable order types 
(i.e., market, marketable limit, and marketable IOC orders), as well as 
for midpoint-or-better limit orders, reporting entities to disclose 
price improvement statistics using the best available displayed price 
as the benchmark \1568\ will 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 will 
reflect a price dis-improvement of $0.05. This will 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. 
Thus, market participants (including broker-dealers) will be able to 
identify those market centers that execute orders at prices better than 
the best available displayed price, taking into account all available 
displayed liquidity.\1569\ This will 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). Continuing the previous example, a market center 
internalizing an order will not be able to post a positive price 
improvement metric when a better-priced odd-lot was available at 
another market center.\1570\ 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.
---------------------------------------------------------------------------

    \1568\ See final 17 CFR 242.600(b)(14) (defining the ``best 
available displayed price'') and 242.605(a)(1)(ii)(M) through (Q); 
see also supra section III.B.4.g)(2) for further discussion of these 
amendments.
    \1569\ If only the NBBO is used as the benchmark for the adopted 
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 will be the same as the price improvement 
statistics currently included in Rule 605 and will not have 
significant economic effects. See supra note 719.
    \1570\ One academic study found that incorporating information 
about the best odd-lot price into the NBBO for the purposes of 
calculating price improvement decreased estimates of price 
improvement by 2.44 percentage points. See Battalio & Jennings, 
supra note 1253, at 17.
---------------------------------------------------------------------------

    Multiple commenters supported including a measure of price 
improvement relative to the best displayed price.\1571\ However, 
several commenters stated that the measure would be ``misleading,'' 
particularly because it does not account for the size available at the 
best displayed price.\1572\ The Commission recognizes that an odd-lot 
price that is better than the NBBO may not reflect sufficient quantity 
to execute certain orders, particularly larger-sized orders, and, as a 
result, price improvement relative to the best displayed price will be 
more relevant in some cases and for some orders than for others.\1573\ 
However, the Commission disagrees that this will result in the measure 
being misleading. First, since orders will be grouped in notional order 
size buckets and broken out separately into fractional, odd-lot, and 
round lot orders, Rule 605 reports will present the price improvement 
statistics related to best available displayed price in a format that 
will make it possible to focus in on those smaller-sized orders for 
which the measure is most informative.\1574\ Second, in cases where the 
depth available at the best displayed price is insufficient to fill all 
or most orders, such that executions relative to the best displayed 
price reflect price dis-improvement, this will be similarly true for 
all reporting entities. If the reporting entity does execute against 
the depth that is available, and/or otherwise achieves price 
improvement for its handled orders, the reporting entity may still 
reflect a negative value for price improvement relative to the best 
displayed price, but less negative than that of a reporting entity that 
did not offer any price improvement. Thus, to the extent that Rule 605 
reports will primarily be used by market participants to compare 
execution quality across market centers and across broker-dealers, a 
measure of price improvement relative to the best displayed price will 
not be misleading and will still allow market participants to identify 
reporting entities offering better execution quality, in terms of which 
reporting entity has offered a lower amount of price dis-improvement 
relative to the best displayed price (i.e., a less negative 
number).\1575\
---------------------------------------------------------------------------

    \1571\ See, e.g., Better Markets Letter at 9; Angel Letter at 3.
    \1572\ See, e.g., SIFMA Letter at 32; Schwab Letter II at 6; 
Rule 605 Citadel Letter at 6; Robinhood Letter at 47.
    \1573\ For example, price improvement relative to the best 
displayed price will typically always be relevant for fractional 
orders less than one share, and may often be relevant for odd-lots, 
since it is more likely that odd-lot volume would equal or exceed 
depth at the best displayed price. Price improvement relative to the 
best displayed price may also be relevant for round lots if 
aggregated odd-lot volume across market centers is sufficient to 
fill the order, if there is hidden liquidity available at the best 
displayed price, or if market centers such as wholesalers take the 
best displayed price into account when actively offering price 
improvement when executing orders against its own inventory.
    \1574\ See supra section III.B.4.g)(2) for further discussion.
    \1575\ For example, consider an extreme case in which the volume 
available at the best displayed price is only one share. Unless it 
is a fractional order, in all likelihood a market center will not be 
able to execute sufficient volume at the best displayed price, and 
thus would always reflect dis-improvement relative to the best 
displayed price (unless it was able to achieve price improvement via 
other means). For example, assuming that the best displayed price is 
$0.01 better than the NBBO, for a market center that was able to 
execute a 100-share order against that 1 share, its share-weighted 
average price dis-improvement relative to the best displayed price 
would be -$0.009, compared to -$0.01 for a market center that 
executed an entire 100-share order at the NBBO.
---------------------------------------------------------------------------

    Other commenters stated that including two sets of price 
improvement metrics using two different reference points would be 
confusing for retail investors,\1576\ and that including price 
improvement relative to the best displayed price would ``add 
unnecessary complexity to the report.'' \1577\ The Commission is 
mindful that an increase in the complexity of Rule 605 reports may make 
it difficult for individual investors to review and digest the detailed 
reports. However, it is also important that market participants have 
access to a variety of detailed execution quality information to meet 
their various purposes. Statistics on price improvement relative to the 
best available displayed price will provide a useful data point for 
market participants to consider, in addition to statistics on price 
improvement relative

[[Page 26574]]

to the NBBO.\1578\ Furthermore, it is likely that many individual 
investors will not face this issue as the Commission expects that many 
will exclusively make use of Rule 605 summary reports, which will only 
include one measure of price improvement, i.e., price improvement 
relative to the NBBO.\1579\
---------------------------------------------------------------------------

    \1576\ See Robinhood Letter at 47. Similarly, another commenter 
stated that ``an odd-lot NBBO creates ambiguity.'' Data Boiler 
Letter at 28.
    \1577\ See Schwab Letter II at 6.
    \1578\ See supra section III.B.4.g)(2) for further discussion.
    \1579\ See supra section III.B.4.g)(2) for further discussion.
---------------------------------------------------------------------------

    Commenters were also critical of the inclusion of price improvement 
information for non-marketable limit orders, because ``price 
improvement is only a relevant statistic for marketable group orders'' 
\1580\ and because, for beyond-the-midpoint orders, ``the fact that the 
limit order's price between the midpoint and far touch (exclusive) is a 
variable controlled by the individual investor--and is responsible for 
some of its `price improvement.' '' \1581\ The Commission agrees that 
some of the price improvement associated with non-marketable limit 
orders will be driven by the order's limit price, which is outside of a 
reporting entities' control. In Rule 605 as amended, price improvement 
will be required to be reported only for one particular type of non-
marketable limit order, i.e., midpoint-or-better NMLOs. These NMLOs in 
particular can execute at prices better than their limit price, 
particularly if they have a significant likelihood to immediately 
execute against hidden or odd-lot liquidity inside the spread.\1582\ 
Therefore, it is not always the case that price improvement statistics 
for non-marketable limit order will be a function of the order's limit 
price alone, but will also reflect a reporting entities' ability to 
offer inside-the-quote liquidity that is priced better than the order's 
limit price. This will particularly be the case for midpoint-or-better 
NMLOs. Therefore, price improvement statistics for this order type will 
benefit consumers of Rule 605 reports.
---------------------------------------------------------------------------

    \1580\ See FIF Letter at 21.
    \1581\ See Schwab Letter II at 7. Though the commenter only 
mentioned the importance of an order's limit price in the context of 
price improvement for beyond-the-midpoint orders, the Commission 
recognizes that the same could be said for other types of non-
marketable limit orders.
    \1582\ See, e.g., results from Table 4, showing that a larger 
percentage of these orders are submitted with IOC designations.
---------------------------------------------------------------------------

(viii) Relative Fill Rates
    The adopted amendment requiring reporting entities to report the 
number of shares that executed regular way at prices that could have 
filled an executable NMLO while the order was in force will promote 
transparency regarding differences in the execution probabilities of 
NMLOs between reporting entities. This will increase the ability of 
investors and their broker-dealers to route orders to those reporting 
entities with higher fill rates of executable NMLOs (including limit 
orders submitted with stop prices and at-and-beyond-the-midpoint 
NMLOs). Market participants will 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. In order to attract this order flow, reporting 
entities will need to improve their ability to achieve executions for 
executable NMLOs. Market centers can 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.\1583\ Broker-dealers 
can 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. Reporting entities will be required to 
report the cumulative number of shares both across all market centers, 
as well as only across national securities exchanges. The Commission 
agrees with a commenter that information about the cumulative number of 
shares executed regular way on national securities exchanges will be 
useful for market participants because it will exclude liquidity that 
potentially was not accessible to a reporting entity.\1584\
---------------------------------------------------------------------------

    \1583\ See, e.g., Price List--Trading Connectivity, NASDAQ, 
available at https://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2 (last visited Feb. 1, 2024, 3:52 
p.m.), which describes how one market center charges its members a 
penalty for exceeding a certain ``Weighted Order-to-Trade Ratio.''
    \1584\ See FIF Letter at 22. For example, there are difference 
in fair access rules between national securities exchanges and other 
trading venues, such as ATSs.
---------------------------------------------------------------------------

    Furthermore, the adopted amendment requiring the reporting of the 
number of orders that received either a complete or partial fill will 
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.\1585\
---------------------------------------------------------------------------

    \1585\ 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, 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) Improvements to Accessibility
    Execution quality will also increase as a result of the adopted 
amendment requiring reporting entities to prepare human-readable 
summary reports,\1586\ as market participants will be better able to 
use information from Rule 605 reports to compare execution quality 
across reporting entities and competition among reporting entities on 
the basis of execution quality will increase as a result. The data 
generated under Rule 605 are complex, and the raw data may be difficult 
for some market participants to interpret and aggregate. 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, 
will be better able to access information from Rule 605 reports to 
compare execution quality across larger broker-dealers, which will 
increase the extent to which these broker-dealers will need to compete 
on the basis of execution quality to attract and retain these 
customers.
---------------------------------------------------------------------------

    \1586\ See final 17 CFR 242.605(a)(2).
---------------------------------------------------------------------------

    The usefulness of summary reports particularly for individual 
investors was supported by several commenters.\1587\ However, other 
commenters stated that summary reports could be misleading if they do 
not allow investors to control for potential differences in reporting 
entities' order flow characteristics when assessing execution 
quality.\1588\ The Commission agrees that differences in execution 
quality can be driven by differences between reporting entities other 
than differences in their skills at handling and/or executing orders, 
such as differences in the characteristics of their order flow,\1589\ 
and thus 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

[[Page 26575]]

entities.\1590\ The statistics required in the summary reports will 
strike this balance. First, market participants will be able to control 
for the average order sizes handled by a particular market center in 
several ways. For example, the summary reports will allow market 
participants to examine execution quality statistics separately for 
different notional order size buckets,\1591\ as well as to control for 
the average notional order size within each order size bucket.\1592\ 
Second, information about realized spreads will allow market 
participants to control for differences in reporting entities' order 
handling practices during times of market stress or high adverse 
selection.\1593\
---------------------------------------------------------------------------

    \1587\ See, e.g., Vanguard Letter at 4; Nasdaq Letter at 46; 
Fidelity Letter at 1; NASAA Letter at 6.
    \1588\ See, e.g., Virtu Letter at 6; Rule 605 Citadel Letter at 
4. Another commenter, while agreeing with the Commission's intent of 
``enhanced disclosure,'' was critical of the summary report as 
proposed, stating that it ``fails to allow for an apples-to-apples 
comparison, which directly subverts the Commission's stated goals.'' 
Schwab Letter at 31.
    \1589\ See supra note 984 for an example of how differences in 
order flow characteristics can impact inferences about execution 
quality.
    \1590\ See, e.g., Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 
75423 (Dec. 1, 2000).
    \1591\ See final 17 CFR 242.605(a)(2).
    \1592\ See final 17 CFR 242.605(a)(2)(ii). The inclusion of 
average notional order size in the summary reports was suggested by 
a commenter, who stated that, ``since a broker's average order size 
can impact its average execution quality metrics, providing this 
transparency to users of the Summary Report will mitigate the 
potential for misinterpretation of the data and better inform 
individual investors when they compare brokers.'' Schwab Letter II 
at 3.
    \1593\ As suggested by commenters, information about average 
realized spreads may also allow market participants to control for 
potential differences in order flow characteristics. See, e.g., FIF 
Letter at 32; Schwab Letter II at 3. One commenter specifically 
mentioned the extent to which market participants classify order 
flow as informed and the size of an order relative to the ADV of a 
stock as examples of such order characteristics. See FIF Letter at 
32.
---------------------------------------------------------------------------

    In a change from the proposal, the amended rules require the use of 
CSV and PDF formats for the summary report, rather than XML and PDF 
formats as proposed.\1594\ One commenter recommended the use of CSV 
rather than XML for the summary reports, stating that CSV ``would allow 
investors to compare summary data across firms more readily.'' \1595\ 
Like XML and PDF, CSV is an ``open standard,'' a term that is generally 
applied to technological specifications that are widely available to 
the public, royalty-free, at no cost. Many investors and other members 
of the public may find a CSV file format preferable to an XML file 
format because the data can be more readily viewed and analyzed in 
widely used spreadsheet applications. Replacing the proposed XML format 
requirement with a CSV format requirement will likely facilitate use of 
the summary reports, thereby heightening the transparency benefits that 
the summary reports will create.\1596\
---------------------------------------------------------------------------

    \1594\ See final 17 CFR 242.605(a)(2).
    \1595\ See FIF letter at 5, 32.
    \1596\ The efficiency of processing and analyzing summary 
reports may further increase if a third-party determined to provide 
a centralized location from which market participants can retrieve 
all summary reports. See, e.g., Regulatory Notice.
---------------------------------------------------------------------------

    Unlike the CSV format, the PDF format is generally meant for a 
human reader rather than for a machine reader. Requiring market centers 
and broker-dealers to post a PDF version of the summary report will 
allow an individual human reader to open and read a summary report 
without having to download the data into a spreadsheet or other 
analytical program. This will make the information in the summary 
reports accessible to a broader range of individual users. In addition, 
because PDF documents are presented consistently across websites, 
operating systems, and applications, the PDF requirement will provide 
individual human readers with more comparable summary reports and 
facilitate their understanding of the reported summary execution 
statistics.
    Requiring market centers to post summary reports in two formats 
(PDF and CSV) will permit market participants to use the summary 
reports for a variety of different purposes. For example, a retail 
investor could use the PDF version of a market center's latest summary 
report to easily identify the percentage of shares executed at the 
quote or better at that market center. By contrast, a broker-dealer 
assessing its own order routing practices could download the CSV 
versions of 10 different market centers' summary reports in each of the 
preceding 12 months, and identify which of those market centers had 
consistent month-to-month increases in percentage of shares executed at 
the quote over that period.
(c) Other Benefits From Increased Competition
    To the extent that these 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. 
Improvements in areas other than execution quality because 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 these 
amendments to the extent that these improvements are complementary. 
Furthermore, to the extent that these amendments increase competition 
in related markets, market participants may 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 to compete with the publicly available data under Rule 605.
(d) Potential Limitations to Benefits
    There are certain factors, however, that could limit the benefits 
of these amendments for transparency and competition, which could limit 
the effectiveness of these amendments in improving execution quality.
(1) Effect on Smaller Broker-Dealers
    The expanded scope of Rule 605 includes only 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 relative to larger broker-dealers, as they will 
not incur the compliance costs of preparing Rule 605 reports. Also, 
increased levels of competition among larger broker-dealers may spill 
over to affect smaller broker-dealers, as their customers may expect 
more transparency, and smaller broker-dealers will continue to be able 
to publish ad hoc execution quality reports that focus on execution 
quality metrics in which they perform well.\1597\ Altogether, the 
cumulative effects on smaller broker-dealers, who handle only a 
fraction of all customer accounts and a minority of orders,\1598\ and 
whose customers may be more likely to be institutional investors (who 
have alternative sources of information about their broker-dealers' 
execution quality) \1599\ are likely to be small, and limiting the 
scope of Rule 605 to larger broker-dealers is designed to achieve the 
competitive effects discussed in prior sections.\1600\
---------------------------------------------------------------------------

    \1597\ These information asymmetries are described in more 
detail in supra section IX.C.1.a).
    \1598\ See infra section IX.E.1.a) for a discussion of an 
analysis showing that broker-dealers with 100,000 customers or 
greater handled 59.5% of customer orders and 98.3% of customer 
accounts identified in the data sample. If these smaller broker-
dealers attract enough customers such that they represent a more 
significant fraction of orders, it is likely they will also 
subsequently fall above the customer account threshold and be 
required to begin publishing Rule 605 reports.
    \1599\ See discussion infra section IX.E.1.a).
    \1600\ See supra section IX.D.1.a)(1) for a discussion of the 
effects of the amendments expanding the scope of reporting entities 
to include larger broker-dealers on competition among broker-dealers 
on the basis of execution quality.
---------------------------------------------------------------------------

    One commenter stated that smaller broker-dealers could be 
disadvantaged by not being required to prepare Rule 605 reports, which 
could lead to the

[[Page 26576]]

``further concentration and funneling of customer order flow among a 
small portion of broker-dealers.'' The commenter stated that 
``[p]roviding execution quality reports constitute a significant 
advantage . . . and could be a tipping point in their decision to part 
away with their current broker-dealer.'' \1601\ As discussed above, it 
is also possible that smaller broker-dealers may gain a competitive 
advantage in the form of lower costs because of not having to prepare 
Rule 605 reports. To the extent the smaller broker-dealers are 
disadvantaged by not making Rule 605 reports available, there is 
nothing that precludes them from preparing and publishing reports that 
comply with Rule 605 requirements.\1602\ However, the Commission 
acknowledges that it is possible that, because of these amendments, 
smaller broker-dealers that are unable,\1603\ 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 may cause some smaller broker-dealers 
to exit the market.\1604\ The Commission is unable to quantify the 
likelihood that a brokerage firm will cease operating because of an 
inability to compete with the transparency offered by larger broker-
dealers, and commenters did not provide data that would support such an 
analysis. Even if some smaller broker-dealers were to exit, the 
Commission does not believe this will significantly impact competition 
in the market for brokerage services because the market is served by a 
large number of broker-dealers.\1605\ The Commission recognizes that 
smaller broker-dealers may have unique business models that are not 
currently offered by competitors, but other broker-dealers, including 
new entrants, could create similar business models if demand is 
adequate.
---------------------------------------------------------------------------

    \1601\ See Letter from JT at 1-2.
    \1602\ The costs for smaller broker-dealers to prepare execution 
quality reports may not be the same as the costs for larger broker-
dealers. See infra section IX.D.2.b)(2) for further discussion.
    \1603\ 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 may be unable to offer 
the same level of transparency even if they prepare an execution 
quality report containing all of the information and according to 
the exact specifications of Rule 605.
    \1604\ This was also acknowledged in the Proposing Release. See 
Proposing Release, 88 FR 3786 at 3876 (Jan. 20, 2023).
    \1605\ See supra section IX.C.4.a)(1) for a discussion of the 
current structure of the market for brokerage services.
---------------------------------------------------------------------------

    One commenter stated that excluding smaller broker-dealers from 
reporting requirements means that ``only 6.7% of broker-dealers'' would 
be subject to reporting requirements, and ``[c]ustomers who use smaller 
broker-dealers are just as entitled to information about how their 
orders are or may be handled as customers who use larger broker-
dealers.'' \1606\ The Commission agrees that lowering the threshold 
would be beneficial if more broker-dealer customers are able to benefit 
from the adopted modifications to reporting entities; however, an 
analysis shows that a customer account threshold of 100,000 customer 
accounts includes more than 98% customer accounts, and that those 
customers whose accounts are not included are more likely to be 
institutional investors, who have alternative sources of information 
about their broker-dealers' execution quality.\1607\
---------------------------------------------------------------------------

    \1606\ See Robinhood Letter at 45.
    \1607\ See discussion infra section IX.E.1.a).
---------------------------------------------------------------------------

    The same commenter also stated that limiting the Rule 605 reporting 
requirements to larger broker-dealers would ``create an information gap 
about new entrants to the retail broker-dealer space where there may be 
a greater need to see data about execution quality.'' \1608\ As stated 
above, it is possible that an increase in competition among larger 
broker-dealers on the basis of execution quality may spill over to 
affect smaller broker-dealers, as their customers may expect more 
transparency; \1609\ this could be true of new entrants to the market 
for brokerage services as well. If this occurs, then customers of new 
entrants may also benefit from increased transparency. However, absent 
the standardized reporting standards under Rule 605, new entrants may 
be able to publish ad hoc execution quality reports that focus on 
execution quality metrics in which they perform well, and thus it is 
possible that these customers may continue to face some information 
asymmetries.\1610\ As described above, this is expected to be a 
minority of customers.\1611\
---------------------------------------------------------------------------

    \1608\ See Robinhood Letter at 45.
    \1609\ See also Proposing Release, 88 FR 3786 at 3876 (Jan. 20, 
2023).
    \1610\ These information asymmetries are described in more 
detail in supra section IX.C.1.a).
    \1611\ See supra note 1599 and corresponding text.
---------------------------------------------------------------------------

(2) Switching Costs
    The effects of these amendments to Rule 605 on competition among 
reporting entities 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 among reporting 
entities on the basis of execution quality is limited, this could limit 
the extent to which execution quality will improve as a result of these 
amendments.\1612\
---------------------------------------------------------------------------

    \1612\ 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 will optimally want to switch between 
reporting entities will likely be more limited, and in this case 
switching costs may be a relatively small and/or short-term 
friction.
---------------------------------------------------------------------------

    First, if the costs for customers to switch broker-dealers are 
significant,\1613\ this will 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 facilitates 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.\1614\
---------------------------------------------------------------------------

    \1613\ See supra section IX.C.4.a)(1) for a discussion of costs 
related to switching broker-dealers.
    \1614\ See supra note 1289 for an example.
---------------------------------------------------------------------------

    Second, the presence of switching costs that broker-dealers incur 
from changing the primary trading venues to which they route orders 
\1615\ may limit the effects of these amendments on competition among 
market centers. However, the Commission expects this to be less of an 
issue for the larger broker-dealers that will be required to produce 
Rule 605 reports,\1616\ as these broker-dealers will 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

[[Page 26577]]

might have with individual market centers.
---------------------------------------------------------------------------

    \1615\ See supra section IX.C.4.b)(2) for discussions of costs 
broker-dealers may face when switching trading venues.
    \1616\ The competitive effects of these amendments will 
principally accrue to larger broker-dealers, who will be required to 
prepare Rule 605 reports, and thus will be the 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 IX.D.2.b)(2). For these smaller broker-
dealers, switching costs may be more binding.
---------------------------------------------------------------------------

(3) Limited Usage and Search Costs
    The benefits of these amendments to Rule 605 for transparency, 
competition, and execution quality may be limited if market 
participants are not likely to make use of the additional information 
available under these 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,\1617\ which in certain circumstances may be more relevant 
for institutional investors than aggregate information about the 
execution quality of broker-dealers' held orders \1618\ and may lead to 
a low usage rate by institutional investors of larger broker-dealers' 
Rule 605 reports. This could limit the benefits of these 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 with which an investor does not do 
business,\1619\ these amendments will likely impact competition for 
institutional brokerage services as well.
---------------------------------------------------------------------------

    \1617\ See supra note 1003 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.
    \1618\ See supra section IX.C.4.a)(1)(b) for a discussion of 
institutional investors' usage of not held orders.
    \1619\ See discussion in supra section IX.C.2.c).
---------------------------------------------------------------------------

    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) 
will increase as a result of the amendments modifying the coverage of 
orders and expanding the information required by Rule 605.\1620\ As 
stated by some commenters,\1621\ both of these factors may make the 
evaluation of the raw data in Rule 605 reports costlier. One commenter 
stated that ``[f]urther transparency that generates costs, but if not 
used by customers, is a waste of resources and ultimately would create 
costs without any real benefits.'' \1622\ The Commission disagrees that 
the amended rule will result in costs without any benefits. The amended 
rule will result in numerous benefits described above. Furthermore, the 
increase in complexity of Rule 605 reports is not likely to 
significantly reduce the benefits of the amended rule. The Commission 
agrees with a commenter's statement that, since they are designed to be 
machine-readable, increasing the number of rows in Rule 605 reports is 
not likely to significantly increase market participants' cost to 
process and interpret these reports.\1623\ 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 data as a result of its increase in complexity,\1624\ 
the Commission expects that independent analysts, consultants, broker-
dealers, the financial press, academics, and market centers will 
continue to respond to the needs of investors by analyzing the 
disclosures and producing more digestible information using the 
data.\1625\ This was supported by one commenter, who stated that ``even 
though a certain percentage of retail investors may not read the Rule 
605 reports, they will still benefit indirectly as the enhanced 
disclosure will promote competition, improve regulatory oversight, and 
facilitate use by third-party researchers and academics.'' \1626\
---------------------------------------------------------------------------

    \1620\ For example, dividing each notional order size bucket up 
into further categories to capture lot type will increase the 
complexity of Rule 605 reports by increasing the number of rows.
    \1621\ See, e.g., Robinhood Letter at 41-42, stating that ``the 
volume and complexity of Rule 605 reports would only increase if 
Proposed Rule 605 were adopted because more market participants, 
more orders, and more statistics would be included in the reporting, 
making them even harder to read;'' Data Boiler Letter, stating that 
the proposed statistics were ``overly complicated for the average 
investors to digest;'' Tastytrade Letter at 4, stating that ``under 
the new proposal by the Commission, 605 reports would expand to 
thirty-seven columns wide and forty-two rows deep. That will result 
in 1,554 data points per ticker on a universe of approximately 
10,000 NMS traded products.''
    \1622\ See Tastytrade Letter at 5.
    \1623\ See, e.g., FIF Letter at 16, stating that ``[a]dding rows 
and columns to the Rule 605 report, within reason, would not 
materially increase the costs of processing these reports and 
storing the relevant data,'' and that ``[the Rule 605 report] is 
intended to be machine-readable, not human-readable.''
    \1624\ See supra section IX.C.2.b) for a discussion of the 
difficulties that individual investors may face when accessing Rule 
605 reports.
    \1625\ See, e.g., supra notes 1076-1077, describing the use of 
Rule 605 data in academic literature, in comment letters related to 
Commission and SRO rulemaking, and the financial press.
    \1626\ See Better Markets Letter at 9-10.
---------------------------------------------------------------------------

    The benefits of these amendments to Rule 605 for transparency, 
competition, and execution quality may also be limited by the presence 
of search costs. These amendments are expected to increase the number 
of Rule 605 reporting entities from 228 to 343.\1627\ Market 
participants that demand a complete or mostly complete set of Rule 605 
reports will need to search through and download reports from a greater 
number of websites, which will increase their search costs.\1628\ If, 
in order to avoid this increase in search costs, market participants do 
not incorporate execution quality information from the additional 
reporting entities into their search or analysis of Rule 605 reports, 
this will limit the benefits of the expansion of Rule 605 reporting 
entities.
---------------------------------------------------------------------------

    \1627\ See supra section VIII.C for a description of these 
estimates.
    \1628\ See supra section IX.C.3.d) for a discussion of the 
search costs associated with collecting information from Rule 605 
reports.
---------------------------------------------------------------------------

(4) Liquidity Externalities
    The effects of these amendments to Rule 605 on competition among 
market centers may be limited by the development of liquidity 
externalities, or the consolidation of liquidity on a few dominant 
market centers.\1629\ Under such circumstances, while the consolidation 
of liquidity on market centers offering superior execution quality may 
benefit market participants in the short run,\1630\ 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 some smaller market centers will 
cease

[[Page 26578]]

operating, and commenters did not provide data to support such an 
analysis.
---------------------------------------------------------------------------

    \1629\ 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).
    \1630\ There is a large body of academic literature that 
examines the benefits to traders from the consolidation of 
liquidity. See, e.g., H. Mendelson, Consolidation, Fragmentation, 
and Market Performance, 22 J. Fin. and Quantitative Analysis 189 
(1987), in which the author finds that ``fragmentation reduces the 
expected quantity traded, increases the price variance faced by 
individual traders, and reduces the expected gains from trade.'' See 
also Pagano, supra note 1629, in which the author finds that the 
concentration of liquidity is generally more efficient than 
fragmentation, and Madhavan, supra note 1629, in which the author 
finds that ``fragmentation results in higher price volatility and 
violations of price efficiency.'' At the same time, there is also a 
large body of literature examining the competitive benefits of 
fragmentation; see, e.g., T. Hendershott & H. Mendelson, Crossing 
Networks and Dealer Markets: Competition and Performance, 55 J. Fin. 
2071 (2000); B. Boehmer & E. Boehmer, Trading Your Neighbor's ETFs: 
Competition or Fragmentation?, 27 J. Banking & Fin. 1667 (2003).
---------------------------------------------------------------------------

(5) Dimensions of Execution Quality Not Captured by Rule 605 Reports
    The expected benefits from these 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.\1631\
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    \1631\ See, e.g., Carole Comerton-Forde & Kar Mei Tang, 
Anonymity, Liquidity and Fragmentation, 12 J. Fin. Mkt. 337 (2009), 
who found 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.
---------------------------------------------------------------------------

    Furthermore, the extent to which the reported statistics are 
perceived as an insufficiently timely proxy for a reporting entities' 
ability to secure favorable executions may dampen the benefits of these 
amendments for execution quality. This may happen if, for example, 
future market developments render the monthly reporting requirement too 
infrequent to be useful.
    In this vein, one commenter stated that policymakers should not 
``prescribe or endorse certain statistical benchmarks,'' because 
``other shopping comparisons emphasize different aspects, such as 
customer service,'' \1632\ and that ``one group may prefer one set of 
benchmarks that make their brands look better.'' \1633\ This commenter 
instead stated that, ``[i]f any constituent including the regulators 
want to have comprehensive metrics produced, let's have the vendors 
compete for their business.'' \1634\ The Commission agrees with the 
commenter that different market participants may have preferences for 
different aspects of execution quality, and acknowledges that not all 
of these aspects may be included in Rule 605 reports as amended. The 
Commission also acknowledges that, to the extent that this causes 
market participants to focus on some dimensions of execution quality to 
the detriment of others, these amendments may reduce execution quality 
along certain dimensions that may be relevant to some investors.\1635\ 
The Commission also recognizes that the different reporting entities 
may also have a preference for those benchmarks that make them look the 
most favorable.\1636\ However, rather than being exacerbated by the 
``prescription'' of standardized metrics, having a standardized set of 
execution quality metrics will alleviate this concern by requiring the 
disclosure of metrics that market participants are able to compare 
across reporting entities using the same set of metrics. It is unlikely 
that a set of standardized metrics will result from a competitive 
environment, for the reasons described in the Market Failures 
section.\1637\
---------------------------------------------------------------------------

    \1632\ See Data Boiler Letter II at 1. Another commenter 
similarly stated that the use of the summary reports to compare 
across broker-dealers could be misleading if they do not account for 
``other aspects of the services that brokers provide or offer, 
including fees, interest rates, commissions, ease of use, customer 
service, accessibility, tools, and educational resources.'' Virtu 
Letter at 11.
    \1633\ See Data Boiler Letter II at 1. This commenter also 
stated that they did not support the prescription or endorsement of 
statistical benchmarks because ``[s]ome benchmarks use the average 
rather than the median (tail risk).'' The Commission agrees that 
statistics calculated using the median rather than the mean is often 
preferred when dealing with data that contain extreme outliers, such 
as some of the data being collected under Rule 605 (such as time-to-
execution). However, as stated by another commenter, medians are 
problematic in that they cannot be aggregated across rows. See FIF 
Letter at 21-22; see also infra section IX.E.3.b)(1) for further 
discussion.
    \1634\ See Data Boiler Letter II at 1.
    \1635\ See infra section IX.D.2.b)(3) for further discussion.
    \1636\ See supra section IX.B for further discussion.
    \1637\ See supra note 976 and corresponding text.
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(e) Interacting Benefits of the Final Rule and the MDI Rules
    The Commission received a comment stating that the MDI Rules, once 
implemented, could have positive interacting effects with the final 
Rule 605 amendments.\1638\ The Commission anticipates that the 
additional information contained in consolidated market data once the 
MDI Rules are implemented will allow more informed order routing 
decisions. This in turn will help facilitate best execution, which will 
reduce transaction costs and increase execution quality.\1639\ However, 
given that the MDI Rules have not yet been implemented, data that will 
be required for a quantitative analysis of a baseline that includes the 
effects of the MDI Rules, and of the benefits of the final Rule 605 
amendments with new baseline assumptions, are not available. Instead, 
the Commission has included assumptions about the effect of the MDI 
Rules in its baseline and has analyzed the benefits and costs relative 
to this baseline.\1640\
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    \1638\ See Robinhood Letter at 39 (``The SEC contemplates that 
amending Rule 605 could improve execution quality, including by 
improving execution prices, execution speeds, size improvement, and 
fill rates. . . These potential benefits are likely enhanced when 
combined with the anticipated effects of the pending MDI Rules and 
our recommended changes regarding the Tick Size Proposal . . . the 
MDI Rules, by adjusting round lot sizes and enhancing the 
information displayed on the consolidated market data feeds, are 
expected to increase competition and encourage price improvement''); 
id. at 40.
    \1639\ See section IX.C.1.c)(2), infra, discussing benefits and 
costs based on implementation assumptions.
    \1640\ See id.
---------------------------------------------------------------------------

2. Costs
    As discussed in detail below, the Commission recognizes that these 
amendments to Rule 605 will 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 these 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.\1641\
---------------------------------------------------------------------------

    \1641\ See supra section VIII for a discussion of how these 
amendments will create burdens under the PRA.
---------------------------------------------------------------------------

(a) Compliance Costs
    The majority of costs related to these amendments to Rule 605 will 
be in the form of compliance costs, including both initial and ongoing. 
Table 9 provides a summary of the estimated change in compliances costs 
\1642\ resulting from these amendments. The majority of both initial 
and ongoing compliance costs will be related to expanding the scope of 
reporting entities. However, a significant portion of initial 
compliance costs will also result from the amendments modifying the 
coverage of orders and information required by Rule 605, as market 
centers that were required to prepare Rule 605 reports (``prior 
reporters'') will need to update their systems, and additionally some 
new market centers trading in fractional shares will be required to 
report. Lastly, compliance costs resulting from the amendment requiring 
reporting entities to prepare summary execution quality reports will 
mostly be ongoing.
---------------------------------------------------------------------------

    \1642\ The discussion in section VIII.D considers the total 
expected ongoing compliance costs for all reporting entities, both 
new respondents and prior respondents. To focus on the costs that 
will directly follow from these amendments, this section focuses on 
the expected change in ongoing costs, which excludes the portions of 
ongoing costs that prior respondents incurred prior to these 
amendments.

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[[Page 26579]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.034

    Table 9 further breaks aggregate 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 aggregate costs presented may 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 reporting entities are able to 
more cost-effectively contract with third-party vendors to prepare 
their reports.\1643\ 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 made use of third-party vendors to prepare their Rule 605 
reports prior to these amendments, nor the percentage of entities that 
will make use of third-party vendors following these amendments. 
Therefore, the Commission is basing its compliance cost estimates on 
the highest of its estimated costs to prepare of Rule 605 reports in 
order to be conservative, which is equivalent to the cost of in-house 
preparation of Rule 605 reports ($51,648 per respondent per 
year).\1644\
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    \1643\ The Commission estimates that, while preparing in-house 
reports will result in an annualized ongoing cost of $51,648 per 
respondent, contracting with a third party to prepare Rule 605 of 
their behalf will result in an annualized ongoing cost of between 
$36,000 and $42,000 per respondent. See supra note 957 and 
corresponding text. The Commission uses the higher estimate of in-
house reporting in the present analysis to obtain a more 
conservative estimate of potential costs.
    \1644\ See supra note 1643.
---------------------------------------------------------------------------

(1) Compliance Costs Related To Expanding the Scope of Rule 605 
Reporting Entities
    As a result of the amendments expanding the scope of Rule 605 
reporting entities, market centers and broker-dealers that were not 
required to publish Rule 605 reports prior to these amendments will 
incur initial costs to prepare and post Rule 605 reports for the first 
time, which may include developing any policies and procedures that may 
be needed to do so, and ongoing costs to continue to prepare them each 
month. Larger broker-dealers will incur initial and ongoing compliance 
costs as a result of the amendment expanding the scope of Rule 605 
reporting entities to include larger broker-dealers. Similarly, the 
amendments requiring reporting entities to prepare separate reports for 
their SDPs will result in market centers that, prior to these 
amendments, were not required to prepare Rule 605 reports facing 
initial and ongoing compliance costs. The Commission estimates that 85 
broker-dealers, along with 10 SDPs operated by broker-dealers,\1645\ 
will be required to start publishing Rule 605 reports as a result of 
the amendment expanding the scope of Rule 605 reporting entities.\1646\ 
Table 10 breaks down the initial and ongoing compliance costs 
associated with these two types of reporting entities.
---------------------------------------------------------------------------

    \1645\ See infra section IX.E.1.a) for a discussion of the 
estimated number of larger broker-dealers (i.e., broker-dealers that 
introduce or carry customers above a threshold number of customer 
accounts), that will be required to prepare execution quality 
reports pursuant to final Rule 605, defining the customer account 
threshold as 100,000 customer accounts.
    \1646\ In addition, the Commission estimates that 20 market 
centers that trade exclusively in fractional shares will be required 
to prepare Rule 605 reports for the first time. See infra section 
IX.D.2.a)(2) for a discussion of the expected compliance costs for 
these reporting entities.

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[[Page 26580]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.035

    New reporters will face one-time, initial compliance costs to 
prepare Rule 605 reports for the first time, which may include costs to 
develop and implement procedures. It is likely that the majority of 
these costs will 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 will 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 
will 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,\1647\ 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.\1648\ These new 
reporters likely retained most, if not all, of the underlying raw data 
necessary to generate these reports in electronic format prior to these 
amendments, or obtained this information from publicly available data 
sources, and calculated similar measures to those that will be required 
under Rule 605 for their own internal purposes prior to these 
amendments.\1649\ However, as a result of the amendments, new reporters 
may have to acquire or develop data specialists and/or programmers to 
the extent that the information required by Rule 605 is different or 
more complex than the information that the new reporters typically 
process, and/or acquire legal specialists to help ensure compliance 
with Rule 605.
---------------------------------------------------------------------------

    \1647\ See supra section IX.C.1.c)(2) for a discussion of the 
unimplemented MDI Rules.
    \1648\ For example, a broker-dealer that routes an order away 
for execution will receive time of order execution and execution 
price as part of the trade confirmation provided by the execution 
venue. The broker-dealer can 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. With respect to 
NMLOs, the broker-dealer can 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.
    \1649\ For example, broker-dealers may calculate similar 
measures as part of their Best Execution Committees' periodic 
review. See supra note 1100 and accompanying text.
---------------------------------------------------------------------------

    One commenter stated that requiring larger broker-dealers to newly 
prepare Rule 605 reports will be costly because ``[t]his is not a type 
of report that broker-dealers that are not also market centers 
generally prepare.'' \1650\ Another commenter stated that the broad 
scope of the proposed inclusion of larger retail broker-dealers will 
impose significant costs.\1651\ The Commission acknowledges that many 
larger broker-dealers will not have previous experience with preparing 
Rule 605 reports, and for that reason has allocated estimates of 
initial compliance costs to first-time reporters, including broker-
dealers, that are higher than those allocated to prior reporters.\1652\
---------------------------------------------------------------------------

    \1650\ See Robinhood Letter at 42. The commenter suggested that, 
rather than Rule 605 reports, broker-dealers should be required to 
submit expanded Rule 606 reports that contain information about 
execution quality. See infra section IX.E.5.b) for a discussion and 
the Commission's response to this alternative.
    \1651\ See Cambridge Letter at 7.
    \1652\ Specifically, while the analysis in Table 9 assigns 
first-time respondents, such as larger broker-dealers, a per-
respondent initial compliance cost of $40,150, the analysis in Table 
10 assigns preexisting reporting entities, who have experience with 
preparing Rule 605 reports, a much lower initial per-respondent cost 
of $20,075.
---------------------------------------------------------------------------

    These compliance costs related to expanding the scope of Rule 605 
reporting entities may be under- or overestimated to the extent that 
larger broker-dealers, which are assumed to have the same ongoing 
compliance costs as market centers and the same initial and ongoing 
compliance costs as SDPs operated by broker-dealers, may 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 did not obtain transaction 
information, such as the time of order execution and execution price, 
from trade confirmations provided by execution venues prior to these 
amendments, and therefore will need to develop the procedures for doing 
so. Broker-dealers

[[Page 26581]]

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 have calculated similar measures as part of their 
Best Execution Committees' periodic review prior to these 
amendments.\1653\ In addition, the Commission does not believe that 
there will 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 will face higher or 
lower compliance costs than market centers, the Commission is 
conservatively estimating that broker-dealers will incur the same 
compliance costs as other types of reporting entities.
---------------------------------------------------------------------------

    \1653\ See supra section IX.C.2.d); see, e.g., Virtu Letter at 
11, stating that ``many retail brokers already monitor execution 
quality on these and other order types excluded under current Rule 
605 when measuring the execution quality provided by market 
centers.''
---------------------------------------------------------------------------

    Furthermore, many of the larger broker-dealers that will be newly 
included in the scope of reporting requirements have experience with 
filing Rule 605 reports prior to these amendments; e.g., because they 
operate an ATS, engage in market making, or are otherwise affiliated 
with market centers that filed Rule 605 reports prior to these 
amendments.\1654\ Likewise, broker-dealers that operate SDPs could also 
have lower initial costs to the extent that these SDPs qualified as 
market centers that were required to publish Rule 605 reports prior to 
these amendments. In both cases, these reporting entities can leverage 
this experience to prepare the reports for these additional lines of 
businesses more cost effectively.
---------------------------------------------------------------------------

    \1654\ For example, based on larger broker-dealers' answers in 
their Q4 2022 FOCUS Report Form X-17A-5 Schedules I and II, the 
Commission estimates that 28 out of the 85 broker-dealers identified 
as introducing or carrying at least 100,000 customer accounts also 
engage in OTC or specialist market making activities. Specifically, 
16 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, 
19 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. An analysis in the Proposing Release of Q4 2021 
FOCUS Report Form X-17A-5 Schedules I and II found similar results. 
See Proposing Release, 88 FR 3786 at 3880, n.968 (Jan. 20, 2023).
---------------------------------------------------------------------------

    One commenter stated that ``many broker-dealers outsource 
reporting,'' and that ``bringing that reporting in-house would be a 
substantial cost.'' \1655\ The amended rule does not preclude larger 
broker-dealers from outsourcing the preparation of its Rule 605 reports 
by contracting with third parties. Broker-dealers that are scoped into 
Rule 605 reporting requirements will be able to continue to use third 
parties to prepare their execution quality metrics, to the same extent 
that they found it optimal to do so prior to these amendments.
---------------------------------------------------------------------------

    \1655\ See TastyTrade Letter at 5.
---------------------------------------------------------------------------

(2) Compliance Costs Related to Modifications to the Coverage of Orders 
and Information Required by Rule 605 Reports
    As a result of the amendments modernizing and expanding the 
coverage of orders and information required by Rule 605 reports, 
reporting entities will incur initial compliance costs and additional 
ongoing compliance costs.\1656\ First, the estimated 228 prior 
reporters \1657\ will 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 will need to be collected and 
stored.\1658\ Second, the adopted amendment expanding the coverage of 
order sizes included in Rule 605 to include orders for less than one 
share will result in an additional estimated 20 market centers that 
trade exclusively in fractional shares to be required to begin filing 
Rule 605 reports.\1659\ Third, the 16 national securities exchanges and 
1 national securities association will be required to amend the Rule 
605 NMS Plan to account for the new data fields required to be 
reported. Table 11 breaks down the associated initial and ongoing 
compliance costs.
---------------------------------------------------------------------------

    \1656\ This analysis compares the costs that will accrue to new 
reporting entities, including larger broker-dealers and SDPs, to a 
baseline world in which these entities do not have to publish Rule 
605 reports. As such, this section does not consider the cost of the 
amendments modifying the coverage and information required by Rule 
605 to apply to first-time reporting entities, as these entities 
instead will face the costs of initially developing systems to 
prepare Rule 695 reports (rather than, e.g., modifying existing 
systems).
    \1657\ See supra note 942 and accompanying text for a discussion 
of this estimate.
    \1658\ One commenter stated that ``[a]dding rows and columns to 
the Rule 605 report, within reason, would not materially increase 
the costs of processing these reports and storing the relevant 
data.'' FIF Letter at 16. If so, then this could be a mitigating 
factor to the Commission's estimates of the increase in current 
reporting entities' compliance costs.
    \1659\ Using a sample of CAT from Mar. 2022, the Commission 
identified 19 firm MPIDs that executed fractional shares during the 
sample time period that did not have a corresponding Rule 605 
report; this was rounded up to 20 to be conservative. A similar 
analysis using a more recent sample of CAT data found 19 firms that 
exclusively executed fractional shares for at least one month during 
calendar year 2023; however, an estimate of 20 firms has been 
maintained to be conservative. Based on FOCUS data from calendar 
year 2022, these firms are relatively large, with an average net 
capital of $1.75 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 ($1.6 billion). In 
fact, the Commission estimates that 15 of these market centers that 
exclusively execute fractional shares are also larger broker-dealers 
that meet the customer account threshold. This implies that there 
may be 5 broker-dealers that will be newly required to produce Rule 
605 reports related to their activity as market centers as a result 
of trading in fractional shares, that will not be larger broker-
dealers and thus will not need to produce Rule 605 reports related 
to their broker-dealer activities. See supra section II.A.2.b) for a 
discussion of the requirement that larger broker-dealers that are 
also market centers produce separate reports pertaining to each 
function. However, the Commission believes this to be an upper 
bound, as several of these identified broker-dealers either engage 
in trading of non-fractional orders in some months (likely odd 
lots), or have greater than 100,000 customers in some months. 
Similar numbers were found using 2021 FOCUS data in the Proposing 
Release; Proposing Release, 88 FR 3786 at 3880, n.971 (Jan. 20, 
2023). To the extent that a market center that exclusively executes 
fractional shares is also a broker-dealer that meets or exceeds the 
customer account threshold, then this reporting entity will be 
required to file separate Rule 605 reports pertaining to each 
function. See supra section II.A.2.b).
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BILLING CODE 8011-01-P

[[Page 26582]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.036

BILLING CODE 8011-01-C
    As a result of these amendments, prior reporters will incur initial 
compliance costs to update their systems to collect and store new 
information.\1660\ For example, prior reporters will 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 will need to update their systems to 
reclassify certain orders, such as IOCs, riskless principal orders, and 
midpoint-or-better NMLOs, into new or different order type categories. 
Similarly, prior reporters will need to expand their data collection 
systems to incorporate additional order sizes, including odd-lots, 
fractional orders, and larger-sized orders.
---------------------------------------------------------------------------

    \1660\ The Commission assumes that the majority of reporting 
entities' initial burden hours under the PRA will be spent updating 
current systems as a result of the many changes to Rule 605, and 
thus estimates that 30 of the 50 initial burden hours estimated for 
prior reporters and described in supra note 951 will be allocated to 
compliance with the amendments modifying the information contained 
in Rule 605.
---------------------------------------------------------------------------

    Prior reporters will also incur initial compliance costs to update 
their data

[[Page 26583]]

processing software to generate modernized and additional metrics. For 
example, prior reporters will need to update their methodologies for 
calculating realized spread to include additional measures, and will 
need to develop programs (i.e., code) to calculate newly required 
metrics, such as E/Q. Some of the metrics will involve matching trade 
information to data elements that were not required by Rule 605 prior 
to these amendments but that can be obtained from public data sources, 
such as the best displayed price for calculating price improvement 
relative to the best displayed price,\1661\ and the number of shares 
displayed at the NBBO for calculating the benchmark measure related to 
size improvement.\1662\ As stated by a commenter, the Consolidated 
Audit Trail currently requires firms to report order events with at 
least a millisecond granularity.\1663\ Thus, it is likely that the cost 
to prior reporters of updating their systems to record timestamps in 
terms of milliseconds rather than seconds will be minimal.\1664\
---------------------------------------------------------------------------

    \1661\ See supra section III.B.4.g)(2) for a discussion of the 
data required to calculate this measure. Under MDI Rules, competing 
consolidators are not required to offer products that include all 
core data items, and therefore some competing consolidators may 
offer products that do not contain all information that will be 
required for calculating Rule 605 statistics, such as odd-lot 
information for the purposes of calculating the best displayed 
price. However, as discussed in section IX.C.1.c)(2) supra, the 
Commission believes that for competitive reasons at least one 
competing consolidator will offer a data product that contains all 
core market data items. To the extent that a reporting entity would 
have subscribed to a cheaper data product if not for these 
amendments to Rule 605, the need to subscribe to a more expensive 
data product represents an additional cost of complying with Rule 
605 as amended.
    \1662\ See supra section III.B.4.e)(2) for a discussion of the 
data required to calculate this measure.
    \1663\ See FIF Letter at 17.
    \1664\ The commenter also stated that many market centers 
typically already record events with even greater precision. See FIF 
Letter at 17, stating that ``[m]arket centers, in particular, 
typically record trading events with greater precision than 
milliseconds.''
---------------------------------------------------------------------------

    After prior reporters update their systems to reflect the 
amendments, it is likely that changes to their ongoing costs will be 
limited, as the process for generating and publishing Rule 605 reports 
will largely be unchanged.\1665\ This is because most reporting 
entities retained most, if not all, of the underlying raw data 
necessary to generate the additional data elements prior to these 
amendments, 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 
prior reporters are already doing, such as monitoring and debugging 
these statistical programs.
---------------------------------------------------------------------------

    \1665\ One exception is the adopted amendment requiring 
reporting entities to prepare summary reports summarizing key 
information from their Rule 605 reports. The Commission assumes that 
current reporters will face additional ongoing costs as a result of 
this amendment, and discuss these costs in infra section 
IX.D.2.a)(3).
---------------------------------------------------------------------------

    One commenter stated that some of the amendments will impose 
additional costs on reporting entities as a result of an increase in 
the complexity of the calculations.\1666\ Another commenter stated that 
they believe that the estimated annual costs associated with the 
Proposed Rule 605 were underestimated, because they ``neglect[ed] to 
take into account dedicated staff time needed for data reconciliation 
and validation and other ongoing compliance costs.'' These commenters 
did not provide the Commission with data regarding what an appropriate 
estimate of the annual compliance burden would be. However, the 
Commission recognizes that there may be some additional ongoing costs 
to the extent that some metrics introduced under these amendments may 
require more data storage or more complex calculations, such that the 
cost of preparing monthly Rule 605 reports may increase. Therefore, in 
response to these commenters, the Commission has increased its 
allocation of additional ongoing costs to account for additional costs 
of maintaining programmers and systems analysts for the ongoing 
technical support of Rule 605 reports.\1667\
---------------------------------------------------------------------------

    \1666\ See, e.g., BlackRock Letter at 4.
    \1667\ Specifically, three additional ongoing monthly burden 
hours per respondent have been allocated to prior reporters to 
account for the need to maintain a technical staff, such as 
programmer(s) and systems analyst(s), in addition to the one 
additional hour in the Proposing Release. See footnote to Table 10; 
see also Proposing Release, 88 FR 3786 at 3881, n.976 (Jan. 20, 
2023); see also supra note 954 and corresponding text for further 
discussion of the Commission's adjustment of its burden estimates in 
response to commenters. This additional allocation of three ongoing 
monthly burden hours is similar to the technology-related burdens in 
other rules; see, e.g., Securities Exchange Act Release No. 98738 
(Oct. 13, 2023), 88 FR 75100 (PRA Table 1) (Nov. 1, 2023) 
(allocating an additional 2 hours of work by a programmer for the 
purposes of preparing reports using a structured XML-based data 
language).
---------------------------------------------------------------------------

    As a result of the adopted 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, prior to these amendments, were not 
required to file Rule 605 reports in their capacity as a market center 
due to fractional shares falling below the smallest order size category 
in Rule 605 prior to these amendments, will be required to begin 
publishing Rule 605 reports. The Commission is assuming that these 
broker-dealers will incur similar initial and ongoing costs as those 
discussed above for larger broker-dealers and SDPs. 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 will be included because 
of the expanded scope of reporting entities. However, these firms are 
relatively large, with an average net capital similar to that of all 
larger broker-dealers that meet the customer account threshold of at 
least 100,000 customer accounts, and an estimated 15 of these market 
centers are also larger broker-dealers that meet the customer account 
threshold.\1668\
---------------------------------------------------------------------------

    \1668\ See supra note 1659.
---------------------------------------------------------------------------

    One commenter stated that the requirement for market centers that 
exclusively engage in fractional trading to comply with Rule 605 
``would harm smaller broker-dealers by creating a barrier to entry to 
support fractional share programs.'' \1669\ The Commission acknowledges 
that, to the extent that a smaller broker-dealer intends to begin 
executing fractional shares internally, it will need to incur the 
initial and ongoing costs associated with complying with Rule 605. 
However, these compliance costs are not large enough such that this is 
likely, as compliance costs are estimated to be a small fraction of 
broker-dealer revenues, even for broker-dealers with fewer than 100,000 
customers.\1670\ Furthermore, as previously discussed, an analysis of 
firm MPIDs that exclusively execute fractional shares found that these 
firms tend to be relatively large, and that the majority of them will 
also meet the customer account threshold.\1671\ Thus, there are likely 
barriers to entry for smaller broker-dealers to offer fractional 
programs that exist apart from these

[[Page 26584]]

amendments.\1672\ Therefore, the Commission does not believe that the 
requirement for market centers that exclusively engage in fractional 
trading to comply with Rule 605 will significantly increase barriers to 
entry for fractional share programs.
---------------------------------------------------------------------------

    \1669\ See SIFMA Letter at 31.
    \1670\ For example, data on broker-dealers' median monthly 
revenues from FOCUS Report Form X-17A-5 Schedule II from Q4 2022 
show that the estimated monthly compliance cost will represent 0.02% 
of the monthly revenues of broker-dealers with 100,000 customers or 
less, and 0.002% of the monthly revenues of broker-dealers with 
100,000 customers or more. An analysis in the Proposing Release of 
FOCUS Report Form X-17A-5 Schedule II from Q4 2021 found similar 
results. See Proposing Release, 88 FR 3786 at 3882, n.981 (Jan. 20, 
2023).
    \1671\ See supra note 1659 for further discussion of this 
analysis.
    \1672\ Smaller introducing broker-dealers (with under 100,000 
customers) could still offer their customers fractional share 
trading without having to prepare Rule 605 reports if their clearing 
broker executes the fractional share trades. If an introducing 
broker's fractional share orders are executed by their clearing 
broker, then the clearing broker will have to prepare a Rule 605 
report as a market center if it meets the definition of an ``OTC 
market maker'' and receives ``covered orders'' for execution in such 
capacity. See supra note 170 and accompanying text for further 
discussion on the preparation of Rule 605 reports with respect to 
fractional share orders.
---------------------------------------------------------------------------

    In addition, according to this commenter, because ``much of today's 
market infrastructure does not yet support fractional share trading,'' 
(including that ``FINRA does not currently have a mechanism to report 
fractional share trades''), ``the costs to fully modify this 
infrastructure would be high compared to the minimal benefit of 
including fractional share reporting.'' \1673\ The Commission 
acknowledges that prior reporters will incur a cost associated with 
expanding their data collection systems to incorporate additional order 
sizes, including odd-lots, fractional orders, and larger-sized orders, 
and has accounted for this in its estimates of compliance costs.\1674\ 
The Commission disagrees with the commenter that the benefits of 
including fractional share reporting will be minimal, particularly 
considering that fractional shares are a significant percentage of 
orders associated with individual accounts,\1675\ and because there is 
a significant amount of variation in the execution quality received by 
these orders.\1676\
---------------------------------------------------------------------------

    \1673\ See SIFMA Letter at 31.
    \1674\ This was also acknowledged in the Proposing Release. See, 
e.g., Proposing Release 88 FR 3786 at 3881 (Jan. 20, 2023), stating 
that ``current reporters would need to expand their data collection 
systems to incorporate additional order sizes, including odd-lots, 
fractional orders, and larger-sized orders.''
    \1675\ Fractional orders less than a share represent a 
relatively high fraction (16.4%) of executions received by 
individual account holders in terms of number of trades. See supra 
note 1145 and corresponding text.
    \1676\ See, e.g., Professor Schwarz et al. Letter at 4, 
describing an analysis showing that E/Q received by fractional 
trades ranged between 0.127 to 0.915, as compared to 0.056 and 0.624 
for full-share trades. See Professor Schwarz et al. Letter, Table 2. 
The commenter does not state whether these statistics include only 
fractional trades less than one share, or all trades that have a 
fractional components.
---------------------------------------------------------------------------

    Lastly, the Commission estimates that the 16 national securities 
exchanges and 1 national securities association will 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 will mostly 
consist of legal time to develop and draft the amendments to the NMS 
Plan.
(3) Compliance Costs Related to Summary Execution Quality Reports
    The estimated 228 prior reporters \1677\ will face additional 
initial and ongoing compliance cost as a result of the adopted 
amendment requiring reporting entities to prepare summary reports 
summarizing key information from their Rule 605 reports.\1678\ Table 12 
breaks down the initial and ongoing compliance costs associated with 
this amendment.
---------------------------------------------------------------------------

    \1677\ This section does not consider the cost of these 
amendments to those reporting entities that will begin publishing 
Rule 605 reports as a result of the amendments expanding the scope 
of Rule 605 reporting entities. See explanation in supra note 1656.
    \1678\ The Commission estimates that a significant portion of 
reporting entities' initial burden hours under the PRA will be 
allocated to updating current systems to prepare summary reports, 
which will entail both a new format and a new level of information 
aggregation as compared to prior Rule 605, and thus estimates that 
20 of the 50 initial burden hours estimated for prior reporters and 
described in supra note 951 will be allocated to compliance with the 
amendments modifying the information contained in Rule 605.
[GRAPHIC] [TIFF OMITTED] TR15AP24.037

    The Commission estimates that these costs will not comprise the 
majority of overall costs to comply with Rule 605 reporting 
requirements, because Rule 605 summary reports contain only a small 
subset of the information published in the fuller Rule 605 reports. 
However, there may be incremental costs in structuring these summary 
reports using a custom CSV schema and providing these reports in a 
human-readable format using a PDF

[[Page 26585]]

renderer.\1679\ Many broker-dealers already have experience structuring 
their data using machine-readable schemas and rendering them using a 
PDF renderer. For example, the Commission requires broker-dealers to 
submit quarterly and customer-specific order handling reports required 
under Rule 606 using an XML schema and associated PDF renderer.\1680\
---------------------------------------------------------------------------

    \1679\ 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 Off., available at https://www.uspto.gov/patents/apply/applying-online/file-size. However, the lower information 
content of the summary file PDFs and CSVs likely results in lower 
file sizes despite the larger per-pixel storage requirements.
    \1680\ 17 CFR 242.606(a)(1) and (b)(3). The Commission does not 
expect that the process of using a CSV schema for preparing Rule 605 
summary reports will vary significantly from that of using an XML 
schema for preparing Rule 606 reports because, in each instance, the 
reporting entity must encode the required disclosures in machine-
readable format (whether the simpler CSV format or the more complex 
XML format) according to a fixed set of rules and relationships 
(i.e., a schema) created and maintained by the Commission, and post 
the resulting machine-readable document alongside a rendered PDF 
version on the entity's public website.
---------------------------------------------------------------------------

(4) Implications of Compliance Costs for Competition
    While the primary competitive effect of these amendments to Rule 
605 will be to increase competition among reporting entities on the 
basis of execution quality,\1681\ it is possible that these amendments 
will 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.\1682\
---------------------------------------------------------------------------

    \1681\ See supra section IX.D.1 for a discussion of the effects 
of these amendments on competition among reporting entities on the 
basis of execution quality.
    \1682\ For example, one commenter stated that the compliance 
costs associated with the reporting of fractional shares would 
represent a significant barrier to entry to the creation of 
fractional share programs by smaller broker-dealers. See SIFMA 
Letter at 31. However, based on the Commission's analysis, 
fractional share programs are more likely to be offered by larger 
broker-dealers who would fall within the customer account threshold, 
so the Commission does not expect this to represent an additional 
significant barrier to entry beyond those that already exist. See 
supra note 1659 and corresponding text for further discussion and 
response to this commenter.
---------------------------------------------------------------------------

    The Commission is unable to quantify the likelihood that either a 
trading venue or a brokerage firm will cease operating as a result of 
the compliance costs associated with these amendments. While the 
Commission does not believe that these compliance costs are large 
enough such that this will be likely,\1683\ 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 may become unprofitable if 
subjected to these costs.\1684\ This may impact competition among 
reporting entities, for example, by causing some reporting entities to 
leave the market, or preventing the entry of new ones. It may also 
result in broker-dealers avoiding taking on more than 100,000 
customers, to avoid crossing the customer account threshold such that 
they need to begin complying with Rule 605 reporting requirements.
---------------------------------------------------------------------------

    \1683\ For example, data on broker-dealers' median monthly 
revenues from FOCUS Report Form X-17A-5 Schedule II from Q4 2022 
show that the estimated monthly compliance cost will represent 0.03% 
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.
    \1684\ The Commission does not believe that these compliance 
costs are large enough such that this is likely. See supra note 
1683, describing how the compliance costs are likely to be a small 
percentage of broker-dealers' monthly revenue.
---------------------------------------------------------------------------

    On the other hand, if Rule 605 compliance costs are variable, then 
the scalability of compliance costs means that smaller reporting 
entities will incur lower compliance costs related to execution quality 
reports, which will mitigate some of these concerns. Rule 605 
compliance costs may be variable, e.g., because smaller reporting 
entities handle lower order volumes and therefore will require less 
data storage and less complexity when calculating the metrics required 
by these amendments.
    Furthermore, even if compliance costs are fixed from the 
perspective of reporting entities (which will 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 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 could 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.\1685\ The Commission recognizes that smaller reporting 
entities may have unique business models that are not currently offered 
by competitors, but a competitor could create similar business models 
if demand were adequate.
---------------------------------------------------------------------------

    \1685\ See supra section IX.C.4.a)(1) for a discussion of the 
structure of the market for brokerage services, and supra section 
IX.C.4.b)(1) for a discussion of the structure of the market for 
trading services.
---------------------------------------------------------------------------

(5) Implementation Costs From Overlapping Compliance Periods
    Some commenters stated that proposed Rule 605 and another recently 
adopted rule, the Settlement Cycle Adopting Release, would have 
interacting effects. Commenters stated that implementing the rules 
together would impact industry resources, or that the rules had 
uncertain interacting effects.\1686\ The Commission acknowledges that 
the effects of any final rule may be impacted by recently adopted rules 
that precede it. Accordingly, each economic analysis in each adopting 
release considers an updated economic baseline that incorporates any 
new regulatory requirements, including compliance costs, at the time of 
each adoption, and considers the incremental new benefits and 
incremental new costs over those already resulting from the preceding 
rules. In some cases, resource limitations can lead to higher 
compliance costs when the compliance period of the rule being 
considered overlaps with the compliance period of other rules. In 
determining compliance periods, the Commission considers the benefits 
of the rules as well as the costs of delayed compliance periods and 
potential overlapping compliance periods.
---------------------------------------------------------------------------

    \1686\ See supra note 1051 (citing comments).
---------------------------------------------------------------------------

    The Commission acknowledges that there are compliance dates for 
certain requirements of the Settlement Cycle Adopting Release that 
overlap in time with the amended rule, which may impose costs on 
resource-constrained entities affected by multiple rules.\1687\ The 
broker-dealers with compliance obligations under the Settlement Cycle 
Adopting Release will incur one-time costs in connection with a May 
2024 compliance date for the Settlement

[[Page 26586]]

Cycle Adopting Release,\1688\ while the compliance period for the Rule 
605 amendments for these broker-dealers culminates in the fall of 
2025.\1689\
---------------------------------------------------------------------------

    \1687\ See section VII (compliance dates for the Rule 605 
amendments); supra note 1050 (compliance dates for the Settlement 
Cycle Adopting Release).
    \1688\ See Settlement Cycle Adopting Release, 88 FR 13872 at 
13918, section VII (compliance date) (Mar. 6, 2023). The Commission 
estimated that broker-dealers serving institutional investors will 
incur initial compliance costs under Rule 15c6-1 to configure their 
trading systems, update reference data, and update trade 
confirmation/affirmation systems, documentation, cashiering and 
asset servicing functions, as applicable; but will have minimal 
ongoing direct compliance costs after the initial transition to a 
T+1 standard settlement cycle; and those also serving retail 
investors will face additional one-time compliance costs after the 
initial transition for client education and customer service. See 
id. at 13937-38, section VIII.C.5. Broker-dealers which adopt 
policies and procedures related to allocation, confirmation, and 
affirmation of transactions, instead of entering into or modify 
existing written agreements with relevant parties, will additionally 
incur initial costs to create policies and procedures, and ongoing 
costs related to monitoring, compliance, and documentation 
obligations under Rule 15c6-2. See id. at 13938-39.
    \1689\ The final rule has an effective date 60 days after its 
date of publication in the Federal Register and a compliance date 18 
months after the effective date. See section VII, supra.
---------------------------------------------------------------------------

    While the Commission received comments on the interaction of the 
MDI Rules and the final amendments to Rule 605, the commenters did not 
specifically address costs associated with overlapping compliance 
periods.\1690\ The Commission outlined a phased transition plan for the 
implementation of the MDI Rules.\1691\ Based on the times provided in 
the transition plan for implementation of the MDI Rules, the Commission 
estimated that the full implementation of the MDI Rules will be at 
least two years after the Commission's approval of the plan 
amendment(s) required by Rule 614(e).\1692\
---------------------------------------------------------------------------

    \1690\ See supra notes 1006, 1638; infra note 1725 (citing 
comments).
    \1691\ See MDI Adopting Release, 86 FR 18596 at 18699-18701 
(Apr. 9, 2021).
    \1692\ See supra note 1022.
---------------------------------------------------------------------------

    The Operating Committees of the CTA/CQ Plan and UTP Plan filed the 
MDI Plan Amendments on November 5, 2021.\1693\ The Commission 
disapproved the proposed amendments on September 21, 2022.\1694\ As a 
result, the participants to the effective national market system 
plan(s) will need to develop and file new proposed amendments as 
required by Rule 614(e), before the implementation period prescribed by 
the phased transition plan can commence. The Commission therefore 
believes that the length of time affected market participants will have 
to come into compliance with both the MDI Rules and these amendments, 
and the likelihood of limited overlap in compliance periods, will 
mitigate compliance costs.
---------------------------------------------------------------------------

    \1693\ See supra note 1023.
    \1694\ See supra note 1024.
---------------------------------------------------------------------------

(b) Other Potential Costs
    Some market participants may incur costs other than compliance 
costs as a result of these amendments to Rule 605. 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 
these 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, these 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.\1695\
---------------------------------------------------------------------------

    \1695\ The costs to reporting entities associated with increased 
transparency and competition on the basis of execution quality will 
likely represent a transfer from these reporting entities to other 
market participants.
---------------------------------------------------------------------------

    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 will 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 will receive less 
payment for such order flow and might make up for the lost payments by, 
for example, by raising brokerage commissions or other fees on 
customers. The same outcome might occur if broker-dealers were to route 
orders to trading centers with lower rebates and higher fees. Broker-
dealers may make up for lost payments or revenues at the expense of 
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. If the reporting entity is executing an order, an 
improvement in execution systems will correspond to a direct 
improvement in execution quality for its customers (that is, the cost 
is a transfer from the reporting entity to its customers). If the 
reporting entity is routing the order, then the cost of improved 
routing will also benefit the customer in terms of superior execution 
(the cost is, in part, a transfer). The reporting entity may pass some 
of the costs of improved routing on to its customers, reducing the 
benefit from improved execution quality relative to what it might 
otherwise have been. If the cost to the reporting entity from 
improvements to routing is sufficiently high, and if this cost cannot 
be passed on to customers, then on net, there may be costs from 
improved execution practices.
    It is possible that the capital expenditure associated with 
upgrading their order routing and execution systems may be such that 
some reporting entities will no longer remain profitable.\1696\ 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 because 
the Commission does not know how market participants will adjust their 
order flow based on the updated information in the amended 605 reports. 
The Commission acknowledges that if some reporting entities offering 
lower execution quality exit the market then their customers may incur 
costs to switch to other reporting entities.\1697\ However, these 
customers' order execution quality may improve if they switch to 
reporting entities that offer better execution quality.
---------------------------------------------------------------------------

    \1696\ See, e.g., ModernIR Letter at 3, stating that expanding 
Rule 605 disclosures ``will drive yet more broker-dealers from the 
market.''
    \1697\ These costs will vary based on the reporting entity that 
exited the market and the services the individual customers received 
from the reporting entity and other entities. For example if a 
customer used multiple reporting entities that offered similar 
services, then the costs to the customer of one of these reporting 
exiting the market may be smaller than for a customer that used only 
one reporting entity that exited the market. The Commission is 
unable to quantify these costs because it is unable to estimate the 
entities that will exit the market.
---------------------------------------------------------------------------

    If reporting entities offering worse execution quality exit the 
market, the Commission does not believe that it will have an adverse 
effect on competition, either in the market for brokerage services or 
in the market for trading services. Both markets are served by a large 
number of competitors and if a reporting entity were to exit for this 
reason, these markets will be served by more efficient firms that are 
better able to offer execution quality to customers in line with their 
industry peers.
(2) Costs for Smaller Broker-Dealers
    These amendments to Rule 605 may entail additional costs if smaller 
broker-

[[Page 26587]]

dealers that are not subject to Rule 605 reporting requirements under 
the final rule face competitive pressure to provide customers with more 
information and execution quality, and incur initial and ongoing costs 
to voluntarily provide customers with execution quality reports.\1698\ 
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 will 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.
---------------------------------------------------------------------------

    \1698\ See infra section IX.D.1.d)(1) for a discussion of the 
impact of these amendments on smaller broker-dealers.
---------------------------------------------------------------------------

(3) Costs Due to Incentives From Reporting of Execution Quality
    The Commission acknowledges that, to the extent that these 
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, these amendments may 
reduce execution quality along certain dimensions that are relevant to 
some investors. The nature of execution quality as a multi-faceted 
concept has been a focus of academic papers, which have stated that 
execution quality is composed of multiple aspects or dimensions, 
including price and speed, among others.\1699\ As stated by the 
Commission in the Rule 11Ac1-5 Adopting Release, different investors 
may have different concerns and priorities related to execution of 
their orders.\1700\ If these 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 these amendments to the disadvantage of other investor groups.
---------------------------------------------------------------------------

    \1699\ See, e.g., Robert Battalio et al., All Else Equal?: A 
Multidimensional Analysis of Retail, Market Order Execution Quality, 
6 J. Fin. Mkt. 143 (2003); Boehmer (2005); Emiliano S. Pagnotta & 
Thomas Philippon, Competing on Speed, 86 Econometrica 1067 (2018).
    \1700\ See Rule 11 Ac1-5 Adopting Release, 65 FR 75414 at 75432 
(Dec. 1, 2000).
---------------------------------------------------------------------------

    For example, 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.\1701\ It is possible 
that incentivizing hidden liquidity at the cost of displayed orders may 
negatively impact market quality by obscuring trading interest, making 
order books look thinner than they actually are. This scenario is 
unlikely for two reasons. First, exchanges are unlikely to incentivize 
hidden liquidity because they have economic incentives to promote 
displayed liquidity over hidden liquidity.\1702\ Second, market centers 
may not specifically focus on promoting hidden liquidity to improve 
size improvement metrics because Rule 605 reports also require 
information, such as time-to-execution, that show other dimensions of 
execution quality that could be negatively affected by increases in 
hidden liquidity.
---------------------------------------------------------------------------

    \1701\ For example, if two exchanges have 200 shares available 
at the NBO 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 would not on the other venue.
    \1702\ For example, exchanges earn market data revenue from the 
SIPs based on their trading activity and the proportion of time 
their displayed quotes are at the NBBO. The SIP market data revenue 
allocation formula is summarized at, e.g., UTP Plan Participants, 
Summary of Market Data Revenue Allocation Formula, available at 
https://www.utpplan.com/DOC/Revenue_Allocation_Formula.pdf (last 
accessed Jan. 11, 2024).
---------------------------------------------------------------------------

    One commenter stated that, because of the expansion of Rule 605 
reporting requirements to include larger broker-dealers, ``brokers 
could become less willing to accept difficult orders, or orders under 
challenging market conditions, in an attempt to maintain favorable 
summary statistics.'' \1703\ To the extent that this occurs and results 
in delayed executions or a lack of fill, this could lower some market 
participants' execution quality. However, broker-dealers will continue 
to have competitive reasons to accept these orders, as customers whose 
orders are consistently rejected by a broker-dealer may find it 
advantageous to switch to another broker-dealer. Furthermore, broker-
dealers' incentives to engage in this behavior will be limited by the 
fact that consumers of Rule 605 reports will be able to control for 
differences in several characteristics of broker-dealers' order flow, 
including stock mix, order size, and realized spreads. Therefore, 
market participants will be able to observe whether a broker-dealer's 
reported execution quality statistics are less favorable because they 
tend to handle more difficult orders, such as larger orders, those in 
less liquid stocks, or those with higher adverse selection.\1704\
---------------------------------------------------------------------------

    \1703\ See Virtu Letter at 13.
    \1704\ See supra note 1485 for how information about adverse 
selection can be inferred from measures of realized spreads in 
amended Rule 605 reports.
---------------------------------------------------------------------------

    Several commenters stated that execution quality could worsen for 
some market participants if the amendments result in changes in order 
flow as more difficult-to-handle order flow shifts to broker-dealers 
that previously had easier-to-handle orders.\1705\ It is possible that 
the information contained in the amended Rule 605 reports could cause 
more difficult-to-handle order flow to shift to broker-dealers that 
have easier-to-handle orders, but it is uncertain what effects this 
would have on the execution quality of the easier-to-handle orders of 
the existing customers of these broker dealers. To the extent that such 
shifts in order flow occur, there is sufficient detail in Rule 605 
reports to allow for customers to account for changes in order flow 
characteristics brought about by the amendments to Rule 605 when 
assessing execution quality. For example, assume that the customers of 
Firm A disproportionately submit larger orders, which are typically 
harder to execute than smaller orders,\1706\ and

[[Page 26588]]

then view from Rule 605 reports that Firm B offers better execution 
quality for larger orders than Firm A, and then switch to using Firm B. 
It could be the case that, in aggregate, Firm B's execution quality 
statistics decline, because that broker-dealer is now handling more 
orders that are difficult to execute. However, because both the 
detailed Rule 605 reports and the summary reports contain disaggregated 
information by notional order size, market participants will be able to 
account for this order flow characteristic when assessing that broker-
dealer's execution quality from its summary report.\1707\ Furthermore, 
it is not necessarily the case that, just because a broker-dealer is 
handling more of a particular type of order flow that may be harder to 
execute, the broker-dealer will offer these orders worse execution 
quality. In fact, to the extent that broker-dealers may benefit from 
liquidity externalities or economics of scale because of handling more 
of this order flow, the opposite may happen instead.\1708\
---------------------------------------------------------------------------

    \1705\ See SIFMA Letter II at 30, stating that ``the Commission 
does not account for any potential negative effects on execution 
quality caused by the shifting of order flow itself.'' The commenter 
gives an example of customers that shift their order flow from one 
broker-dealer (``Firm A'') to another (``Firm B'') because of 
``perceived better execution quality at Firm B.'' In this case, the 
commenter states that ``the customers of Firm B are unlikely to 
receive better execution quality, and may receive worse execution 
quality,'' because ``Firm B would now receive all of the order flow 
from Firm A that received less favorable execution quality.'' 
Instead, the customers of Firm B ``may lose some of that execution 
quality in relative terms if the flow from Firm A improves its 
execution quality.'' The commenter also stated that ``the flow from 
Firm A may not receive any improvement as the reason for their lower 
execution quality could be that some broker-dealers simply have more 
adverse order selection.'' Another commenter similarly stated that 
``[t]he Proposed Rule may lead to changes in the equilibrium mix of 
customer types at each broker, in ways that can result in positive 
or negative externalities for other investors at each broker,'' 
offering as an example that, ``[i]f the Proposed Rule induces retail 
investors with more costly to service orders to move to brokers that 
previously had less costly to service orders, it could cause 
execution quality to worsen at the broker with previously less 
costly to service orders.'' Virtu Letter at 9. See also Virtu Letter 
at 37, stating that the proposed amendments to Rule 605 ``may change 
the equilibrium mix of the brokers used by their customers, in ways 
that can result in positive or negative externalities for other 
investors . . . If the rule induces informed traders to move to 
brokers that previously had uninformed traders, it could cause 
execution quality to worsen at that broker.''
    \1706\ See supra note 984 for a discussion of why larger orders 
are typically more difficult to execute. This example also could 
apply to other differences in order flow characteristics that make 
execution more difficult, such as higher adverse selection as 
measured by the realized spread.
    \1707\ To the extent that order flow shifts such that the 
aggregate order flow characteristics are similar across broker-
dealers, the execution quality information contained in the final 
Rule 605 reports will still incentivize broker-dealers to compete to 
on the basis of execution quality.
    \1708\ See supra section IX.D.1.d)(4) for a discussion of how 
liquidity externalities can improve execution quality under certain 
circumstances but may not always be beneficial.
---------------------------------------------------------------------------

    One commenter stated that, to the extent that ``perceived 
differences in execution quality'' result in the consolidation of order 
flow among a smaller number of firms, this could result in a reduction 
in competition and harm overall execution quality.\1709\ The Commission 
is unable to quantify the likelihood that a trading venue or a 
brokerage firm will cease operating because of the consolidation of 
order flow and the subsequent effect that this will have on competition 
and execution quality. However, based on the academic literature, it 
may be the case that the consolidation of order flow actually improves 
execution quality as a result of liquidity externalities.\1710\
---------------------------------------------------------------------------

    \1709\ See SIFMA Letter at 30.
    \1710\ See supra section IX.D.1.d)(4) for a discussion of how 
liquidity externalities can improve execution quality under certain 
circumstances but may not always be beneficial.
---------------------------------------------------------------------------

(4) Costs To Update Best Execution Methodologies
    As a result of these amendments to Rule 605, financial service 
providers that are subject to best execution obligations \1711\ will 
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.\1712\ 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. These amendments do not, however, address and therefore 
do not change the existing legal standards that govern financial 
service providers' best execution obligations.\1713\
---------------------------------------------------------------------------

    \1711\ See supra note 1099 and accompanying text.
    \1712\ This statement was supported by one commenter. See 
Decimus Letter at 2.
    \1713\ See supra note 1099.
---------------------------------------------------------------------------

(5) Other Costs
    One commenter stated that the enhanced reporting requirements under 
Rule 605 would result in ``giving away vast amounts of information to 
free riders,'' which would result in vulnerabilities.\1714\ The same 
commenter expressed a similar concern that the more detailed order 
execution information would ``enhance certain constituents' ability to 
model the market,'' who then ``could use sophisticated algorithms to 
craft out order flow.'' \1715\ The commenter did not further specify 
how the increase in information would increase vulnerabilities or how 
the more detailed information could be utilized for algorithmic 
trading. Given the low frequency of Rule 605 reports (i.e., once per 
month), and high level of aggregation of these reports (i.e., not 
order-by-order, but aggregated across order sizes and types), the risk 
of market participants using Rule 605 reports to, e.g., infer 
information about other participants' trading strategies is likely to 
be low, particularly because only larger broker-dealers, who introduce 
or carry a large number of customer accounts and thus whose order flow 
is less traceable to any one customer account, will be required to 
report under amended Rule 605 requirements.\1716\
---------------------------------------------------------------------------

    \1714\ See Data Boiler Letter at 5.
    \1715\ See Data Boiler Letter II at 1.
    \1716\ See infra section IX.E.1.a) for a discussion of 
information leakage as an indirect cost of a reasonable alternative 
requiring these smaller broker-dealers to publish Rule 605 reports.
---------------------------------------------------------------------------

    The amendment 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 voluntarily provided their 
customers with execution quality reports prior to these amendments stop 
providing these reports, which potentially contain more or different 
information than what these amendments require.\1717\ This scenario is 
not very likely because customers could still request additional 
information or customized reports from their broker-dealers and broker-
dealers may be incentivized to satisfy such requests, to the extent 
they did so prior to these amendments, to retain their customers.\1718\
---------------------------------------------------------------------------

    \1717\ These reports could include, for example, public reports 
prepared according to the FIF Template (see supra note 973), or 
private ad hoc reports the broker-dealers prepare for their 
customers (see discussion in section IX.C.2.c), supra).
    \1718\ See, e.g., 2018 Rule 606 Amendments Release, 83 FR 58338 
at 58403 (Nov. 19, 2018), which discusses a similar potential cost 
and further states 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.
---------------------------------------------------------------------------

    As another potential cost, the amendments to Rule 605 may render 
the preexisting Rule 605 data less useful and reduce the ability of 
researchers to perform statistical analyses. Some Rule 605 metrics will 
lose comparability before and after the new reporting requirements are 
implemented, so that in some cases there will be two shorter data sets 
rather than one longer one, leading to reduced statistical power.\1719\ 
This cost will apply for studies done over a limited period, as over 
time the new data will accumulate. The changes will also impact market 
participants' ability to compare certain categories in the reports 
before and after the amendment.\1720\ The ability to examine the effect 
of changes in order execution

[[Page 26589]]

quality close in time to the implementation of the adopted amendments 
to Rule 605 will be limited because the Rule 605 data available to 
analyze the change will differ before and after the implementation of 
the amendments.\1721\ The ability to aggregate across different order 
categories (e.g., notional buckets) mitigates this cost in that 
aggregated metrics can be compared across preexisting and amended Rule 
605.\1722\ At the same time, there are some differences in the scope of 
Rule 605, even taking the ability to aggregate into account.\1723\ 
Finally, this cost may also be mitigated by the existence of other data 
that provides relevant information on execution quality.\1724\
---------------------------------------------------------------------------

    \1719\ For example, time-to-execution metrics for some NMLOs 
will not be comparable, because preexisting Rule 605 required time-
to-execution for NMLOs to be measured based on the time of order 
receipt, while Rule 605 as amended will require time-to-execution 
metrics for NMLOs to be measured based on the time the order becomes 
executable. For NMLOs submitted at or inside the NBBO, the time of 
order receipt is equivalent to the time of order executability. 
However, for NMLOs submitted outside the quote, there may be a 
difference between the time of order receipt and the time of order 
executability. Therefore, this change may impair the ability to 
compare the time-to-execution metrics of near-the-quote limits 
orders in prior Rule 605 reports to that of non-marketable limit 
orders in the amended Rule 605 reports.
    \1720\ For example, the amendments changing the order size 
categories from share-based to notional-based will affect market 
participants' ability to compare these categories before and after 
the amendments. Furthermore, while IOC orders were not broken out 
separately and thus were distributed across various order type 
categories in preexisting Rule 605, IOC orders will be categorized 
separately into marketable and non-marketable IOC categories under 
amended Rule 605. This will likely affect the comparability of order 
type categories that had a high percentage of IOC orders prior to 
these amendments. The amended Rule 605 reports will also include 
non-exempt short sales and some orders submitted pre-opening/post-
closing, which were not included in preexisting Rule 605.
    \1721\ This pertains to changes in execution quality resulting 
from, for example, regulatory changes. See, e.g., Letter from 
Stephen John Berger, Managing Director, Global Head of Government & 
Regulatory Policy, Citadel Securities (Mar. 31, 2023) at 29 re 
Minimum Pricing Increments Proposing Release, available at https://www.sec.gov/comments/s7-30-22/s73022-20164212-334052.pdf.
    \1722\ For example, the effective spread for market and 
marketable limit orders reported for individual stocks may be 
comparable after aggregating across different order size categories. 
More specifically, the effective spread can be computed for the 
combination of market and marketable limit orders in an individual 
stock in preexisting Rule 605 data by aggregated across all pre-
existing order size categories for market and marketable limit 
orders. This will be compared with the effective spread for 
aggregated market, marketable limit, and marketable IOC orders in 
amended Rule 605 data, which will be computed by aggregating across 
all order size categories that remain for these order types after 
excluding order notional size categories with fractional and odd-lot 
components and notional size categories for which the notional value 
of the order will be equivalent to an order share size of 10,000 
shares or greater.
    \1723\ For example, the amendments to Rule 605 expand its scope 
to include non-exempt short sales and some orders submitted outside 
of market hours. Since these orders will not be in separate order 
type categories, it will not be possible to exclude them from 
amended Rule 605 reports for the purposes of comparison to 
preexisting Rule 605 reports.
    \1724\ See IEX Letter at 3 (``There are myriad sources of 
information that both regulators and market participants draw on to 
consider how orders are handled and how markets compete with and 
compare to each other.'')
---------------------------------------------------------------------------

    The Commission received comments stating that the round lot 
definition in the MDI Rules, once implemented, could reduce the 
benefits of the amendments to Rule 605; or that the amendments to Rule 
605 could add to the cost of consolidated market data, an effect that 
could be compounded by the implemented MDI rules.\1725\ The baseline 
against which the benefits and costs are measured incorporates the 
potential effects of the MDI Rules, however, given that the MDI Rules 
have not yet been implemented, data that will be required for a 
quantitative analysis of a baseline that includes the effects of the 
MDI Rules, and of the cost of the final Rule 605 amendments with new 
baseline assumptions, is not available.\1726\ In further response to 
the comments, the new round lot definition is not expected to reduce 
the benefits of the amendments to Rule 605 because Rule 605 report 
metrics are at the individual stock level; since the new round lot 
definition will affect only stocks with prices of $250 or greater, the 
vast majority of stocks will not be affected by it.\1727\ Likewise, the 
amendments to Rule 605 will not alter the contents or requirements of 
consolidated market data, so the final rule is not expected to affect 
the cost of consolidated market data.
---------------------------------------------------------------------------

    \1725\ See Schwab Letter II at 32, 34 (``The 605(a)(1) report's 
beyond-the-midpoint limit order category adds unnecessary 
complexity, as it is not a large category today, and will become de 
minimis with the Market Data Infrastructure (`MDI') round lot 
definitions . . . Further, when the MDI's new round lot definitions 
take effect, the percent of the time `best available price' differs 
from the NBBO will be even smaller''); Fidelity Letter at 4: (``[W]e 
anticipate market data costs will increase in several areas under 
the Proposals. Market data is a critical element of the equity 
markets, but the SEC has not yet required the self-regulatory 
organizations (`SROs') to re-submit a proposal setting fees for the 
data content underlying consolidated market data offerings pursuant 
to the Commission's Market Data Infrastructure Rules (`MDIR') nor 
acted on simple governance reforms to help curtail market data 
costs'').
    \1726\ See section IX.C.1.c)(2), infra, discussing benefits and 
costs based on implementation assumptions.
    \1727\ See id.
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3. Economic Effects on Efficiency, Competition, and Capital Formation
(a) Efficiency
    The Commission believes that these amendments to Rule 605 will 
improve the efficiency of analyzing Rule 605 reports, which will result 
in improved price efficiency. Improved transparency is expected to 
result in an increase in competition, which, in turn, is expected to 
improve order execution quality and price efficiency. Investors are 
expected to benefit from improved execution quality as a result of 
these amendments, such that these investors will also likely benefit 
from lower transaction costs. Transaction costs reflect a friction in 
the trading process that limits the ability of prices to fully reflect 
a stock's underlying value.\1728\ Such friction makes it more costly to 
trade and makes investing less efficient, and limits the ability of 
arbitrageurs or informed investors to push prices to their underlying 
values. Thus, transaction costs make prices less efficient. These 
amendments to Rule 605 are expected to improve order execution quality 
and reduce transaction costs. This, in turn, will reduce financial 
friction and improve price efficiency.
---------------------------------------------------------------------------

    \1728\ See Hans R. Stoll, Friction, 55 J. Fin. 1479 (2000).
---------------------------------------------------------------------------

(b) Competition
    As previously discussed in the benefits section of this economic 
analysis, the Commission believes that these amendments to Rule 605 
will facilitate competition on the basis of execution quality in the 
markets for brokerage services and trading services.\1729\ These 
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).
---------------------------------------------------------------------------

    \1729\ See supra section IX.D.1 for a detailed discussion of the 
effects of the 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 these 
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 these amendments. 
Exchanges compete on the basis of fees and rebates to incentivize 
broker-dealers to route more order flow to them.\1730\ If an exchange 
offers the 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.\1731\ To the extent that this occurs and 
to the extent that the resulting lower fees or higher rebates will be 
passed on to investors, this could be beneficial for investors.
---------------------------------------------------------------------------

    \1730\ See supra section IX.C.4.b)(2) for a discussion of 
competition between national securities exchanges on the basis of 
fees and rebates.
    \1731\ 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 improving its execution 
quality. To the extent that this occurs, this may limit the extent 
to which competition will lead to improved execution quality for the 
customers of these reporting entities. However, these customers will 
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 offering new 
functionalities that

[[Page 26590]]

appeal to customers, such as the ability to trade on margin; to trade 
in additional asset classes, such as options; or to trade fractional 
shares.\1732\
---------------------------------------------------------------------------

    \1732\ See, e.g., supra note 1140, describing how trading volume 
increased substantially for brokers after they introduced the use of 
fractional shares.
---------------------------------------------------------------------------

(2) Competition in Related Markets
    These amendments to Rule 605 can 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 
the amended Rule 605 reports become available, because the customer 
decides that the information contained in the reports is sufficient. If 
fewer customers purchase TCA, this will 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 may 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 final rule to offer new or better 
products.
(3) Interacting Rule Effects
    In addition, as stated above, some commenters requested the 
Commission consider interactions between the economic effects of the 
proposed rule and other recent Commission rules.\1733\ As discussed 
above, the Commission acknowledges that overlapping compliance periods 
may in some cases increase costs.\1734\ This may be particularly true 
for smaller entities with more limited compliance resources.\1735\ This 
effect can negatively impact competition because these entities may be 
less able to absorb or pass on these additional costs, making it more 
difficult for them to remain in business or compete. However, the rules 
highlighted by commenters have compliance dates that do not 
significantly overlap with the expected industry compliance dates of 
the amendments to Rule 605, and therefore we do not expect these 
effects on competition to be significant.\1736\ We acknowledge that to 
the extent such overlap (in scope or timing) occurs, there could be 
costs which could affect competition, but we do not expect these costs 
to be significant.
---------------------------------------------------------------------------

    \1733\ See supra section IX.C.1.d).
    \1734\ See supra section IX.D.2.a)(5).
    \1735\ See supra section IX.D.2.a)(4) (discussing generally the 
competitive effect of fixed and variable compliance costs on smaller 
reporting entities). This issue may be mitigated by the fact that 
Rule 605 reporting requirements will only apply to larger broker-
dealers. In addition, the Commission has estimated that, of the 
firms that will be impacted by the amendments, only one exchange 
market maker is a ``small entity'' within the meaning of the 
Regulatory Flexibility Act. See infra section X.
    \1736\ See supra section IX.D.2.a)(5).
---------------------------------------------------------------------------

(c) Capital Formation
    These amendments to Rule 605 might promote capital formation by 
improving price efficiency. As discussed above, these amendments are 
expected to improve order execution quality and reduce transaction 
costs, which is expected to improve price efficiency, and to reduce 
financial friction and promote investors' ability to trade. Financial 
friction in the form of higher transaction costs can limit trading 
activity, and thereby hinder the efficient adjustment of prices and 
limit the ability of prices to reflect fundamental values. Less 
efficient prices can result in some issuers experiencing a cost of 
capital that is higher or lower than if their prices fully reflected 
underlying values, 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. Under these amendments, 
improved price efficiency is expected to cause firms' stock prices to 
reflect their underlying values more accurately, which can improve 
capital allocation and promote capital formation.

E. Reasonable Alternatives

1. Reasonable Alternative Modifications to Reporting Entities
(a) Different Customer Account Thresholds for Differentiating Larger 
Broker-Dealers
    The Commission considered alternatives to the adopted amendment, 
which requires larger broker-dealers \1737\ to prepare execution 
quality reports pursuant to Rule 605 and excludes broker-dealers that 
introduce or carry less than a threshold number of customer accounts, 
defining the customer account threshold as 100,000 customer 
accounts.\1738\ 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 might also be beneficial if more broker-dealer customers are 
able to benefit from the proposed modifications to reporting 
entities.\1739\ On the other hand, raising the customer account 
threshold would lower the total costs of the proposal, but might result 
in fewer broker-dealer customers benefiting from the proposed 
modifications to reporting entities.\1740\
---------------------------------------------------------------------------

    \1737\ See supra note 61 defining the term ``larger broker-
dealers.''
    \1738\ See supra section II.A.2.a) discussing the adopted 
customer account threshold.
    \1739\ See supra section IX.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.
    \1740\ While one commenter supported the 100,000 customer 
account threshold (see Nasdaq Letter at 43), and several commenters 
supported expanding reporting requirements to all broker-dealers 
(see infra section IX.E.1.b), the Commission did not receive 
comments supporting alternative customer account thresholds.
---------------------------------------------------------------------------

    In order to examine the number of broker-dealers that would be 
subject to Rule 605 reporting requirements under the final rule at 
different customer account thresholds, it is first necessary to 
estimate the number of customers both for carrying and for introducing 
broker-dealers.\1741\ To estimate the number of carrying broker-
dealers' customers, the Commission used data from broker-dealers' 2022 
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.\1742\ To estimate 
the number of introducing broker-dealers' customers, the Commission 
used data from CAT during the calendar year 2022 on the number of 
unique customer accounts whose order originations 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.\1743\ The 
resulting

[[Page 26591]]

customer numbers 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 definitions of the 
customer account threshold. The estimated costs of these 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.\1744\
---------------------------------------------------------------------------

    \1741\ See supra note 98 and accompanying text for a definition 
of carrying and introducing broker-dealers.
    \1742\ Specifically, item 8080 asks for information on 
``respondent's total number of public customer accounts,'' but only 
broker-dealers that are carrying firms are required to answer this 
question, so information on introducing broker-dealers' customers is 
not included.
    \1743\ 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 in FINRA Rule 4512(c) and 
are also not a proprietary account. See supra note 1144 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 originate orders from 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 
originated orders during the sample period from Jan. to Dec. 2022. 
Therefore, to the extent that there are customer accounts that did 
not originate orders 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 originated orders during 2022). 
Dividing the number of accounts from CAT by the number of customer 
accounts from FOCUS reveals that, on average, around 26.6% of these 
broker-dealers' customer accounts traded during 2022. Observed 
customer numbers from CAT are then scaled up using the adjustment 
factor of \1/0.266\ to estimate the total number of customers for 
each broker-dealer (both carrying and introducing). In order to 
ensure that this 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 its customer account number reported in FOCUS and the 
adjusted number of customers estimated from CAT. 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 1278 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 originated orders 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 pools together the accounts of potentially multiple underlying 
customers but would only be recorded as a single account in CAT.
    \1744\ See supra section VIII.D for a description of these 
costs. This analysis assumes the same costs for both larger and 
smaller broker-dealers.
---------------------------------------------------------------------------

    Lowering the customer account threshold might be beneficial if more 
broker-dealer customer accountholders are able to benefit from the 
enhanced reporting requirements. 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 will be subject to the amended 
reporting requirements of Rule 605 according to various definitions of 
the customer account threshold. Additionally, using estimates of the 
number of orders that originate from institutional or individual 
accounts at broker-dealers as identified in CAT,\1745\ the Commission 
calculated the cumulative percentage of customer order originations 
associated with broker-dealers that would be included under the various 
thresholds.\1746\
---------------------------------------------------------------------------

    \1745\ This is estimated as the total number of order 
originations associated with a broker-dealer's institutional and 
individual customer accounts identified in CAT during calendar year 
2022. See supra note 1743 for more information about how these 
accounts are identified.
    \1746\ Some of these order originations 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.
---------------------------------------------------------------------------

    Table 13 \1747\ 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, 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 250,000 would reduce both the initial 
and ongoing costs of the amendments by around 41.7%,\1748\ but would 
also result in lower coverage. In particular, coverage of customer 
order originations would drop by 55.7 percentage points.
---------------------------------------------------------------------------

    \1747\ This analysis has been updated since the Proposing 
Release in several ways. First, to measure the scope of broker-
dealer customer activity that would be included in Rule 605 reports 
according to different definitions of the customer account 
threshold, the Proposing Release used data from broker-dealers' 2021 
FOCUS Report Form X-17A-5 Schedule I and CAT data from calendar year 
2021. The updated analysis in Table 13 below uses more recently 
available data from calendar year 2022. See supra note 1743 for 
further discussion; see also Proposing Release, 88 FR 3786 at 3885, 
n.1008 (Jan. 20, 2023). The customer account thresholds have also 
been updated since the Proposing Release to provide additional 
granularity on the costs and percentage of customers that would be 
covered by extending the rule to cover broker-dealers with between 
250,000 and 500,000 customer accounts. Finally, the Proposing 
Release included a statistic, labeled ``Customer Transactions 
Included,'' that was calculated by taking the higher of the number 
of broker-dealer's customer transactions as reported in FOCUS or the 
number of order originations from the broker-dealer's institutional 
and individual customer accounts observed in CAT and then summing 
across broker-dealers. The Proposing Release describes the 
methodology as using the number of transactions observed in CAT, 
although order data was actually used. See Proposing Release, 88 FR 
3786 at 3886, n.1010, 3887 (tbl.13) (Jan. 20, 2023). Upon further 
review, the Commission believes that order originations are the 
appropriate way to assess changes in the scope of Rule 605 as the 
threshold changes. This is because Rule 605 requires the reporting 
of all covered orders, regardless of whether they result in a 
transaction; see, e.g., final Rule 605(a), requiring reporting 
entities to prepare ``a report on the covered orders in NMS stocks 
that it received for execution . . .'' (emphasis added). In the 
updated Table 13, we therefore continue to use the total number of 
order originations associated with a broker-dealer's institutional 
and individual customer accounts observed in CAT. As FOCUS does not 
include information on order originations, we have not included it 
in updated Table 13. Therefore, changes to the data and methodology 
did not affect the Commission's conclusions from this analysis 
relative to the Proposing Release; namely, the updated data analysis 
continues to support a 100,000-customer threshold.
    \1748\ Increasing the customer account threshold from 100,000 to 
250,000 would reduce the initial compliance costs from $3,412,750 to 
$2,409,000 and the ongoing compliance costs from $4,390,080 to 
$3,098,880.
---------------------------------------------------------------------------

    Meanwhile, reducing the customer account threshold from 100,000 to 
10,000 would increase the coverage of customer order originations by an 
additional 21.0 percentage points. However, it would significantly 
increase both the initial and ongoing compliance costs, which would 
increase by approximately 187%.\1749\ The Commission also understands 
that accounts of broker-dealers with fewer customers are more likely to 
belong to institutional traders,\1750\ 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.\1751\ Therefore, lowering the 
customer account threshold to include these customers might not be 
particularly beneficial, especially when compared to the substantial 
increase in compliance costs.
---------------------------------------------------------------------------

    \1749\ Reducing the customer account threshold from 100,000 to 
10,000 would increase the initial compliance costs from $3,412,750 
to $9,796,600 and the ongoing compliance costs from $4,390,080 to 
$12,602,112.
    \1750\ For example, data from CAT order originations reveals 
that broker-dealers with less than 100,000 customers have a higher 
percentage of institutional accounts on average than broker-dealers 
with 100,000 or more customer accounts.
    \1751\ See supra section IX.C.2.c) for a discussion of 
institutional investors' access to alternative sources of execution 
quality other than Rule 605 reports.

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[[Page 26592]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.038

    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 might be difficult to identify the orders of a particular 
customer in the amended Rule 605 reports. However, a smaller broker-
dealer might have only a few institutional investor customers that 
represent the majority of its business and this might be known to other 
market participants. In this case, it might 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 will only 
pertain to historical order flow and will 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 might 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 adopted 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. Several commenters supported 
this alternative.\1752\
---------------------------------------------------------------------------

    \1752\ See, e.g., Robinhood Letter at 44; Angel Letter at 3.
---------------------------------------------------------------------------

    Expanding reporting requirements to all broker-dealers, subject to 
a de minimis threshold, would greatly increase the scope of these 
amendments, as there were 3,494 registered broker-dealers as of Q2 
2023.\1753\ However, only around a third (specifically, 1,245) 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.\1754\ 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, 
it is likely 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 will focus the associated implementation costs 
on those broker-dealers for which the availability of more specific 
execution quality statistics would provide a greater benefit. One 
commenter stated that only 6.7% of broker-dealers that carry or 
introduce at least one customer account would be required to prepare 
Rule 605 reports.\1755\ However, as discussed above, these broker-
dealers, while a relatively small percentage of broker-dealers, are 
responsible for the vast majority (more than 98%) of customer accounts, 
as well as a significant percentage (59.5%) of customer order 
flow.\1756\
---------------------------------------------------------------------------

    \1753\ See supra section IX.C.4.a)(1). In addition, based on Q2 
2021 data, the Commission stated in the Proposing Release that there 
were 3,498 registered broker-dealers with only around a third 
(specifically, 1,267) of these broker dealers introducing or 
carrying at least one individual and/or institutional investor in 
the market for NMS stocks within the sample time period. See 
Proposing Release, 88 FR 3786 at 3887 (Jan. 20, 2023). These numbers 
are comparable to the ones in this adopting release.
    \1754\ See analysis in supra Table 13 for estimated number of 
broker-dealers that introduce or carry at least one customer 
account.
    \1755\ See Robinhood Letter at 44.
    \1756\ See Table 13 and corresponding discussion.

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

[[Page 26593]]

(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 number of issues that would limit the benefits of this 
approach. The Commission did not receive comment on this alternative, 
which was also in the Proposing Release.\1757\
---------------------------------------------------------------------------

    \1757\ See Proposing Release, 88 FR 3786 at 3888 (Jan. 20, 
2023).
---------------------------------------------------------------------------

    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.\1758\ Meanwhile, individual 
investors have fewer alternatives to Rule 605 for information about the 
execution quality achieved by their broker-dealers.\1759\ 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 might be most useful for consumers of Rule 605 
reports.
---------------------------------------------------------------------------

    \1758\ See section IX.C.2.c) for a discussion of institutional 
investors' access to alternative sources of execution quality 
information other than Rule 605 reports.
    \1759\ See section IX.C.2.b) for a discussion of individual 
investors' usage of Rule 605 reports.
---------------------------------------------------------------------------

    Second, defining the threshold using the number of customer 
transactions might 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.\1760\ This could potentially 
be disruptive to broker-dealers, who would have to coordinate 
compliance with Rule 605 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 might 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 might 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.\1761\ This would 
increase the total compliance costs associated with the amendments to 
Rule 605.
---------------------------------------------------------------------------

    \1760\ This possibility is somewhat limited by the adopted 
amendment requiring a broker or dealer that equals or exceeds the 
customer account threshold to provide reports for at least three 
calendar months. See supra section II.A.2.
    \1761\ This possibility would be somewhat limited by the adopted 
amendment requiring broker-dealers to publish Rule 605 reports only 
after a three-month initial grace period. See supra section II.A.2.
---------------------------------------------------------------------------

    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 around 88.1% 
of customer-carrying broker-dealers reported the actual number of their 
customer transactions (rather than an estimated number) on their FOCUS 
Report Form X-17A-5 Schedule I in 2022,\1762\ the extent to which 
broker-dealers would be able or choose to track the number of 
transactions associated with their customer accounts is unclear.
---------------------------------------------------------------------------

    \1762\ This number was calculated by dividing the number of 
broker-dealers that answered ``yes'' to items I8084 (``Respondent 
carries its own public customer accounts'') and I8105 (``Actual 
number of respondent's public customer transactions'') and that 
reported at least one customer transaction, by the total number of 
broker-dealers that answered ``yes'' to item I8084 and reported at 
least one customer transaction. See supra note 1746 for a 
description of FOCUS Report Form X-17A-5 Schedule I. The Proposing 
Release included a similar analysis using 2021 FOCUS Report Form X-
17A-5 Schedule I that looked that customer-carrying broker dealers 
that reported the actual number of respondent's public customer 
transactions, but did not control for whether the respondent 
reported at least one customer transaction (i.e., it additionally 
includes broker-dealers that reported no transactions during the 
calendar year). Using 2022 FOCUS Report Form X-17A-5 Schedule I, 
this number is 47.7%, which is similar to the number from the 
Proposing Release. See Proposing Release, 88 FR 3786 at 3888 (Jan. 
20, 2023). The Commission has adjusted its methodology to control 
for the number of broker-dealers that report at least one customer 
transaction in order to achieve a more conservative estimate of 
broker-dealers that will face costs from updating their systems to 
record transaction information. It is unlikely that broker-dealers 
that report actual transaction numbers of zero, to the extent that 
they continue to not handle any transactions, will need to update 
their systems in this way for the purposes of tracking customer 
transactions. While these methodologies produce different numbers, 
they both support the idea that the extent to which broker-dealers 
will be able or choose to track the number of transactions 
associated with their customer accounts is unclear.
---------------------------------------------------------------------------

2. Reasonable Alternative Modifications To Scope of Covered Orders
(a) Explicitly Include ISO Orders With Limit Prices Inferior to the 
NBBO
    Both prior to and after these amendments, 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 will exclude them 
from Rule 605 reports.\1763\ The Commission considered an alternative 
to explicitly include these orders within the scope of covered orders, 
either aggregated with other order types or as a separate order type 
category. The Commission did not receive comment on this alternative, 
which was also in the Proposing Release.\1764\
---------------------------------------------------------------------------

    \1763\ See supra note 4, 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.
    \1764\ See Proposing Release, 88 FR 3786 at 3888 (Jan. 20, 
2023).
---------------------------------------------------------------------------

    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.\1765\ 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

[[Page 26594]]

dataset.\1766\ Table 13 \1767\ 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.\1768\
---------------------------------------------------------------------------

    \1765\ 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).
    \1766\ See supra note 1545 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 
Mar. 2019. 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 IX.C.1.c)(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.
    \1767\ The same table can be found in the Proposing Release. See 
Table 14 in the Proposing Release, 88 FR 3786 at 3888 (Jan. 20, 
2023).
    \1768\ 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 are based on self-
reported data by trading centers, there is the possibility that the 
data may be subject to certain errors or omissions.
[GRAPHIC] [TIFF OMITTED] TR15AP24.039

    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 might 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.\1769\
---------------------------------------------------------------------------

    \1769\ 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 \1770\ and ``pinging'') that are not intended to 
provide liquidity, and therefore might have limited information about 
the execution quality of a particular market center. Excluding quickly 
cancelled orders from the definition of ``covered order'' might 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 might entail losing important information if these 
cancellations capture information about orders that did not or could 
not receive a fill, rather than trading strategies. The Commission did 
not receive comment on this alternative, which was also in the 
Proposing Release.\1771\
---------------------------------------------------------------------------

    \1770\ 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 at 3606 (Jan. 21, 2010).
    \1771\ See Proposing Release, 88 FR 3786 at 3888 (Jan. 20, 
2023).

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[[Page 26595]]

    In order to examine how the presence of quickly cancelled orders 
might 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 2023.\1772\ Figure 24 \1773\ plots the conditional distribution 
of cancellation and execution times,\1774\ and shows that cancellation 
times tend to be shorter than execution times: while the largest 
percentage (30.5%) of cancelled executable NMLOs are cancelled between 
1 and 100 milliseconds after submission, the largest percentage (46.4%) 
of executable NMLOs that received execution are not executed until 
between 1 and 30 seconds after submission. In fact, while 70.6% of 
cancelled orders are cancelled in less than 1 second, only 34.2% 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.
---------------------------------------------------------------------------

    \1772\ See supra note 1130 for data description. This analysis 
does not include IOC NMLOs, which are not captured in MIDAS metrics. 
As discussed in supra section IX.C.3.c)(9), these orders may have 
contributed to low fill rates in reports under preexisting Rule 605. 
Execution times and cancellations times are calculated from the time 
of order receipt to the first time that one or more of the order's 
shares are executed, or the first time that one or more of the 
order's shares are cancelled, respectively.
    \1773\ The MIDAS data used in this analysis have been updated 
and corrected since the Proposing Release for the reasons discussed 
in supra note 1130. See Proposing Release, 88 FR 3786 at 3890 
(Figure 16), 3842, n.634 (Jan. 20, 2023) (for data description). The 
numbers in the Proposing Release are similar: 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; and 
that while 75% of cancelled orders are cancelled in less than 1 
second, only 41.1% of executions happen within the same time frame. 
Therefore, changes to the MIDAS dataset did not affect the 
Commission's conclusions from this analysis relative to the 
Proposing Release, namely that many orders may be cancelled before 
they are given a reasonable opportunity to execute.
    \1774\ 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
[GRAPHIC] [TIFF OMITTED] TR15AP24.040


[[Page 26596]]


    Therefore, it might be the case that excluding orders cancelled 
below some minimum threshold might 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 might 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.\1775\ 
Meanwhile, one recent academic paper found that high frequency trading 
strategies operate in approximately 5 to 10 microseconds.\1776\ This 
would imply that a useful range for determining an appropriate 
threshold might be between approximately a few microseconds and one 
second. Figure 25 \1777\ plots the fill rates \1778\ 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, increasing by 
less than 0.1%. Fill rates increase when orders cancelled in less than 
1 second are excluded, but still remain on the lower side at 4.55%. 
This implies that the impact of excluding quickly cancelled orders on 
fill rates might be limited.\1779\
---------------------------------------------------------------------------

    \1775\ See, e.g., Neil Johnson et al., 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).
    \1776\ See Aquilina et al.
    \1777\ The MIDAS data used in this analysis have been updated 
and corrected since the Proposing Release for the reasons described 
in supra note 1130. See Proposing Release, 88 FR 3786 at 3891 (fig. 
17), 3842, n.634 (Jan. 20, 2023) (for data description). The 
analysis in the Proposing Release found similar results: fill rates 
increase and approach 100% as more and more cancelled orders are 
excluded from the calculation of the fill rate, and do not change 
much when orders cancelled in less than 100 microseconds (only 
increasing by 0.2%). Fill rates increase when orders cancelled in 
less than 1 second are excluded, but still remain on the lower side 
at 11.5%. Therefore, changes to the MIDAS dataset did not affect the 
Commission's conclusions from this analysis relative to the 
Proposing Release, namely that the impact of excluding quickly 
cancelled orders on fill rates might be limited.
    \1778\ As discussed in supra note 1199, the analysis may 
overestimate fill rates due to the exclusion of orders with multiple 
submission messages. In the alternative analysis without this 
exclusion described in supra note 1199, fill rates differ from those 
in Figure 25 by less than 1 percentage point. While this alternative 
analysis, by assigning to the total submitted volume the price at 
the time of submission, tended to overestimate the number of 
executable NMLOs, it is unclear that this would systematically 
overestimate fill rates for executable NMLOs as discussed in supra 
note 1442. Therefore, the Commission's conclusions from this 
analysis are not affected by the exclusion of orders with multiple 
submission messages.
    \1779\ 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.
[GRAPHIC] [TIFF OMITTED] TR15AP24.041


[[Page 26597]]


    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 
might be limited.
(c) Include NMLOs Submitted Outside of Regular Trading Hours as a 
Separate Order Category
    These amendments to Rule 605 will require NMLOs submitted outside 
of regular trading hours to be included in Rule 605 reports if they 
become executable during regular trading hours. The Commission 
considered whether it would be useful to include these orders as a 
separate order type category in Rule 605 reports. If NMLO orders 
submitted outside of regular trading hours have characteristics that 
are fundamentally different from other types of orders and have 
sufficient volume, their inclusion along with other orders could skew 
execution quality statistics. Pre-open orders likely have 
characteristics that differ from orders submitted during regular 
hours.\1780\ However, these pre-open orders make up only a very small 
percentage of order volume.\1781\ 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. The Commission did not 
receive comment on this alternative, which was also in the Proposing 
Release.\1782\
---------------------------------------------------------------------------

    \1780\ See supra section IX.C.3.b)(4) for an analysis showing 
that orders submitted pre-open are more likely to be more individual 
customer accounts as compared to orders submitted during regular 
opening hours.
    \1781\ See supra section IX.C.3.b)(4) for an analysis.
    \1782\ See Proposing Release, 88 FR 3786 at 3891 (Jan. 20, 
2023).
---------------------------------------------------------------------------

3. Reasonable Alternative Modifications to Required Information
(a) Reasonable Alternative Order Size Categories
(1) Defining Order Sizes Based on Number of Round Lots Rather Than 
Notional Categories
    Instead of redefining order size categories according to notional 
values, the Commission considered an alternative that defined 
categories based on the number of round lots.\1783\ This approach has 
several advantages. First, similar to defining categories based on 
notional values as in these amendments, categories based on number of 
round lots might make it easier to compare execution quality metrics 
across market centers that 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 meaningfully compare 
market centers using Rule 605 data. However, according to the MDI 
Rules, round lots are based on the previous month's trading 
price.\1784\ Furthermore, as stated by several commenters, the MDI 
round lot categories are wide and therefore contain a wide range of 
stocks in terms of price, and as such, order size categories based on 
round lot denominations might not meet the objective of grouping orders 
with similar notional values.\1785\ Therefore, unlike categories based 
on round lots, categories based on notional values include a more 
granular categorization of order sizes, and also incorporate 
information about changing stock prices in real time, thereby better 
grouping together similarly sized orders.
---------------------------------------------------------------------------

    \1783\ One commenter supported this alternative. See Better 
Markets Letter at 6.
    \1784\ See supra note 1015 and accompanying text. A commenter 
stated that one issue with defining order size categories in terms 
of round lots would be that the definitions would not be based on 
real-time data. See Rule 605 Citadel Letter at 6.
    \1785\ See, e.g., FIF Letter at 14; SIFMA Letter at 32; Rule 605 
Citadel Letter at 6; Schwab Letter at 33.
---------------------------------------------------------------------------

(2) Require Separate Information for Orders Larger Than One Share With 
a Fractional Component
    The Commission considered an alternative in which, in addition to 
odd-lots, round lots, and fractional orders less than one share, 
reporting entities would also be required to report separate execution 
quality information for round lots with a fractional component, and 
odd-lots with a fractional component. This was suggested by a 
commenter, who stated that ``when a round lot or odd-lot order has a 
fractional share component, this could, in some cases, impact the time 
to execution and the execution price.'' \1786\ The Commission agrees 
that, similarly to fractional orders less than a share, handling 
practices regarding orders greater than one share with fractional 
components may vary across broker-dealers and market centers \1787\ 
and, to the extent that this is the case, this might have an impact on 
execution quality. However, an analysis of CAT data from 2023 for 400 
stocks \1788\ shows that odd-lots with fractional components and round 
lots with fractional components only make up a small percentage of 
order flow (0.003% and 0.0008%, respectively). Furthermore, in contrast 
to fractional orders less than a share, the Commission did not find 
execution quality to systematically vary significantly between odd-lots 
and rounds lots with fractional components and their counterparts 
without fractional components. Specifically, Figure 26 shows the share-
weighted average time-to-execution of fractional orders less than a 
share, and orders greater than a share both with and without fractional 
components. In order to focus on order flow that is most likely to 
contain fractional components, this analysis focuses on orders 
originating from individual customer accounts at broker-dealers. The 
results show that, while fractional orders less than a share have much 
longer execution times, the execution times of odd-lot and round lot 
orders with fractional components do not appear to be systematically 
longer than those without fractional components. Therefore, the 
Commission does not believe that there would be a significant benefit 
to including separate execution quality information for these types of 
orders.
---------------------------------------------------------------------------

    \1786\ See FIF Letter at 15.
    \1787\ See supra section IX.C.3.b)(1)(b) for further discussion 
for differences in handling practices for fractional shares.
    \1788\ See supra note 1211 for dataset description.

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[[Page 26598]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.042

BILLING CODE 8011-01-C
(b) Reasonable Alternative Time-to-Execution Statistics
(1) Replace Time-to-Execution Buckets With Time-to-Execution Statistics
    In the Proposing Release, the Commission proposed eliminating time-
to-execution buckets and instead requiring reporting entities to report 
additional time-to-execution statistics,\1789\ specifically, the median 
and 99th percentile of time-to-execution statistics.\1790\
---------------------------------------------------------------------------

    \1789\ See Proposing Release, 88 FR 3786 at 3812-3813 (Jan. 20, 
2023); see also supra section III.B.3.a).
    \1790\ See proposed Rule 605(a)(1)(ii)(D), (E), (H), (I), (M), 
and (N); proposed Rule 605(a)(1)(iii)(D) and (E). Several commenters 
supported the inclusion of time-to-execution statistics rather than 
time-to-execution buckets. See, e.g., Robinhood Letter at 46; Nasdaq 
Letter at 45.
---------------------------------------------------------------------------

    The Commission continues to believe that requiring time-to-
execution statistics as proposed would provide market participants with 
useful information about the distribution of time-to-execution for a 
given stock, order size, and order type combination (i.e., a given 
``row'' in a Rule 605 report). However, the Commission acknowledges 
that, as stated by a commenter, one issue with point estimates of 
distribution information, such as the median and 99th percentile, is 
that they would not allow for an aggregation across rows.\1791\ The 
commenter instead suggested including two measures of the share-
weighted average time-to-execution--one adjusted for outliers, and one 
not adjusted for outliers.\1792\
---------------------------------------------------------------------------

    \1791\ See FIF Letter at 21, stating that ``market participants 
and other firms analyzing Rule 605 data cannot aggregate [median and 
99th percentile] across different symbols and order type 
categories.''
    \1792\ See FIF Letter at 22.
---------------------------------------------------------------------------

    The Commission understands that consumers of Rule 605 reports 
benefit from the ability to aggregate information across various order 
types and sizes (i.e., rows) of Rule 605 reports \1793\ and therefore 
agrees that the inability to aggregate across median and 99th 
percentile time-to-execution measures represents a disadvantage to 
including these measures. However, requiring time-to-execution buckets 
will allow market participants to recreate average time-to-execution 
\1794\ in a way that is

[[Page 26599]]

more straightforward than the method suggested by the commenter.\1795\
---------------------------------------------------------------------------

    \1793\ See, e.g., id.
    \1794\ See, e.g., Healthy Markets Letter at 17, stating that 
``[b]y creating buckets for timestamp, rather than average time to 
execution, the reports would provide much greater granularity while 
still allowing a user of the data to recreate average time to 
execution.''
    \1795\ Furthermore, the commenter's suggested alternative of a 
time-to-execution average adjusted for outliers would result in the 
same issue as with median and 99th percentile--i.e., it would not be 
possible to aggregate these measures across rows as the identified 
outliers in the aggregated group could be different from those 
identified within each individual pre-aggregate group.
---------------------------------------------------------------------------

(2) Calculate Time-to-Execution Based on Time of Order Route
    The Commission also considered an alternative in which, rather than 
calculating order execution times from the time of order receipt, 
broker-dealers would calculate the execution time from the time of 
order route, i.e., a time after the broker-dealer has performed 
internal risk controls and decided to accept the order. This 
alternative was suggested by several commenters, who stated that 
current order management systems may not generate a timestamp for when 
risk controls have been applied and it would be costly to generate such 
markers,\1796\ and that using order receipt time could create a 
perverse incentive for firms to diminish time spent on necessary 
reviews in an effort to improve execution speed statistics.\1797\ The 
Commission disagrees that the use of order receipt time will 
incentivize broker-dealers to circumvent their risk controls. Broker-
dealers are subject to other regulatory requirements, including the 
Commission's market access rule, that will continue to apply.\1798\ 
Furthermore, broker-dealers likely have other incentives to perform 
these risk controls, such as reputational and business concerns. 
Furthermore, to the extent that the requirement to use order receipt 
time requires broker-dealers to update their management systems to 
generate such a timestamp, such costs are included in the cost 
estimates for first-time Rule 605 reporters as described in section 
IX.D.2.a)(1). On the other hand, there are greater benefits associated 
with using time of order receipt rather than time of order route. This 
timestamp method is more relevant to customers because it will show how 
the broker-dealer handled the order from the time the broker-dealer 
received it.\1799\
---------------------------------------------------------------------------

    \1796\ See FIF Letter at 19.
    \1797\ See Schwab Letter II at 33; Schwab Letter III at 5; FIF 
Letter II at 9.
    \1798\ See supra note 185 and corresponding text.
    \1799\ See supra section II.A.2.c) for further discussion. One 
commenter supported the use of receipt time rather than route time 
for broker-dealers; see Healthy Markets Letter at 16.
---------------------------------------------------------------------------

(c) Reasonable Alternative Spread Measures
(1) Use Different Clock Time Horizons To Calculate Realized Spread
    The adopted amendments to Rule 605 will require the realized spread 
to be calculated at a range of time horizons between 50 milliseconds 
and 5 minutes. This represents an expansion to what was proposed, that 
the realized spread be calculated at two time horizons (15 seconds and 
one minute).\1800\ The Commission also considered alternative 
approaches, such as including a smaller set of time horizons.\1801\
---------------------------------------------------------------------------

    \1800\ See Proposing Release, 88 FR 3786 at 3814-3816 (Jan. 20, 
2023); see also supra section III.B.4.a)(1).
    \1801\ Specifically, in the Proposing Release, the Commission 
proposed including two realized spread time horizons, 15 seconds and 
one minute. See Proposing Release, 88 FR 3786 at 3815 (Jan. 20, 
2023).
---------------------------------------------------------------------------

    In the Proposing Release, the Commission acknowledged that 
``requiring an additional specification of realized spreads would 
entail adding another data item, which would also increase the 
complexity of Rule 605 reports.'' \1802\ However, upon further review, 
the Commission agrees with a commenter that the detailed Rule 605 
reports are ``intended to be machine-readable, not human-readable,'' 
and that ``[a]dding rows and columns to the Rule 605 report, within 
reason, would not materially increase the costs of processing these 
reports and storing the relevant data.'' \1803\ Furthermore, a lower 
number of time horizons would reduce the benefits from including a wide 
range of realized spread time horizons, as discussion in section 
IX.D.1.b)(2)(c)(i).
---------------------------------------------------------------------------

    \1802\ See Proposing Release, 88 FR 3786 at 3892 (Jan. 20, 
2023).
    \1803\ See FIF Letter at 16.
---------------------------------------------------------------------------

    One commenter suggested replacing the five-minute time horizon with 
``short timeframes to include 50ms, 100ms.'' \1804\ Some of the results 
from the Commission's analysis of realized spreads in section 
IX.D.1.b)(2)(c)(i) support the inclusion of very short time horizons, 
particularly for the largest stocks, and as discussed above the 
Commission is including a 50-millisecond time horizon.\1805\ However, 
other analyses show that including longer time horizons will be 
beneficial for smaller stocks.\1806\ Therefore, as discussed above, it 
will be beneficial to include a wide range of time horizons between 50 
milliseconds and 5 minutes.
---------------------------------------------------------------------------

    \1804\ See Healthy Markets Letter at 17.
    \1805\ See, e.g., the results in Figure 19 and surrounding 
discussion.
    \1806\ See, e.g., the results in Figure 18 and Table 6 and 
surrounding discussion.
---------------------------------------------------------------------------

(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.'' The Commission did not receive 
comment on this alternative, which was also in the Proposing 
Release.\1807\ 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. This horizon varies according to characteristics that impact 
liquidity providers' ability to turn over their positions, including 
stock liquidity; \1808\ 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.
---------------------------------------------------------------------------

    \1807\ See Proposing Release, 88 FR 3786 at 3892 (Jan. 20, 
2023).
    \1808\ See supra note 1239 and the results in Figure 14 and 
surrounding discussion.
---------------------------------------------------------------------------

    Instead of setting a fixed ``clock time'' horizon, volume or 
``trade time'' measures changes between the ``the initial trade to the 
ith trade thereafter,'' \1809\ 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 allows for the horizon to match these 
different speed ``regimes'' and might result in realized spread 
calculations that are more consistently relevant.\1810\
---------------------------------------------------------------------------

    \1809\ See Conrad and Wahal, supra note 544, at 241.
    \1810\ For this reason, some academic studies use 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 this 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.\1811\ More computationally intensive metrics

[[Page 26600]]

would likely increase reporting entities' compliance costs. Therefore, 
the adopted amendment to include multiple fixed time horizons will 
allow for sufficient 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.
---------------------------------------------------------------------------

    \1811\ See supra note 1009.
---------------------------------------------------------------------------

(3) Use Weighted Midpoint To Calculate Effective and Realized Spread
    Under the adopted amendments, Rule 600(b)(8) 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. For midpoint-or-better limit orders, the time of executability 
is used rather than the time of order receipt.\1812\ The Commission is 
further adopting a definition of the average percentage effective 
spread, which will be equal to the average effective spread for order 
executions, divided by the midpoint for order executions.\1813\ 
However, an academic study \1814\ 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.\1815\
---------------------------------------------------------------------------

    \1812\ See final 17 CFR 242.600(b)(8).
    \1813\ See final 17 CFR 242.600(b)(10).
    \1814\ See Bias in the Effective Bid-Ask Spread, supra note 
1244.
    \1815\ 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 id.
---------------------------------------------------------------------------

    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.\1816\ Furthermore, the midpoint may be easier to compute and 
interpret, as it is more familiar to market participants than the 
weighted midpoint. The Commission did not receive comment on this 
alternative, which was also in the Proposing Release.\1817\
---------------------------------------------------------------------------

    \1816\ This may not be a significant cost, as reporting entities 
are required to collect information on NBBO depth for computing the 
size improvement measures under the adopted amendments. See supra 
section III.B.4.e)(2).
    \1817\ See Proposing Release, 88 FR 3786 at 3893 (Jan. 20, 
2023).
---------------------------------------------------------------------------

(d) Reasonable Alternative Size Improvement Measures
(1) Dollar Size Improvement Calculated Using Proprietary Full Depth-of-
Book Data
    The Commission considered alternative measures of size improvement, 
including requiring a measure of dollar size improvement that would 
capture the dollar savings that an investor receives from size 
improvement offered by a reporting entity, taking into account the 
depth of book quotes and odd-lot quotes available from all exchanges' 
proprietary depth-of-book data feeds. The measures of dollar size 
improvement considered include both RPI and a modified RPI measure that 
would account for the fact that order sizes may exceed the consolidated 
depth available across all order levels.
    First, as suggested by a petitioner, the Commission considered 
requiring the reporting of RPI, which would be calculated as the signed 
difference between the value-weighted average price (``VWAP'') of the 
transaction, and a reference price calculated as the VWAP 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.\1818\ 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.\1819\ Because prices worsen deeper in 
the book, this measure could contain more information than combining 
price improvement with the size improvement metrics described in 
section IX.D.1.b)(2)(c)(v). Further, because the execution price is 
measured relative to depth of book as opposed to midpoint, this measure 
could contain information beyond effective spread.
---------------------------------------------------------------------------

    \1818\ See supra section III.B.4.e)(2) for further discussion of 
the RPI measure.
    \1819\ There can be variation in the information contained in 
different national securities exchanges' proprietary depth-of-book 
data feeds. For example, some exchange depth-of-book products may 
offer information on order messages while others may offer aggregate 
information on the shares available at different price levels. 
Additionally, it is also possible that some national securities 
exchanges may not offer depth-of-book data feeds. It may be 
difficult to compare RPI across reporting entities if different 
entities used different depth-of-book feeds containing different 
information to compute the metric.
    \1820\ To see why this matters for a measure of dollar size 
improvement, consider an example where a wholesaler internalizes a 
sell order for 10,000 shares at the NBB, while there are only 6,000 
shares available across all bid prices in the consolidated book. The 
hypothetical price that the trader would have gotten for the 4,000 
shares in excess of the consolidated book depth is not defined, and 
thus it is unclear how the RPI reference price (i.e., the VWAP that 
the trader would have gotten from walking a consolidated limit order 
book consisting of displayed liquidity from all national securities 
exchanges) should be calculated.
---------------------------------------------------------------------------

    In addition to RPI, the Commission also considered a modified RPI 
measure that would account for the fact that order sizes may exceed the 
consolidated depth available across all order levels.\1820\ This 
alternative would account for this possibility by truncating the 
calculation of dollar size improvement at the consolidated depth of 
book size, and separately requiring the reporting of the number of 
shares executed in excess of consolidated depth of book size. 
Specifically, this alternative would consist of the following three 
data elements: (1) The share-weighted average of, for each order, the 
signed difference between the value-weighted average price (``VWAP'') 
that the trader would have gotten from walking a consolidated limit 
order book consisting of the depth available from consolidated 
proprietary depth-of-book data, and the midpoint (``reference 
spread''); (2) The share-weighted average of, for each order, the 
signed difference between the VWAP that the trader actually received on 
their order and the midpoint. If the number of executed shares exceeded 
the depth available from consolidated proprietary depth-of-book data, 
the VWAP should only be calculated for those executed shares that are 
not in excess of this sum (``truncated effective spread''); (3) The sum 
of, for each order, the number of shares executed in excess of the 
depth available from consolidated proprietary depth-of-book data 
(``shares executed in excess of consolidated depth-of-book''). With 
this information, market participants would be able to compare the 
truncated effective spread to the reference spread to determine the 
dollar size improvement that they received for their order (capped at 
the consolidated depth-of-book size). Market participants would also be 
able to use the shares

[[Page 26601]]

executed in excess of consolidated depth-of-book for two purposes. 
First, market participants would be able to get a sense of the number 
of executed shares that are not included in the truncated effective 
spread and reference benchmark measures, which would help contextualize 
the informativeness of these measures. Second, in combination with 
information about total executed shares and share-weighted average 
effective spread in Rule 605 reports, market participants could use 
this measure to back out the per share effective spread paid for shares 
executed in excess of consolidated depth-of-book.\1821\
---------------------------------------------------------------------------

    \1821\ To see this, consider that the average effective spread 
(EffSpr) can be calculated as the weighted average between the 
truncated effective spread (EffSprtrunc) and the 
effective spread paid for shares in excess of consolidated depth-of-
book (EffSprexcess). By defining by stotal the 
total number of executed shares, sexcess the shares 
executed in excess of consolidated depth-of-book, one can calculate 
the number of shares available from the consolidated depth-of-book 
at strunc = stotal-sexcess. The 
effective spread paid for shares in excess of consolidated depth-of-
book EffSprexcess could then be derived from the 
following relationship: EffSpr = (strunc/
stotal) * EffSprtrunc + (sexcess/
stotal) * EffSprexcess.
---------------------------------------------------------------------------

    Dollar size improvement metrics differ from the size improvement 
metrics in the adopted amendments in several ways. First, in the 
adopted amendments, both the order size benchmark and the size improved 
outsized shares \1822\ are reported in terms of numbers of shares, and 
as such do not ascribe a dollar value to the size improvement received 
by traders. Therefore, while market participants can use these metrics 
to calculate the rate of size improvement offered by a reporting entity 
(e.g., by calculating the outsized size improvement rate \1823\), they 
do not allow market participants to associate this rate with a 
particular cost savings.\1824\ Second, while the size improvement 
metrics included in the adopted amendments consider only displayed 
depth available at the NBBO, the alternative dollar size improvement 
metrics would incorporate information about the consolidated depth and 
prices available across all order book levels.
---------------------------------------------------------------------------

    \1822\ See supra section III.B.4.(e)(2) for more information 
about these metrics.
    \1823\ See supra note 1547 and corresponding text for 
information about how the outsized size improvement rate is 
calculated.
    \1824\ Rule 605 as amended will allow for market participants to 
calculate some information about their cost savings. First, the 
measures of price improvement in final Rule 605(a)(1)(ii)(F) and (O) 
will allow market participants to calculate their savings relative 
to, respectively, the NBBO and best displayed price. However, this 
measure will be incomplete for orders that execute with size 
improvement. Second, the average effective spread in final Rule 
605(a)(1)(ii)(B) will allow market participants to calculate their 
savings relative to the midpoint. However, this measure does not 
take into consideration the prices or depth available at different 
order books levels.
---------------------------------------------------------------------------

    Requiring the reporting of dollar size improvement in Rule 605 
reports could result in additional benefits for market participants 
relative to the adopted amendments. Because it incorporates information 
across all order book levels, a measure of dollar size improvement 
(such as RPI) may be more informative than measures calculated only 
using information about depth at the best displayed prices. In order to 
compare the extent to which RPI and the adopted size improvement 
metrics contain similar information about size improvement, the 
Commission used data from the Tick Size Pilot B.II Market and 
Marketable Limit Order dataset \1825\ to calculate the average 
correlation \1826\ between these measures. Similar to the analysis in 
Table 8 examining whether price improvement and size improvement 
measures contain different information, the Commission also calculated 
the average correlation between RPI, price improvement and effective 
spreads to confirm that RPI 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.
---------------------------------------------------------------------------

    \1825\ See supra note 1545 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 will impact the correlations between these 
measures documented in this analysis. See supra section 
IX.C.1.c)(2).
    \1826\ See supra note 1546 for a description of how average 
correlations are calculated.
---------------------------------------------------------------------------

    Results are presented in Table 15 and show that RPI and price 
improvement have a correlation of around 0.4 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.\1827\ Similarly, there is moderate negative 
correlation between RPI and effective spreads, implying that these 
measures are also somewhat overlapping in terms of their information 
about execution quality for both types of market centers. The analysis 
shows a low level of correlation between RPI and the outsized size 
improvement rate for exchanges (6.4%) and for off-exchange market 
centers (14.1%). This implies that the adopted size improvement measure 
may be missing some information about size improvement that would be 
contained in a measure of dollar size improvement, such as RPI.
---------------------------------------------------------------------------

    \1827\ This analysis has been updated from the Proposing Release 
for the reasons described in supra note 1548. See Proposing Release, 
88 FR 3786 (tbl. 15) (Jan. 20, 2023). The Proposing Release found 
higher correlation between RPI and the proposed measure of size 
improvement (18.4% for exchanges and 22.7% for off-exchange market 
centers). Therefore, relative to the Proposing Release, the analysis 
in Table 15 is more indicative of the adopted size improvement 
measure missing some information about size improvement that would 
be contained in a measure of dollar size improvement, such as RPI.

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

[[Page 26602]]

[GRAPHIC] [TIFF OMITTED] TR15AP24.043

    Reporting RPI or the modified version of RPI would require depth-
of-book information. In the Proposing Release, the Commission stated 
that it was not clear that the cost of requiring reporting entities to 
have access to the full set of consolidated depth information would 
justify the benefits of RPI. One commenter disagreed with this 
conclusion and stated that ``[t]he SEC does not however quantify these 
costs or benefits.'' \1828\ However, the Commission observed in the 
Proposing Release that 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.\1829\ The Commission otherwise qualitatively analyzed the costs 
and benefits of this alternative.\1830\ Another commenter stated that 
``many brokers utilize vendors to produce Rule 605 reports and these 
vendors are capable of handling depth-of-book data.'' \1831\ The 
Commission acknowledges these to be potential cost reductions to 
reporting RPI to the extent that multiple market centers use vendors 
that subscribe to depth-of-book data and vendors pass along the 
resultant cost savings to market participants. It is also the case that 
the data may be available at lower cost if not purchased in real time, 
though the cost may still be substantial.\1832\
---------------------------------------------------------------------------

    \1828\ See CCMR Letter at 16.
    \1829\ See Proposing Release, 88 FR 3786 at 3818, n.414 (Jan. 
20, 2023).
    \1830\ See id.
    \1831\ Virtu Letter II at 12-13. The commenter also states that 
more market centers would need to purchase depth of book data should 
the Commission adopt the Minimum Pricing Proposal; see Minimum 
Pricing Increments Proposing Release, 87 FR 80266 (Dec. 29, 2022). 
This Proposal has not been adopted and thus is not considered as 
either part of the baseline or a cost mitigant here. See supra note 
981.
    \1832\ See, e.g., Price List--U.S. Equities, the Nasdaq Stock 
Market, NASDAQ, available at https://www.nasdaqtrader.com/Trader.aspx?id=DPUSdata#tv (last visited Feb. 2, 2024, 2:11 p.m.); 
and Historical Proprietary Market Data Pricing, NYSE (Jan. 2024), 
available at https://www.nyse.com/publicdocs/nyse/data/NYSE_Historical_Market_Data_Pricing.pdf.
---------------------------------------------------------------------------

    To mitigate the costs of calculating dollar size improvement using 
full depth-of-book data, the Commission considered a second alternative 
that would add a field (or fields) to Rule 605 reports for a dollar 
size improvement measure (or measures), but allow reporting entities 
that subscribe to the full set of proprietary data feeds to voluntarily 
report this measure.\1833\ This approach would standardize the 
disclosure for those entities that choose to report. And only those 
reporting entities that decide to voluntarily report would incur 
additional costs, which may be minimal to the extent they already 
subscribe to proprietary depth-of book products. However, reporting 
entities could voluntarily provide this same information on their 
websites, alongside their Rule 605 reports, without the Commission 
amending the Rule 605 reports to add this field, and the information 
benefits of reporting this information as part of the Rule 605 reports 
versus reporting the information separately, in the same format but a 
different file, is not clear. The Commission acknowledges, however, 
that there may be a benefit to investors and to market participants, 
wishing to signal execution quality, to have these statistics as part 
of their Rule 605 reports. The Commission may evaluate the issues 
raised after the implementation of the MDI Rules.
---------------------------------------------------------------------------

    \1833\ This alternative was also discussed in the Proposing 
Release. See Proposing Release, 88 FR 3786 at 3893 (Jan. 20, 2023).
---------------------------------------------------------------------------

(2) Dollar Size Improvement Calculated Using MDI Depth-of-Book Data
    The Commission also considered an alternative that would require 
all Rule 605 reporting entities to report information that is similar 
to the petitioner's measure of RPI described above but adapted to 
require this information only to be reported relative to the odd-lot, 
aggregate quotation size, and depth-of-book information that will be 
available from competing consolidators following the implementation of 
the MDI Rules.\1834\ Since consolidated market data under MDI includes 
only five levels of depth-of-book data,\1835\ under this alternative, 
the required size improvement information would be truncated at the

[[Page 26603]]

sum of displayed liquidity available of shares available from odd-lot 
information,\1836\ aggregate quotation size,\1837\ and depth-of-book 
data.\1838\ Similarly to the measure described in section IX.E.3(d)(1), 
this would also have the effect of excluding from the measure shares 
that are executed in excess of consolidated depth of book size, for 
which RPI is not defined.
---------------------------------------------------------------------------

    \1834\ See supra section IX.C.1.c)(2). One commenter stated that 
a size improvement measure should not be included within Rule 605 
until such a time when the public data feed contains more 
information regarding the depth of quotations. See Healthy Markets 
Letter at 18.
    \1835\ See MDI Adopting Release, 86 FR 18596 at 18625 (Apr. 9, 
2021). MDI requires all national securities exchanges to make market 
data feeds containing their odd-lot information and depth-of-book 
data available to competing consolidators and self-aggregators, 
which would ensure that all exchanges provide the information needed 
to calculate this measure.
    \1836\ See final 17 CFR 242.600(b)(69)(ii).
    \1837\ See 17 CFR 242.600(b)(3).
    \1838\ See final 17 CFR 242.600(b)(31).
---------------------------------------------------------------------------

    Specifically, this alternative would consist of the following three 
data elements: (1) The share-weighted average of, for each order, the 
signed difference between the value-weighted average price (``VWAP'') 
that the trader would have gotten from walking a consolidated limit 
order book consisting of the depth available from odd-lot information, 
aggregate quotation size, and depth-of-book data (``reference 
spread''); (2) The share-weighted average of, for each order, the 
signed difference between the VWAP that the trader actually received on 
their order and the midpoint. If the number of executed shares exceeds 
the depth available from odd-lot information, aggregate quotation size, 
and depth-of-book data, the VWAP should only be calculated for those 
executed shares that are not in excess of this sum (``truncated 
effective spread''); (3) The sum of, for each order, the number of 
shares executed in excess of the depth available from odd-lot 
information, aggregate quotation size, and depth-of-book data (``shares 
executed in excess of consolidated depth-of-book'').
    Requiring the reporting of dollar size improvement calculated using 
data available from competing consolidators could result in some 
additional costs, as reporting entities (following the implementation 
of MDI rules) would be required to obtain depth-of-book data from 
competing consolidators in order to calculate these measures.\1839\ To 
the extent that these reporting entities would have purchased a less 
expensive data product that does not include depth-of-book information 
absent this requirement, this would result in additional costs for 
market participants. However, this alternative could result in 
additional benefits for market participants relative to the adopted 
amendments. Because it would incorporate information across multiple 
order book levels, it may be more informative than measures calculated 
using information only about depth at the best displayed prices. As 
such, it would have some of the same benefits as the alternative in 
section IX.E.3(d)(1), though it would not have all of these benefits as 
the measure would only incorporate information from a subset of order 
book levels. It would be likely to come at lower cost compared to the 
alternative above.\1840\ Though the Commission is not adopting this 
alternative, the Commission will continue to evaluate the issues raised 
to determine if any further action is appropriate following the 
implementation of MDI.
---------------------------------------------------------------------------

    \1839\ To the extent competing consolidators make it available, 
reporting entities could compute the metrics using historical depth-
of-data, which could have a lower price than real-time depth of 
book.
    \1840\ Also, unlike the alternative in section IX.E.3(d)(1), 
this alternative would not require the Commission to identify which 
proprietary depth-of-book data products would be needed to calculate 
the measure, since the measure would be calculated based on depth-
of-book data as defined in core data under the MDI rule.
---------------------------------------------------------------------------

(3) Other Measures of Size Improvement
    As an alternative to the adopted size improvement metrics, one 
commenter suggested including three metrics related to size 
improvement: ``(1) the number of orders for which the order size 
exceeded the available shares displayed on the relevant side of the 
NBBO (`outsized orders'); (2) the total number of shares executed as 
part of these outsized orders; and (3) the number (or percentage) of 
shares within the outsized orders that received size improvement (i.e., 
were executed at or better than the NBBO price, in excess of the amount 
of aggregate displayed liquidity at the NBBO).'' \1841\ The commenter 
stated that, compared to the proposed size improvement metrics, 
``[t]hese metrics would be more informative as they are not affected by 
orders in which there was not a need to provide size improvement.'' 
\1842\
---------------------------------------------------------------------------

    \1841\ See Virtu Letter at 10.
    \1842\ See id.
---------------------------------------------------------------------------

    The Commission agrees with the commenter that ``the number (or 
percentage) of shares within the outsized orders that received size 
improvement (i.e., were executed at or better than the NBBO price, in 
excess of the amount of aggregate displayed liquidity at the NBBO)'' 
would be useful for market participants, and is adopting the ``size 
improvement outsized shares,'' which is substantively equivalent to the 
commenter's third suggested metric.\1843\ However, the information 
provided by the other two metrics suggested by the commenter would not 
be as informative as similar information included in the amendments.
---------------------------------------------------------------------------

    \1843\ See supra section III.B.4.e)(2) for further discussion of 
the ``size improvement outsized shares.''
---------------------------------------------------------------------------

    The suggested metric, ``the number of orders for which the order 
size exceeded the available shares displayed on the relevant side of 
the NBBO (`outsized orders'),'' is similar to the outsized share count 
in the adopted amendments but less informative because it is based on 
the number of orders.\1844\ As most other metrics required by Rule 605 
are recorded in terms of number of shares, rather than number of 
orders,\1845\ market participants would not have been able to compare 
the suggested measure to the other measures in Rule 605 reports.
---------------------------------------------------------------------------

    \1844\ As discussed in section IX.D.1.b)(2)(c)(v), by comparing 
the adopted order size benchmark to the total number of submitted 
shares, market participants will be able calculate the number of 
shares that were submitted in excess of the available shares 
displayed on the relevant side of the NBBO (``outsized share 
count''). Outsized Share Count = Number of Submitted Shares-Order 
Size Benchmark. See supra note 1543.
    \1845\ For example, the metrics required by final Rule 
605(a)(1)(i)(C) through (N); (a)(1)(ii)(E), (H), (J), (M), (O), (P), 
(R), and (S); (a)(1)(iii)(B) and (C) are required to be reported in 
terms of number of shares. In contrast, final Rule 605(a)(1)(i)(A) 
and (a)(1)(iii)(A) are the only statistics required to be reported 
in terms of number of orders.
---------------------------------------------------------------------------

    The suggested metric, ``the total number of shares executed as part 
of these outsized orders,'' is similar to the outsized share count in 
the adopted amendments, but less informative because it would not 
control for size improvement opportunities. While the commenter did not 
specify why this metric would be informative to market participants 
regarding size improvement, one possible use would be to assess the 
number of shares within outsized orders that execute with size 
improvement, as a percentage of total executed shares within outsized 
orders, as a way to calculate a size improvement ``rate.'' For example, 
if the metrics would reveal that 200 shares executed as part of 
outsized orders, and 100 shares of outsized orders received size 
improvement, a market participant could infer that 50% of shares 
executed as part of outsized orders were executed with size 
improvement. However, this rate metric would not be able to distinguish 
between different size improvement opportunities in cases of different 
levels of available depth, and thus would lead to an inaccurate 
comparison across market centers.
    To see this, consider Market A, which fully executes a 500-share 
order at the NBBO while there were only 200 shares of available NBBO 
depth. The metrics suggested by the commenter would reveal the 
following information: (1) one outsized order, (2) 500 shares executed 
as part of outsized orders, and (3) 300 shares of outsized orders that 
received size improvement. Compare this to Market Center B, which fully 
executes a 500-share order at the NBBO while there were 400 shares of 
available NBBO

[[Page 26604]]

depth. The metrics suggested by the commenter would reveal the 
following information: (1) one outsized order, (2) 500 shares executed 
as part of outsized orders, and (3) 100 shares of outsized orders that 
received size improvement. While Market Center B would reveal a 
``worse'' rate of only 20% of executed outsized shares receiving size 
improvement (compared to Market Center A's 60%), this would not take 
into account that Market Center B had fewer ``opportunities'' to 
provide size improvement (in terms of the number of shares that were 
eligible to receive size improvement), due to the higher available 
depth. In other words, comparing the number of shares executed with 
size improvement to the number of executed shares in outsized orders 
would not result in a measure that takes into account the number of 
shares that were eligible to receive size improvement. Instead, a more 
informative assessment of size improvement is to compare (1) the number 
of shares within outsized orders that received size improvement to (2) 
the number of shares that were eligible to receive size improvement. 
The first metric is equivalent to the size improved outsized share 
count, which the Commission is adopting.\1846\ The second metric is 
equivalent to the ``outsized share count,'' which can also be 
calculated from metrics included in the adopted amendments, i.e., by 
subtracting the order size benchmark from the number of submitted 
shares.\1847\
---------------------------------------------------------------------------

    \1846\ See final 17 CFR 242.605(a)(1)(ii)(S).
    \1847\ See supra note 1844.
---------------------------------------------------------------------------

    In sum, because a size improvement rate calculated relative to 
``the total number of shares executed as part of these outsized 
orders'' would not control for size improvement opportunity, and 
because a measure of submitted volume that exceed available depth 
expressed in terms of number of orders would not allow market 
participants to compare this measure to most other Rule 605 measures, 
the Commission does not believe that the metrics suggested by the 
commenter would be more informative than those included in these 
amendments. Furthermore, the Commission disagrees that the metrics 
suggested by the commenter ``would be more informative as they are not 
affected by orders in which there was not a need to provide size 
improvement.'' \1848\ While it is true that the metrics suggested by 
the commenter ``are not affected by orders in which there was not a 
need to provide size improvement,'' as discussed in section 
IX.D.1.b)(2)(c)(v), the adopted size improvement metrics also allow 
market participants to net out the effect of shares for which there 
were no size improvement opportunities from an analysis of size 
improvement, i.e., by subtracting the order size benchmark from the 
number of submitted shares to get the outsized share count.
---------------------------------------------------------------------------

    \1848\ See Virtu Letter at 10.
---------------------------------------------------------------------------

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 on their websites, the Commission 
considered requiring market centers to submit Rule 605 reports to a 
centralized electronic system, which would have then made these reports 
available to market participants. Multiple commenters supported the 
centralized posting of Rule 605 reports, stating that such 
centralization would ``facilitate accessibility'' \1849\ and ultimately 
``increase transparency'' \1850\ and ``promot[e] competition'' \1851\ 
leading to ``improvements in execution quality.'' \1852\ By contrast, 
one commenter opposed centralized filing of Rule 605 reports because 
the resulting ease of access would give too much information to ``free 
riders'' who would ``use market modeling for mischief.'' \1853\ We do 
not agree that increasing accessibility to Rule 605 reports would be 
detrimental to markets. As discussed in further detail below, 
centralized posting of Rule 605 reports would likely have better 
enabled market participants to access, evaluate, and compare the 
reports of multiple (or even the complete set of) reporting entities. 
However, because implementing such centralization would have entailed 
costs and uncertainties as well as potential time delays in 
implementation, the Commission did not adopt this alternative.\1854\
---------------------------------------------------------------------------

    \1849\ See Fidelity Letter at 8; see also Nasdaq Letter at 46; 
BlackRock Letter at 4; J.T. Letter; HMA Letter at 16.
    \1850\ See BlackRock Letter at 4; see also J.T. Letter.
    \1851\ See BlackRock Letter at 4; see also Nasdaq Letter at 46.
    \1852\ See Nasdaq Letter at 46.
    \1853\ See Data Boiler Letter I at 27-28; see also supra section 
IX.D.2.b)(5) for further discussion of the cost of free riding as a 
potential cost of the amendments to Rule 605.
    \1854\ See supra section V.B.2.a) for further discussion.
---------------------------------------------------------------------------

    Market participants may 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.\1855\ Such search costs will 
increase under the adopted amendments, which expand the number of 
reporting entities from 228 to 343, including 85 broker-dealers that 
introduce or carry 100,000 or more customer accounts.\1856\ Compared to 
the adopted amendments, which maintain the requirement for market 
centers to post Rule 605 reports on their individual websites, creating 
a centralized electronic system would have lowered these search costs 
by making it easier for market participants to locate, collect and 
aggregate data from multiple Rule 605 reports in order to compare 
reporting entities, because all reports would have been available at a 
single central location. Compared to the adopted amendments, this 
reduction in search costs and resulting increase in accessibility would 
have enabled investors to use Rule 605 reports to compare execution 
quality across larger broker-dealers more efficiently. This might have 
increased the extent to which broker-dealers would need to compete on 
the basis of execution quality.
---------------------------------------------------------------------------

    \1855\ For example, in order to collect a complete or mostly 
complete set of Rule 605 reports to select the reporting entity 
offering the best execution quality in a given stock, a market 
participant will need to perform the following tasks, for each 
reporting entity: 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). 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, and by the use of third-party vendors. See 
supra section IX.C.3.d) for a discussion; see also supra section 
IX.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 adopted amendments.
    \1856\ See supra section VIII.C for a discussion of the 
estimated number of reporting entities under the adopted amendments; 
see also supra section IX.D.1.d)(3) for a discussion of how the 
increase in reporting entities under the adopted amendments may 
increase search costs for some market participants.
---------------------------------------------------------------------------

    Likewise, compared to the adopted amendments, a centralized 
electronic system would have better enabled broker-dealers to use Rule 
605 reports to compare execution quality across market centers, and 
thus might have increased competition among market centers on the basis 
of execution quality in order to attract order flow.\1857\ Also, unlike 
the individual website posting requirement under the amended rule, a 
centralized electronic system could

[[Page 26605]]

have enabled programmatic checks for appropriate standardization, 
formatting, and completeness before posting, and thus could have 
reduced processing costs for users compared to the amendments.
---------------------------------------------------------------------------

    \1857\ Several commenters agreed that centralization would 
promote the benefits of Rule 605 for competition. See, e.g., 
Blackrock Letter at 4; Nasdaq Letter at 46; J.T. Letter at 7.
---------------------------------------------------------------------------

    While the Commission agrees with commenters that centralizing Rule 
605 reports would have created these benefits, the Commission also 
recognizes that requiring such centralization would impose 
uncertainties and costs related to implementation. As discussed above, 
commenters did not have a consensus view on how to accomplish 
centralization.\1858\ One commenter recommended having FINRA maintain a 
public database for Rule 605 reports,\1859\ another recommended the 
Commission post all Rule 605 reports on a single page on the 
Commission's website,\1860\ and another recommended working out the 
details of a central repository through the Rule 605 NMS Plan.\1861\
---------------------------------------------------------------------------

    \1858\ See supra section V.B.2.a.
    \1859\ See Healthy Markets Letter at 16.
    \1860\ See Fidelity Letter at 8.
    \1861\ See Angel Letter at 3.
---------------------------------------------------------------------------

    The entity or entities responsible for administering the Rule 605 
centralized electronic system would have incurred costs to create and 
maintain a system (including any compliance, programmatic formatting, 
completeness, and/or consistency checks that the system would run on 
the reports before dissemination). Administering entities could have 
passed these costs on to reporting entities in the form of filing fees, 
and/or to consumers of Rule 605 reports in the form of access fees. If 
potential consumers of Rule 605 reports decided not to access the 
reports because of these access fees, this would have represented a 
cost in the form of reduced accessibility of Rule 605 reports.\1862\ 
Furthermore, to the extent that the centralized electronic system would 
have included programmatic formatting, completeness, and/or consistency 
checks on Rule 605 reports before accepting them, reporting entities 
would also have incurred costs to resolve any issues detected by such 
checks.\1863\
---------------------------------------------------------------------------

    \1862\ However, maintaining the current requirement for 
reporting entities to post a free version of the report on their 
websites would have mitigated this cost by requiring that Rule 605 
reports would continue to be freely available.
    \1863\ Reporting entities would likely have been most 
efficiently situated to remedy any identified issues in their own 
reports before posting (as opposed to having system administrators 
or report users remedy such issues).
---------------------------------------------------------------------------

    The Commission specifically considered two options for how to 
implement the centralized electronic system: using the existing Rule 
605 NMS Plan and the Commission's EDGAR system.
    One commenter supported a requirement 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.\1864\ As discussed above, the creation of a centralized 
electronic system would generally have resulted in additional economic 
benefits as compared to the adopted amendments by further promoting 
transparency and competition, and by reducing market participants' 
search costs through the availability of all Rule 605 reports at a 
single location. However, as the NMS Plan would have been tasked with 
designing and implementing the centralized electronic system, the 
Commission would ex ante be uncertain as to the specific functionality, 
ease of access, and extent of user fees that such a centralized 
electronic system would have provided. Likewise, the accessibility and 
timeliness of centralized Rule 605 information would have depended on 
how the NMS Plan would develop the functionality for distributing or 
making the Rule 605 reports public. Thus, adopting this alternative 
would have introduced a level of uncertainty as to the access and use 
of Rule 605 reports.
---------------------------------------------------------------------------

    \1864\ See Angel Letter at 3.
---------------------------------------------------------------------------

    The Commission also considered requiring reporting entities to 
disclose Rule 605 information directly to the Commission through the 
Commission's EDGAR system, with the Commission subsequently making the 
information publicly available on EDGAR.\1865\ However, two commenters 
opposed this alternative, characterizing EDGAR technology as 
``outdated'' and ``inadequate for the task.'' \1866\ Unlike an NMS Plan 
requirement, an EDGAR requirement would not have involved any costs to 
NMS Plan participants of creating and maintaining an electronic system 
for Rule 605 reports, and, as EDGAR does not charge any reporting or 
access fees, would not have involved the cost to reporting entities of 
paying reporting fees or the cost to consumers of Rule 605 reports of 
paying access fees. However, an EDGAR alternative would have increased 
certain reporting entities' compliance costs relative to the adopted 
amendments, as any reporting entities that do not already submit 
documents to the Commission via EDGAR would have incurred a one-time 
burden of submitting a notarized Form ID application to obtain EDGAR 
access codes, a burden that does not apply under the adopted 
amendments.\1867\ EDGAR functionality would also have allowed for 
programmatic checks for appropriate standardization, formatting, and 
completeness of Rule 605 reports before dissemination, and while such 
checks would have improved the quality of Rule 605 data and thus 
benefited users of Rule 605 data, they would also have imposed upon 
reporting entities the additional burden of resolving any detected 
issues and submitting a corrected report before dissemination.
---------------------------------------------------------------------------

    \1865\ 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.
    \1866\ See FIF Letter at 33; Healthy Markets Letter at 16.
    \1867\ See 17 CFR 232.10; Section 3 of the EDGAR Filer Manual 
(Volume I) version 41 (Dec. 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 68 (Dec. 2023).
---------------------------------------------------------------------------

    Because the centralization of Rule 605 disclosures, whether through 
an NMS Plan, EDGAR, or some other means, would have introduced 
implementation costs and uncertainties as well as implementation time 
delays compared to the adopted amendments, the Commission did not adopt 
a requirement for centralized posting of Rule 605 reports.
(b) Modify Format Requirements for Rule 605 Reports
    Rule 605 requires reports to be made available to the public in a 
uniform, readily accessible, and usable electronic format through 
procedures established by the NMS plan participants,\1868\ and the 
governing NMS Plan specifies that Rule 605 reports must be provided in 
pipe-delimited ASCII, which is a machine-readable electronic 
format.\1869\ This has not changed under the adopted amendments. The 
Commission considered an alternative that would have required the 
detailed Rule 605 reports to be provided using an expanded version of 
the existing XML schema for Rule 606 reports.\1870\ This

[[Page 26606]]

alternative would have allowed the data on detailed 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.\1871\ In 
addition, the use of XML rather than pipe-delimited ASCII would have 
facilitated the use of more complex data error checks (such as checks 
on elements in nested structures).
---------------------------------------------------------------------------

    \1868\ See prior 17 CFR 242.605(a)(2); final 17 CFR 
242.605(a)(3).
    \1869\ See Rule 605 NMS Plan at 2 (``Section V . . . provides 
that market center files must be in standard, pipe-delimited ASCII 
format''); see also supra note 135 and accompanying text. Even in 
the absence of an effective NMS plan, reports must be prepared ``in 
a consistent, usable, and machine-readable electronic format.'' 
Prior 17 CFR 242.605(a)(2); final 17 CFR 242.605(a)(4).
    \1870\ See 17 CFR 242.606(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.
    \1871\ See Rule 11Ac1-5 Adopting Release, 65 FR 75414 at 75414 
(Dec. 1, 2000).
---------------------------------------------------------------------------

    On the other hand, this alternative would have required 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 adopted 
amendments. Furthermore, because Rule 605 reports consist solely of a 
series of discrete numeric values, and do not contain elements in 
nested structures, the sophisticated validations that XML enables would 
not have provided significant benefits for Rule 605 reports. In 
addition, because the nature of the Rule 606 data (which include 
narrative discussions) differs from the nature of the Rule 605 data 
(which are 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 will 
report Rule 605 data (market centers and larger broker-dealers), the 
benefits to be realized from interchangeable usage of Rule 605 and Rule 
606 data would not have been significant.
    In a change from the proposal, the adopted amendments require 
market centers to publish summary reports in CSV and PDF formats. One 
commenter recommended this approach, stating CSV (or another format 
that can be copied into a spreadsheet program) ``would allow investors 
to compare summary data across firms more readily.'' \1872\ We could 
alternatively have adopted the proposed requirement for market centers 
to publish summary reports in XML and PDF formats. Compared to CSV, XML 
can accommodate a wider variety of content structures, such as a series 
of multiple differently laid out tables or tables accompanied by 
textual footnotes. XML also enables more sophisticated validations than 
CSV does, such as validations on multiple nested elements. However, 
summary reports do not contain multiple differently laid out tables, 
textual footnotes, or nested elements, so these capabilities of XML are 
not relevant to summary reports. Instead, the Commission agrees with 
the commenter that using CSV rather than XML for the summary reports 
will allow investors to analyze summary report data more readily, and 
that this increased usability is more relevant to summary report data 
than the broader technical coverage that XML provides. The amended 
rules therefore replace the proposed XML requirement for summary 
reports with a CSV requirement.
---------------------------------------------------------------------------

    \1872\ See FIF Letter at 6.
---------------------------------------------------------------------------

5. Other Reasonable Alternatives
(a) Releasing Aggregated CAT Data
    As an alternative to the adopted amendments, the Commission 
considered using CAT data to have either the Commission or the CAT Plan 
Processor \1873\ provide execution quality information to the public at 
monthly intervals--or more frequently. This alternative would 
effectively eliminate the need for Rule 605 reports.
---------------------------------------------------------------------------

    \1873\ 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 (Nov. 15, 2016), 
n.136, 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 adopted amendments, as it would not require reporting 
entities to prepare Rule 605 reports. Another benefit of this 
alternative with regard to the adopted amendments 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.\1874\
---------------------------------------------------------------------------

    \1874\ See supra section IX.E.1.b) for a discussion of increased 
transparency from expanding reporting requirements to include all 
broker-dealers.
---------------------------------------------------------------------------

    Numerous commenters supported this alternative, stating that 
requiring CAT to produce Rule 605 reports would increase efficiency and 
reduce the burdens and costs associated with preparing Rule 605 
reports,\1875\ and would result in more consistent and standardized 
reporting.\1876\
---------------------------------------------------------------------------

    \1875\ See, e.g., SIFMA Letter II at 25; Blackrock Letter at 3-
4; State Street Letter at 2; Angel Letter at 3.
    \1876\ See, e.g., FIF Letter at 32; SIFMA Letter II at 25; State 
Street Letter at 2; Angel Letter at 3; Tastytrade Letter at 4 and 6.
---------------------------------------------------------------------------

    However, there are several drawbacks to this alternative relative 
to the adopted amendments. First, it would take some time before CAT 
data could be used to produce execution quality reports. The Commission 
continues to believe that it would be a major undertaking for the Plan 
Processor to build out and adapt systems to collect, process, and 
publish this information. This might result in a delay in market 
participants' access to information about execution quality, which 
would delay the benefits of the adopted rule. Second, costs associated 
with the Plan Processor would also increase because 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.\1877\ Lastly, 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.
---------------------------------------------------------------------------

    \1877\ Some reporting entities, on the other hand, may incur 
lower costs if they pay a smaller proportion of CAT costs.
---------------------------------------------------------------------------

(b) Expand Rule 606 Reporting Requirements
    The Commission also considered an alternative suggested by a 
commenter in which, rather than requiring larger broker-dealers to 
prepare Rule 605 reports, broker-dealers would be required to submit 
expanded Rule 606 reports \1878\ with additional information about the 
execution quality of their orders.\1879\ While this might result in 
some lower compliance costs as a result of broker-dealers' existing 
experience with preparing and filing Rule 606 reports, many of the 
costs associated

[[Page 26607]]

with the initial reporting of execution quality information, such as 
building out systems to collect data and calculate metrics, would still 
be incurred by broker-dealers regardless of whether those metrics are 
reported via Rule 606 or Rule 605 reports.\1880\ Furthermore, since 
Rule 606 reports are both more aggregated and less frequent than Rule 
605 reports, the benefits of this alternative in terms of increased 
transparency would be substantially lower than those of the adopted 
amendments.\1881\
---------------------------------------------------------------------------

    \1878\ See supra section IX.C.1.b) for a discussion of broker-
dealer reporting requirements under Rule 606.
    \1879\ See Robinhood Letter at 42, stating that `` . . . the SEC 
should require broker-dealers that already publish Rule 606 reports 
(which we expect would include all of the broker-dealers that would 
be subject to Proposed Rule 605, among others) to add execution 
quality statistics to their Rule 606 reports.''
    \1880\ See supra section IX.D.2.a)(1) for further discussion of 
these costs.
    \1881\ Rule 605 reports would be more transparent because they 
are published each month and provide execution quality for 
individual stocks. In contrast, Rule 606 reports under this 
alternative would be published quarterly and would report aggregated 
execution quality metrics for S&P 500 and non-S&P 500 stocks for 
each market center included in the broker-dealer's Rule 606 report.
---------------------------------------------------------------------------

X. Regulatory Flexibility Act Certification

    The RFA \1882\ requires Federal agencies, in promulgating rules, to 
consider the impact of those rules on small entities. Section 603(a) 
\1883\ of the Administrative Procedure Act,\1884\ 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.'' \1885\ 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.\1886\
---------------------------------------------------------------------------

    \1882\ 5 U.S.C. 601 et seq.
    \1883\ 5 U.S.C. 603(a).
    \1884\ 5 U.S.C. 551 et seq.
    \1885\ 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.
    \1886\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    In the Proposing Release, the Commission certified that the 
proposed amendments to Rules 600 and 605 would not have a significant 
economic impact on a substantial number of small entities for purposes 
of the RFA.\1887\ The Commission solicited comments about 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.\1888\ No commenters responded 
to these requests with feedback on the economic impact of the proposed 
rules on small entities.\1889\
---------------------------------------------------------------------------

    \1887\ See Proposing Release, 88 FR 3786 at 3901 (Jan. 20, 
2023).
    \1888\ See id.
    \1889\ One commenter stated, in connection with the Proposing 
Release and multiple other Commission proposals, that the Commission 
should provide ``a reasonable, workable, and staggered schedule for 
public comment on the adoption and implementation of the proposals, 
considering their overlapping nature, significant compliance and 
operational burdens, and if they may be insurmountable for smaller 
or emerging firms.'' McHenry et al. letter at 2. The Commission has 
considered the potential effects of the Rule on smaller broker-
dealers and the interactions of the final rule with certain other 
Commission rules. See supra section IX.D.1.d)(1) for a discussion of 
the potential effects of the amendments on smaller broker-dealers. 
See supra sections IX.C.1.d) and IX.D.2.a)(5) for a discussion of 
the interactions of the final rule with certain other Commission 
rules.
---------------------------------------------------------------------------

    As adopted, the amendments to Rules 600 and 605 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.\1890\
---------------------------------------------------------------------------

    \1890\ A broker or dealer that is not a market center will not 
be subject to the requirements unless it reaches or exceeds the 
customer account threshold. See supra section II.A.2.a).
---------------------------------------------------------------------------

    None of the exchanges registered under section 6 that will be 
subject to the proposed amendments are ``small entities'' for purposes 
of the RFA.\1891\ There is only one national securities association, 
and it is not a small entity as defined by 13 CFR 121.201.\1892\
---------------------------------------------------------------------------

    \1891\ See 17 CFR 240.0-10(e). The regulation at 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 17 CFR 242.601 (``Rule 601'' of Regulation 
NMS), and is not affiliated with any person (other than a natural 
person) that is not a small business or small organization as 
defined in 17 CFR 240.0-10. 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).
    \1892\ See, e.g., Securities Exchange Act Release No. 90610 
(Dec. 9, 2020), 86 FR 18596 at 18808 & n.2549 (Apr. 9, 2021).
---------------------------------------------------------------------------

    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 will be impacted by the amendments, only one exchange market 
maker, no OTC market makers, no larger broker-dealers, and no ATSs are 
small entities.\1893\ Because the Commission estimates that not more 
than one small entity will be required to comply with the rule changes, 
the Commission certifies that the amendments to Rule 605 will not have 
a significant economic impact on a substantial number of small entities 
for purposes of the RFA.
---------------------------------------------------------------------------

    \1893\ These estimates are based on the FYE 2022 FOCUS Reports 
received by the Commission from exchange market makers, OTC market 
makers, larger broker-dealers, and ATSs that would be subject to the 
changes proposed to 17 CFR 242.600 and 242.605.
---------------------------------------------------------------------------

XI. Other Matters

    If any of the provisions of these rules, or the application thereof 
to any person or circumstance, is held to be invalid, such invalidity 
shall not affect other provisions or application of such provisions to 
other persons or circumstances that can be given effect without the 
invalid provision or application.
    Pursuant to the Congressional Review Act,\1894\ the Office of 
Information and Regulatory Affairs has designated these rules as a 
``major rule'', as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \1894\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

Statutory Authority

    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 is amending 
parts 240 and 242 of chapter II of title 17 of the Code of Federal 
Regulations.

List of Subjects in 17 CFR Parts 240 and 242

    Brokers, Confidential business information, Fraud, Reporting and 
recordkeeping requirements, Securities.

    For the reasons stated in the preamble, the Commission is amending 
title 17, chapter II of the Code of Federal Regulations:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The general authority citation for part 240 continues to read as 
follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78j-4, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 
78o-4, 78o-10, 78p,

[[Page 26608]]

78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 80a-20, 80a-23, 
80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., and 8302; 7 
U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and Pub. L. 
111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-106, sec. 503 
and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *


Sec.  240.3a51-1  [Amended]

0
2. Amend Sec.  240.3a51-1 by, in paragraph (a) introductory text, 
removing the text ``Sec.  242.600(b)(55)'' and adding in its place 
``Sec.  242.600(b)(65)''.


Sec.  240.13h-1  [Amended]

0
3. Amend Sec.  240.13h-1 by, in paragraph (a)(5), removing the text 
``Sec.  242.600(b)(54)'' and adding in its place ``Sec.  
242.600(b)(64)''.

PART 242--REGULATIONS M, SHO, ATS, AC, NMS, AND SBSR AND CUSTOMER 
MARGIN REQUIREMENTS FOR SECURITY FUTURES

0
4. The authority for part 242 continues to read as follows:

    Authority:  15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78c-4, 
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, 80a-37, and 8343.


Sec.  242.105  [Amended]

0
5. Amend Sec.  242.105 by:
0
a. In paragraph (b)(1)(i)(C), removing the text ``Sec.  
242.600(b)(30)'' and adding in its place ``Sec.  242.600(b)(35))''; and
0
b. In paragraph (b)(1)(ii), removing the text ``Sec.  242.600(b)(77)'' 
and adding in its place ``Sec.  242.600(b)(88)''.


Sec.  242.201  [Amended]

0
6. Amend Sec.  242.201 by:
0
a. In paragraph (a)(1), removing the text ``Sec.  242.600(b)(55)'' and 
adding in its place ``Sec.  242.600(b)(65)'';
0
b. In paragraph (a)(2), removing the text ``Sec.  242.600(b)(30)'' and 
adding in its place ``Sec.  242.600(b)(35)'';
0
c. In paragraph (a)(3), removing the text ``Sec.  242.600(b)(68)'' and 
adding in its place ``Sec.  242.600(b)(79)'';
0
d. In paragraph (a)(4), removing the text ``Sec.  242.600(b)(50)'' and 
adding in its place ``Sec.  242.600(b)(60)'';
0
e. In paragraph (a)(5), removing the text ``Sec.  242.600(b)(58)'' and 
adding in its place ``Sec.  242.600(b)(68)'';
0
f. In paragraph (a)(6), removing the text ``Sec.  242.600(b)(67)'' and 
adding in its place ``Sec.  242.600(b)(78)'';
0
g. In paragraph (a)(7), removing the text ``Sec.  242.600(b)(77)'' and 
adding in its place ``Sec.  242.600(b)(88)''; and
0
h. In paragraph (a)(9), removing the text ``Sec.  242.600(b)(95)'' and 
adding in its place ``Sec.  242.600(b)(106)''.


Sec.  242.204  [Amended]

0
7. Amend Sec.  242.204 by, in paragraph (g)(2), removing the text 
``Sec.  242.600(b)(77) (Rule 600(b)(77) of Regulation NMS)'' and adding 
in its place ``Sec.  242.600(b)(88) (Rule 600(b)(88) of Regulation 
NMS)''.

0
8. Amend Sec.  242.600 by revising and republishing paragraph (b) to 
read as follows:


Sec.  242.600  NMS security designation and definitions.

* * * * *
    (b) * * *
    (1) Actionable indication of interest means any indication of 
interest that explicitly or implicitly conveys all of the following 
information with respect to any order available at the venue sending 
the indication of interest:
    (i) Symbol;
    (ii) Side (buy or sell);
    (iii) A price that is equal to or better than the national best bid 
for buy orders and the national best offer for sell orders; and
    (iv) A size that is at least equal to one round lot.
    (2) Administrative data means administrative, control, and other 
technical messages made available by national securities exchanges and 
national securities associations pursuant to the effective national 
market system plan or plans required under Sec.  242.603(b) or the 
technical specifications thereto as of April 9, 2021.
    (3) Aggregate quotation size means the sum of the quotation sizes 
of all responsible brokers or dealers who have communicated on any 
national securities exchange bids or offers for an NMS security at the 
same price.
    (4) Alternative trading system has the meaning provided in Sec.  
242.300(a).
    (5) Auction information means all information specified by national 
securities exchange rules or effective national market system plans 
that is generated by a national securities exchange leading up to and 
during auctions, including opening, reopening, and closing auctions, 
and publicly disseminated during the time periods and at the time 
intervals provided in such rules and plans.
    (6) Automated quotation means a quotation displayed by a trading 
center that:
    (i) Permits an incoming order to be marked as immediate-or-cancel;
    (ii) Immediately and automatically executes an order marked as 
immediate-or-cancel against the displayed quotation up to its full 
size;
    (iii) Immediately and automatically cancels any unexecuted portion 
of an order marked as immediate-or-cancel without routing the order 
elsewhere;
    (iv) Immediately and automatically transmits a response to the 
sender of an order marked as immediate-or-cancel indicating the action 
taken with respect to such order; and
    (v) Immediately and automatically displays information that updates 
the displayed quotation to reflect any change to its material terms.
    (7) Automated trading center means a trading center that:
    (i) Has implemented such systems, procedures, and rules as are 
necessary to render it capable of displaying quotations that meet the 
requirements for an automated quotation set forth in paragraph (b)(6) 
of this section;
    (ii) Identifies all quotations other than automated quotations as 
manual quotations;
    (iii) Immediately identifies its quotations as manual quotations 
whenever it has reason to believe that it is not capable of displaying 
automated quotations; and
    (iv) Has adopted reasonable standards limiting when its quotations 
change from automated quotations to manual quotations, and vice versa, 
to specifically defined circumstances that promote fair and efficient 
access to its automated quotations and are consistent with the 
maintenance of fair and orderly markets.
    (8) 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 midpoint-or-better limit orders, average effective 
spread shall be calculated from the time such orders first become 
executable rather than the time of order receipt.
    (9) Average midpoint means the share-weighted average of the 
midpoint of the national best bid and national best offer at the time 
of order receipt or, for non-marketable limit orders, midpoint-or-
better limit orders, and orders submitted with stop prices, at the time 
such orders first become executable.
    (10) Average percentage effective spread means the average 
effective spread for order executions divided by the average midpoint 
for order executions.
    (11) Average percentage realized spread means the average realized

[[Page 26609]]

spread for order executions divided by the average midpoint for order 
executions.
    (12) Average quoted spread means the share-weighted average of the 
difference between the national best offer and the national best bid at 
the time of order receipt or, for order executions of midpoint-or-
better limit orders, the difference between the national best offer and 
the national best bid at the time such orders first become executable.
    (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 midpoint-or-better limit order, the best available 
displayed price shall be determined at the time such order becomes 
executable rather than the time of order receipt.
    (15) Best bid and best offer mean the highest priced bid and the 
lowest priced offer.
    (16) Bid or offer means the bid price or the offer price 
communicated by a member of a national securities exchange or member of 
a national securities association to any broker or dealer, or to any 
customer, at which it is willing to buy or sell one or more round lots 
of an NMS security, as either principal or agent, but shall not include 
indications of interest.
    (17) Block size with respect to an order means it is:
    (i) Of at least 10,000 shares; or
    (ii) For a quantity of stock having a market value of at least 
$200,000.
    (18) Categorized by order size means dividing orders into separate 
categories for the following sizes:
    (i) Less than $250 and less than a share;
    (ii) Less than $250 and odd-lot;
    (iii) Less than $250 and at least a round lot;
    (iv) $250 to less than $1,000 and less than a share;
    (v) $250 to less than $1,000 and odd-lot;
    (vi) $250 to less than $1,000 and at least a round lot;
    (vii) $1,000 to less than $5,000 and less than a share;
    (viii) $1,000 to less than $5,000 and odd-lot;
    (ix) $1,000 to less than $5,000 and at least a round lot;
    (x) $5,000 to less than $10,000 and less than a share;
    (xi) $5,000 to less than $10,000 and odd-lot;
    (xii) $5,000 to less than $10,000 and at least a round lot;
    (xiii) $10,000 to less than $20,000 and less than a share;
    (xiv) $10,000 to less than $20,000 and odd-lot;
    (xv) $10,000 to less than $20,000 and at least a round lot;
    (xvi) $20,000 to less than $50,000 and less than a share;
    (xvii) $20,000 to less than $50,000 and odd-lot;
    (xviii) $20,000 to less than $50,000 and at least a round lot;
    (xix) $50,000 to less than $200,000 and less than a share;
    (xx) $50,000 to less than $200,000 and odd-lot;
    (xxi) $50,000 to less than $200,000 and at least a round lot;
    (xxii) $200,000 or more and less than a share;
    (xxiii) $200,000 or more and odd-lot; and
    (xxiv) $200,000 or more and at least a round lot.
    (19) 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, 
midpoint-or-better limit orders (excluding immediate-or-cancel orders), 
midpoint-or-better limit orders that are immediate-or-cancel, 
executable non-marketable limit orders (excluding orders submitted with 
stop prices, midpoint-or-better limit orders, and immediate-or-cancel 
orders), executable non-marketable orders that are immediate-or-cancel, 
executable market orders submitted with stop prices, executable stop 
marketable limit orders, and executable stop non-marketable limit 
orders.
    (20) Categorized by security means dividing orders into separate 
categories for each NMS stock that is included in a report.
    (21) Competing consolidator means a securities information 
processor required to be registered pursuant to Sec.  242.614 (Rule 
614) or a national securities exchange or national securities 
association that receives information with respect to quotations for 
and transactions in NMS stocks and generates a consolidated market data 
product for dissemination to any person.
    (22) Consolidated display means:
    (i) The prices, sizes, and market identifications of the national 
best bid and national best offer for a security; and
    (ii) Consolidated last sale information for a security.
    (23) Consolidated last sale information means the price, volume, 
and market identification of the most recent transaction report for a 
security that is disseminated pursuant to an effective national market 
system plan.
    (24) Consolidated market data means the following data, 
consolidated across all national securities exchanges and national 
securities associations:
    (i) Core data;
    (ii) Regulatory data;
    (iii) Administrative data;
    (iv) Self-regulatory organization-specific program data; and
    (v) Additional regulatory, administrative, or self-regulatory 
organization-specific program data elements defined as such pursuant to 
the effective national market system plan or plans required under Sec.  
242.603(b).
    (25) Consolidated market data product means any data product 
developed by a competing consolidator that contains consolidated market 
data or data components of consolidated market data. For purposes of 
this paragraph (b)(25), data components of consolidated market data 
include the enumerated elements, and any subcomponent of the enumerated 
elements, of consolidated market data in paragraph (b)(24) of this 
section. All consolidated market data products must reflect data 
consolidated across all national securities exchanges and national 
securities associations.
    (26) Core data means:
    (i) The following information with respect to quotations for, and 
transactions in, NMS stocks:

[[Page 26610]]

    (A) Quotation sizes;
    (B) Aggregate quotation sizes;
    (C) Best bid and best offer;
    (D) National best bid and national best offer;
    (E) Protected bid and protected offer;
    (F) Transaction reports;
    (G) Last sale data;
    (H) Odd-lot information;
    (I) Depth of book data; and
    (J) Auction information.
    (ii) For purposes of the calculation and dissemination of core data 
by competing consolidators, as defined in paragraph (b)(21) of this 
section, and the calculation of core data by self-aggregators, as 
defined in paragraph (b)(94) of this section, the best bid and best 
offer, national best bid and national best offer, protected bid and 
protected offer, and depth of book data shall include odd-lots that 
when aggregated are equal to or greater than a round lot; such 
aggregation shall occur across multiple prices and shall be 
disseminated at the least aggressive price of all such aggregated odd-
lots.
    (iii) Competing consolidators shall represent the quotation sizes 
of the following data elements, if disseminated in a consolidated 
market data product as defined in paragraph (b)(25) of this section, as 
the number of shares rounded down to the nearest multiple of a round 
lot: The best bid and best offer, national best bid and national best 
offer, protected bid and protected offer, depth of book data, and 
auction information.
    (iv) Competing consolidators shall attribute the following data 
elements, if disseminated in a consolidated market data product as 
defined in paragraph (b)(25) of this section, to the national 
securities exchange or national securities association that is the 
source of each such data element: Best bid and best offer, national 
best bid and national best offer, protected bid and protected offer, 
transaction reports, last sale data, odd-lot information, depth of book 
data, and auction information.
    (27) 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 before the primary listing market has disseminated its first firm, 
uncrossed quotations in the security, 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.
    (28) Customer means any person that is not a broker or dealer.
    (29) Customer limit order means an order to buy or sell an NMS 
stock at a specified price that is not for the account of either a 
broker or dealer; provided, however, that the term customer limit order 
shall include an order transmitted by a broker or dealer on behalf of a 
customer.
    (30) Customer order means an order to buy or sell an NMS security 
that is not for the account of a broker or dealer, but shall not 
include any order for a quantity of a security having a market value of 
at least $50,000 for an NMS security that is an option contract and a 
market value of at least $200,000 for any other NMS security.
    (31) Depth of book data means all quotation sizes at each national 
securities exchange and on a facility of a national securities 
association at each of the next five prices at which there is a bid 
that is lower than the national best bid and offer that is higher than 
the national best offer. For these five prices, the aggregate size 
available at each price, if any, at each national securities exchange 
and national securities association shall be attributed to such 
exchange or association.
    (32) 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.
    (33) Dynamic market monitoring device means any service provided by 
a vendor on an interrogation device or other display that:
    (i) Permits real-time monitoring, on a dynamic basis, of 
transaction reports, last sale data, or quotations with respect to a 
particular security; and
    (ii) Displays the most recent transaction report, last sale data, 
or quotation with respect to that security until such report, data, or 
quotation has been superseded or supplemented by the display of a new 
transaction report, last sale data, or quotation reflecting the next 
reported transaction or quotation in that security.
    (34) Effective national market system plan means any national 
market system plan approved by the Commission (either temporarily or on 
a permanent basis) pursuant to Sec.  242.608.
    (35) Effective transaction reporting plan means any transaction 
reporting plan approved by the Commission pursuant to Sec.  242.601.
    (36) Electronic communications network means, for the purposes of 
Sec.  242.602(b)(5), any electronic system that widely disseminates to 
third parties orders entered therein by an exchange market maker or OTC 
market maker, and permits such orders to be executed against in whole 
or in part; except that the term electronic communications network 
shall not include:
    (i) Any system that crosses multiple orders at one or more 
specified times at a single price set by the system (by algorithm or by 
any derivative pricing mechanism) and does not allow orders to be 
crossed or executed against directly by participants outside of such 
times; or
    (ii) Any system operated by, or on behalf of, an OTC market maker 
or exchange market maker that executes customer orders primarily 
against the account of such market maker as principal, other than 
riskless principal.
    (37) 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.
    (38) Exchange-traded security means any NMS security or class of 
NMS securities listed and registered, or admitted to unlisted trading 
privileges, on a national securities exchange; provided, however, that 
securities not listed on any national securities exchange that are 
traded pursuant to unlisted trading privileges are excluded.
    (39) 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 
after the primary listing market has disseminated its first firm, 
uncrossed quotations in the security, 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 and after the primary listing market has disseminated its 
first firm, uncrossed quotations in the security. Executable means, for 
any order submitted with a stop price, that the stop price has been 
triggered during regular trading hours

[[Page 26611]]

and after the primary listing market has disseminated its first firm, 
uncrossed quotations in the security. The time an order becomes 
executable shall be measured in increments of a millisecond or finer.
    (40) Executable stop marketable limit order means, for buy orders, 
orders submitted with stop prices that have limit prices that are equal 
to or greater than the national best offer at the time such orders 
become executable, and, for sell orders, orders submitted with stop 
prices that have limit prices that are equal to or less than the 
national best bid at the time such orders become executable.
    (41) Executable stop non-marketable limit order means, for buy 
orders, orders submitted with stop prices that have limit prices that 
are less than the national best offer at the time such orders become 
executable, and, for sell orders, orders submitted with stop prices 
that have limit prices that are greater than the national best bid at 
the time such orders become executable.
    (42) Executed at the quote means, for buy orders, execution at a 
price equal to the national best offer at the time of order receipt 
and, for sell orders, execution at a price equal to the national best 
bid at the time of order receipt.
    (43) 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.
    (44) Executed outside the quote means, for buy orders, execution at 
a price higher than the national best offer at the time of order 
receipt and, for sell orders, execution at a price lower than the 
national best bid at the time of order receipt.
    (45) Executed with price improvement means, for buy orders, 
execution at a price lower than the national best offer at the time of 
order receipt and, for sell orders, execution at a price higher than 
the national best bid at the time of order receipt.
    (46) 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.
    (47) Intermarket sweep order means a limit order for an NMS stock 
that meets the following requirements:
    (i) When routed to a trading center, the limit order is identified 
as an intermarket sweep order; and
    (ii) Simultaneously with the routing of the limit order identified 
as an intermarket sweep order, one or more additional limit orders, as 
necessary, are routed to execute against the full displayed size of any 
protected bid, in the case of a limit order to sell, or the full 
displayed size of any protected offer, in the case of a limit order to 
buy, for the NMS stock with a price that is superior to the limit price 
of the limit order identified as an intermarket sweep order. These 
additional routed orders also must be marked as intermarket sweep 
orders.
    (48) Interrogation device means any securities information 
retrieval system capable of displaying transaction reports, last sale 
data, or quotations upon inquiry, on a current basis on a terminal or 
other device.
    (49) Joint self-regulatory organization plan means a plan as to 
which two or more self-regulatory organizations, acting jointly, are 
sponsors.
    (50) Last sale data means any price or volume data associated with 
a transaction.
    (51) Listed equity security means any equity security listed and 
registered, or admitted to unlisted trading privileges, on a national 
securities exchange.
    (52) Listed option means any option traded on a registered national 
securities exchange or automated facility of a national securities 
association.
    (53) Make publicly available means posting on an internet website 
that is free and readily accessible to the public, furnishing a written 
copy to customers on request without charge, and notifying customers at 
least annually in writing that a written copy will be furnished on 
request.
    (54) Manual quotation means any quotation other than an automated 
quotation.
    (55) Market center means any exchange market maker, OTC market 
maker, alternative trading system, national securities exchange, or 
national securities association.
    (56) 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 and after the primary listing market has 
disseminated its first firm, uncrossed quotations in the security, 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. For orders received at a time when the national best bid and 
national best offer is being disseminated but the primary listing 
market has not disseminated its first firm, uncrossed quotations in the 
security, whether an order is a marketable limit order shall be 
determined from the time that the primary listing market disseminates 
its first firm, uncrossed quotations in the security.
    (57) Midpoint-or-better limit order means, with respect to an order 
received at a time when a national best bid and national best offer is 
being disseminated and the primary listing market has disseminated its 
first firm, uncrossed quotations in the security, any non-marketable 
buy order with a limit price that is equal to or 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 equal to or 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 equal to or 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 equal to or 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. For orders received at a time when the national best bid and 
national best offer is being disseminated but the primary listing 
market has not disseminated its first firm, uncrossed quotations in the 
security, whether an order is a midpoint-or-better limit order shall be 
determined from the time that the primary listing market disseminates 
its first firm, uncrossed quotations in the security.
    (58) Moving ticker means any continuous real-time moving display of 
transaction reports or last sale data (other than a dynamic market 
monitoring device) provided on an interrogation or other display 
device.

[[Page 26612]]

    (59) Nasdaq security means any registered security listed on The 
Nasdaq Stock Market, Inc.
    (60) National best bid and national best offer means, with respect 
to quotations for an NMS stock, the best bid and best offer for such 
stock that are calculated and disseminated on a current and continuing 
basis by a competing consolidator or calculated by a self-aggregator 
and, for NMS securities other than NMS stocks, the best bid and best 
offer for such security that are calculated and disseminated on a 
current and continuing basis by a plan processor pursuant to an 
effective national market system plan; provided, that in the event two 
or more market centers transmit to the plan processor, a competing 
consolidator or a self-aggregator identical bids or offers for an NMS 
security, the best bid or best offer (as the case may be) shall be 
determined by ranking all such identical bids or offers (as the case 
may be) first by size (giving the highest ranking to the bid or offer 
associated with the largest size), and then by time (giving the highest 
ranking to the bid or offer received first in time).
    (61) National market system plan means any joint self-regulatory 
organization plan in connection with:
    (i) The planning, development, operation or regulation of a 
national market system (or a subsystem thereof) or one or more 
facilities thereof; or
    (ii) The development and implementation of procedures and/or 
facilities designed to achieve compliance by self-regulatory 
organizations and their members with any section of this Regulation NMS 
and part 240, subpart A, of this chapter promulgated pursuant to 
section 11A of the Act (15 U.S.C. 78k-1).
    (62) National securities association means any association of 
brokers and dealers registered pursuant to section 15A of the Act (15 
U.S.C. 78o-3).
    (63) National securities exchange means any exchange registered 
pursuant to section 6 of the Act (15 U.S.C. 78f).
    (64) NMS security means any security or class of securities for 
which transaction reports are collected, processed, and made available 
pursuant to an effective transaction reporting plan, or an effective 
national market system plan for reporting transactions in listed 
options.
    (65) NMS stock means any NMS security other than an option.
    (66) Non-directed order means any order from a customer other than 
a directed order.
    (67) Non-marketable limit order means any limit order other than a 
marketable limit order.
    (68) Odd-lot means an order for the purchase or sale of an NMS 
stock in an amount less than a round lot.
    (69) Odd-lot information means:
    (i) Odd-lot transaction data disseminated pursuant to the effective 
national market system plan or plans required under Sec.  242.603(b) as 
of April 9, 2021; and
    (ii) 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.
    (70) Options class means all of the put option or call option 
series overlying a security, as defined in section 3(a)(10) of the Act 
(15 U.S.C. 78c(a)(10)).
    (71) Options series means the contracts in an options class that 
have the same unit of trade, expiration date, and exercise price, and 
other terms or conditions.
    (72) Order size benchmark means the number of shares of the full 
displayed size of all protected bids at the same price as the national 
best bid at the time of order receipt, in the case of a market or limit 
order to sell, or the full displayed size of all protected offers at 
the same price as the national best offer at the time of order receipt, 
in the case of a market or limit order to buy. For midpoint-or-better 
limit orders, the full displayed size should be measured at the time 
the order becomes executable rather than the time of order receipt. For 
each order, the share count shall be capped at the order size.
    (73) Orders providing liquidity means orders that were executed 
against after resting at a trading center.
    (74) Orders removing liquidity means orders that executed against 
resting trading interest at a trading center.
    (75) 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 block size.
    (76) Participants, when used in connection with a national market 
system plan, means any self-regulatory organization which has agreed to 
act in accordance with the terms of the plan but which is not a 
signatory of such plan.
    (77) Payment for order flow has the meaning provided in Sec.  
240.10b-10 of this chapter.
    (78) Plan processor means any self-regulatory organization or 
securities information processor acting as an exclusive processor in 
connection with the development, implementation and/or operation of any 
facility contemplated by an effective national market system plan.
    (79) Primary listing exchange means, for each NMS stock, the 
national securities exchange identified as the primary listing exchange 
in the effective national market system plan or plans required under 
Sec.  242.603(b).
    (80) Profit-sharing relationship means any ownership or other type 
of affiliation under which the broker or dealer, directly or 
indirectly, may share in any profits that may be derived from the 
execution of non-directed orders.
    (81) Protected bid or protected offer means a quotation in an NMS 
stock that:
    (i) Is displayed by an automated trading center;
    (ii) Is disseminated pursuant to an effective national market 
system plan; and
    (iii) Is an automated quotation that is the best bid or best offer 
of a national securities exchange, or the best bid or best offer of a 
national securities association.
    (82) Protected quotation means a protected bid or a protected 
offer.
    (83) Published aggregate quotation size means the aggregate 
quotation size calculated by a national securities exchange and 
displayed by a vendor on a terminal or other display device at the time 
an order is presented for execution to a responsible broker or dealer.
    (84) Published bid and published offer means the bid or offer of a 
responsible broker or dealer for an NMS security communicated by it to 
its national securities exchange or association pursuant to Sec.  
242.602 and displayed by a vendor on a terminal or other display device 
at the time an order is presented for execution to such responsible 
broker or dealer.
    (85) Published quotation size means the quotation size of a 
responsible broker or dealer communicated by it to its national 
securities exchange or association pursuant to Sec.  242.602 and 
displayed by a vendor on a terminal or other display device at the time 
an order is presented for execution to such responsible broker or 
dealer.
    (86) Quotation means a bid or an offer.
    (87) Quotation size, when used with respect to a responsible 
broker's or dealer's bid or offer for an NMS security, means:
    (i) The number of shares (or units of trading) of that security 
which such responsible broker or dealer has specified, for purposes of 
dissemination to vendors, that it is willing to buy at the bid price or 
sell at the offer price

[[Page 26613]]

comprising its bid or offer, as either principal or agent; or
    (ii) In the event such responsible broker or dealer has not so 
specified, a normal unit of trading for that NMS security.
    (88) Regular trading hours means the time between 9:30 a.m. and 4 
p.m. Eastern Time, or such other time as is set forth in the procedures 
established pursuant to Sec.  242.605(a)(3).
    (89) Regulatory data means:
    (i) Information required to be collected or calculated by the 
primary listing exchange for an NMS stock and provided to competing 
consolidators and self-aggregators pursuant to the effective national 
market system plan or plans required under Sec.  242.603(b), including, 
at a minimum:
    (A) Information regarding Short Sale Circuit Breakers pursuant to 
Sec.  242.201;
    (B) Information regarding Price Bands required pursuant to the Plan 
to Address Extraordinary Market Volatility (LULD Plan);
    (C) Information relating to regulatory halts or trading pauses 
(news dissemination/pending, LULD, Market-Wide Circuit Breakers) and 
reopenings or resumptions;
    (D) The official opening and closing prices of the primary listing 
exchange; and
    (E) An indicator of the applicable round lot size.
    (ii) Information required to be collected or calculated by the 
national securities exchange or national securities association on 
which an NMS stock is traded and provided to competing consolidators 
and self-aggregators pursuant to the effective national market system 
plan or plans required under Sec.  242.603(b), including, at a minimum:
    (A) Whenever such national securities exchange or national 
securities association receives a bid (offer) below (above) an NMS 
stock's lower (upper) LULD price band, an appropriate regulatory data 
flag identifying the bid (offer) as non-executable; and
    (B) Other regulatory messages including subpenny execution and 
trade-though exempt indicators.
    (iii) For purposes of paragraph (b)(89)(i)(C) of this section, the 
primary listing exchange that has the largest proportion of companies 
included in the S&P 500 Index shall monitor the S&P 500 Index 
throughout the trading day, determine whether a Level 1, Level 2, or 
Level 3 decline, as defined in self-regulatory organization rules 
related to Market-Wide Circuit Breakers, has occurred, and immediately 
inform the other primary listing exchanges of all such declines.
    (90) Responsible broker or dealer means:
    (i) When used with respect to bids or offers communicated on a 
national securities exchange, any member of such national securities 
exchange who communicates to another member on such national securities 
exchange, at the location (or locations) or through the facility or 
facilities designated by such national securities exchange for trading 
in an NMS security a bid or offer for such NMS security, as either 
principal or agent; provided, however, that, in the event two or more 
members of a national securities exchange have communicated on or 
through such national securities exchange bids or offers for an NMS 
security at the same price, each such member shall be considered a 
responsible broker or dealer for that bid or offer, subject to the 
rules of priority and precedence then in effect on that national 
securities exchange; and further provided, that for a bid or offer 
which is transmitted from one member of a national securities exchange 
to another member who undertakes to represent such bid or offer on such 
national securities exchange as agent, only the last member who 
undertakes to represent such bid or offer as agent shall be considered 
the responsible broker or dealer for that bid or offer; and
    (ii) When used with respect to bids and offers communicated by a 
member of an association to a broker or dealer or a customer, the 
member communicating the bid or offer (regardless of whether such bid 
or offer is for its own account or on behalf of another person).
    (91) Revised bid or offer means a market maker's bid or offer which 
supersedes its published bid or published offer.
    (92) Revised quotation size means a market maker's quotation size 
which supersedes its published quotation size.
    (93) Round lot means:
    (i) For any NMS stock for which the prior calendar month's average 
closing price on the primary listing exchange was $250.00 or less per 
share, an order for the purchase or sale of an NMS stock of 100 shares;
    (ii) For any NMS stock for which the prior calendar month's average 
closing price on the primary listing exchange was $250.01 to $1,000.00 
per share, an order for the purchase or sale of an NMS stock of 40 
shares;
    (iii) For any NMS stock for which the prior calendar month's 
average closing price on the primary listing exchange was $1,000.01 to 
$10,000.00 per share, an order for the purchase or sale of an NMS stock 
of 10 shares;
    (iv) For any NMS stock for which the prior calendar month's average 
closing price on the primary listing exchange was $10,000.01 or more 
per share, an order for the purchase or sale of an NMS stock of 1 
share; and
    (v) For any NMS stock for which the prior calendar month's average 
closing price is not available, an order for the purchase or sale of an 
NMS stock of 100 shares.
    (94) Self-aggregator means a broker, dealer, national securities 
exchange, national securities association, or investment adviser 
registered with the Commission that receives information with respect 
to quotations for and transactions in NMS stocks, including all data 
necessary to generate consolidated market data, and generates 
consolidated market data solely for internal use. A self-aggregator may 
make consolidated market data available to its affiliates that are 
registered with the Commission for their internal use. Except as 
provided in the preceding sentence, a self-aggregator may not 
disseminate or otherwise make available consolidated market data, or 
components of consolidated market data, as provided in paragraph 
(b)(25) of this section, to any person.
    (95) Self-regulatory organization means any national securities 
exchange or national securities association.
    (96) Self-regulatory organization-specific program data means:
    (i) Information related to retail liquidity programs specified by 
the rules of national securities exchanges and disseminated pursuant to 
the effective national market system plan or plans required under Sec.  
242.603(b) as of April 9, 2021; and
    (ii) Other self-regulatory organization-specific information with 
respect to quotations for or transactions in NMS stocks as specified by 
the effective national market system plan or plans required under Sec.  
242.603(b).
    (97) Specified persons, when used in connection with any 
notification required to be provided pursuant to Sec.  242.602(a)(3) 
and any election (or withdrawal thereof) permitted under Sec.  
242.602(a)(5), means:
    (i) Each vendor;
    (ii) Each plan processor; and
    (iii) The processor for the Options Price Reporting Authority (in 
the case of a notification for a subject security which is a class of 
securities underlying options admitted to trading on any national 
securities exchange).
    (98) Sponsor, when used in connection with a national market system 
plan, means any self-regulatory organization which is a signatory to

[[Page 26614]]

such plan and has agreed to act in accordance with the terms of the 
plan.
    (99) SRO display-only facility means a facility operated by or on 
behalf of a national securities exchange or national securities 
association that displays quotations in a security, but does not 
execute orders against such quotations or present orders to members for 
execution.
    (100) SRO trading facility means a facility operated by or on 
behalf of a national securities exchange or a national securities 
association that executes orders in a security or presents orders to 
members for execution.
    (101) Subject security means:
    (i) With respect to a national securities exchange:
    (A) Any exchange-traded security other than a security for which 
the executed volume of such exchange, during the most recent calendar 
quarter, comprised one percent or less of the aggregate trading volume 
for such security as reported pursuant to an effective transaction 
reporting plan or effective national market system plan; and
    (B) Any other NMS security for which such exchange has in effect an 
election, pursuant to Sec.  242.602(a)(5)(i), to collect, process, and 
make available to a vendor bids, offers, quotation sizes, and aggregate 
quotation sizes communicated on such exchange; and
    (ii) With respect to a member of a national securities association:
    (A) Any exchange-traded security for which such member acts in the 
capacity of an OTC market maker unless the executed volume of such 
member, during the most recent calendar quarter, comprised one percent 
or less of the aggregate trading volume for such security as reported 
pursuant to an effective transaction reporting plan or effective 
national market system plan; and
    (B) Any other NMS security for which such member acts in the 
capacity of an OTC market maker and has in effect an election, pursuant 
to Sec.  242.602(a)(5)(ii), to communicate to its association bids, 
offers, and quotation sizes for the purpose of making such bids, 
offers, and quotation sizes available to a vendor.
    (102) Time of order execution means the time (at a minimum to the 
millisecond) that an order was executed at any venue.
    (103) 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.
    (104) Time of the transaction has the meaning provided in Sec.  
240.10b-10 of this chapter.
    (105) Trade-through means the purchase or sale of an NMS stock 
during regular trading hours, either as principal or agent, at a price 
that is lower than a protected bid or higher than a protected offer.
    (106) Trading center means a national securities exchange or 
national securities association that operates an SRO trading facility, 
an alternative trading system, an exchange market maker, an OTC market 
maker, or any other broker or dealer that executes orders internally by 
trading as principal or crossing orders as agent.
    (107) Trading rotation means, with respect to an options class, the 
time period on a national securities exchange during which:
    (i) Opening, re-opening, or closing transactions in options series 
in such options class are not yet completed; and
    (ii) Continuous trading has not yet commenced or has not yet ended 
for the day in options series in such options class.
    (108) Transaction report means a report containing the price and 
volume associated with a transaction involving the purchase or sale of 
one or more round lots of a security.
    (109) Transaction reporting association means any person authorized 
to implement or administer any transaction reporting plan on behalf of 
persons acting jointly under Sec.  242.601(a).
    (110) Transaction reporting plan means any plan for collecting, 
processing, making available or disseminating transaction reports with 
respect to transactions in securities filed with the Commission 
pursuant to, and meeting the requirements of, Sec.  242.601.
    (111) Vendor means any securities information processor engaged in 
the business of disseminating transaction reports, last sale data, or 
quotations with respect to NMS securities to brokers, dealers, or 
investors on a real-time or other current and continuing basis, whether 
through an electronic communications network, moving ticker, or 
interrogation device.


Sec.  242.602  [Amended]

0
9. Amend Sec.  242.602 by, in paragraphs (a)(5)(i) and (ii), removing 
the text ``Sec.  242.600(b)(90)'' and adding in its place ``Sec.  
242.600(b)(101)''.

0
10. 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 OTC market maker that provides a trading 
system for only a single dealer to solely buy and sell securities 
against all other persons entering orders in that system shall produce 
a separate report pertaining only to covered orders entered in such 
trading system. Alternative trading systems (as defined in 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, midpoint-or-better limit orders, midpoint-
or-better limit orders that are immediate-or-cancel, executable non-
marketable limit orders, executable non-marketable limit orders that 
are immediate-or-cancel, executable market

[[Page 26615]]

orders submitted with stop prices, executable stop marketable limit 
orders, and executable stop non-marketable limit orders:
    (A) The number of covered orders;
    (B) The cumulative notional value of covered orders;
    (C) The cumulative number of shares of covered orders;
    (D) The cumulative number of shares of covered orders cancelled 
prior to execution;
    (E) 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);
    (F) The cumulative number of shares of covered orders executed at 
any other venue;
    (G) The cumulative number of shares of covered orders executed less 
than 100 microseconds after the time of order receipt; or, for non-
marketable limit orders or orders submitted with stop prices, after the 
time the order becomes executable;
    (H) The cumulative number of shares of covered orders executed from 
100 microseconds to less than 1 millisecond after the time of order 
receipt; or, for non-marketable limit orders or orders submitted with 
stop prices, after the time the order becomes executable ;
    (I) The cumulative number of shares of covered orders executed from 
1 millisecond to less than 10 milliseconds after the time of order 
receipt; or, for non-marketable limit orders or orders submitted with 
stop prices, after the time the order becomes executable;
    (J) The cumulative number of shares of covered orders executed from 
10 milliseconds to less than 1 second after the time of order receipt; 
or, for non-marketable limit orders or orders submitted with stop 
prices, after the time the order becomes executable;
    (K) The cumulative number of shares of covered orders executed from 
1 second to less than 10 seconds after the time of order receipt; or, 
for non-marketable limit orders or orders submitted with stop prices, 
after the time the order becomes executable;
    (L) The cumulative number of shares of covered orders executed from 
10 seconds to less than 30 seconds after the time of order receipt; or, 
for non-marketable limit orders or orders submitted with stop prices, 
after the time the order becomes executable;
    (M) The cumulative number of shares of covered orders executed from 
30 seconds to less than 5 minutes after the time of order receipt; or, 
for non-marketable limit orders or orders submitted with stop prices, 
after the time the order becomes executable;
    (N) The cumulative number of shares of covered orders executed 5 
minutes or more after the time of order receipt; or, for non-marketable 
limit orders or orders submitted with stop prices, after the time the 
order becomes executable;
    (O) For executions of covered orders, the average realized spread 
as calculated 50 milliseconds after the time of execution;
    (P) For executions of covered orders, the average percentage 
realized spread as calculated 50 milliseconds after the time of 
execution;
    (Q) For executions of covered orders, the average realized spread 
as calculated 1 second after the time of execution;
    (R) For executions of covered orders, the average percentage 
realized spread as calculated 1 second after the time of execution;
    (S) For executions of covered orders, the average realized spread 
as calculated 15 seconds after the time of execution;
    (T) For executions of covered orders, the average percentage 
realized spread as calculated 15 seconds after the time of execution;
    (U) For executions of covered orders, the average realized spread 
as calculated 1 minute after the time of execution;
    (V) For executions of covered orders, the average percentage 
realized spread as calculated 1 minute after the time of execution;
    (W) For executions of covered orders, the average realized spread 
as calculated 5 minutes after the time of execution;
    (X) For executions of covered orders, the average percentage 
realized spread as calculated 5 minutes after the time of execution;
    (Y) For executions of covered orders, the average midpoint; and
    (ii) For market orders, marketable limit orders, marketable 
immediate-or-cancel orders, midpoint-or-better limit orders, midpoint-
or-better limit orders that are immediate-or-cancel, executable market 
orders submitted with stop prices, and executable stop marketable limit 
orders:
    (A) For executions of covered orders, the average quoted spread;
    (B) For executions of covered orders, the average effective spread;
    (C) For executions of covered orders, the average percentage 
effective spread;
    (D) For executions of covered orders, the average effective divided 
by the average quoted spread, expressed as a percentage;
    (E) The cumulative number of shares of covered orders executed with 
price improvement;
    (F) For shares executed with price improvement, the share-weighted 
average amount per share that prices were improved;
    (G) 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 midpoint-or-better limit orders, midpoint-or-better limit 
orders that are immediate-or-cancel, executable market orders submitted 
with stop prices, and executable stop marketable 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) The cumulative number of shares of covered orders executed at 
the quote;
    (I) 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 
midpoint-or-better limit orders, midpoint-or-better limit orders that 
are immediate-or-cancel, executable market orders submitted with stop 
prices, and executable stop marketable 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 midpoint-or-better limit 
orders, midpoint-or-better limit orders that are immediate-or-cancel, 
executable market orders submitted with stop prices, and executable 
stop marketable 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) The cumulative number of shares of covered orders executed with 
price improvement relative to the best available displayed price;
    (N) 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;
    (O) The cumulative number of shares of covered orders executed at 
the best available displayed price;

[[Page 26616]]

    (P) The cumulative number of shares of covered orders executed 
outside the best available displayed price;
    (Q) 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;
    (R) For executions of covered orders, the cumulative number of 
shares of the order size benchmark;
    (S) The sum of, for each execution of a covered order, the greater 
of: the total number of shares executed with price improvement plus the 
total number of shares executed at the quote minus the order size 
benchmark, or zero; and
    (iii) For midpoint-or-better limit orders, midpoint-or-better limit 
orders that are immediate-or-cancel, executable non-marketable limit 
orders, executable non-marketable limit orders that are immediate-or-
cancel, and executable stop non-marketable limit orders:
    (A) The number of covered 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) The cumulative number of shares executed regular way on any 
national securities exchange at prices that could have filled the order 
while the order was in force, as reported pursuant to an effective 
transaction reporting plan or effective national market system plan. 
For each order, the share count shall be capped at the order size; and
    (D) 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.
    (2) Every market center, broker, or dealer shall make publicly 
available for each calendar month a report providing summary statistics 
on all covered orders that are market and marketable limit orders that 
it received for execution from any person. Such report shall be made 
available as an electronic file using the most recent version of the 
schema for comma separated values format (CSV) 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 be categorized by order type (market orders or marketable limit 
orders) and order size (less than $250, $250 to less than $1,000, 
$1,000 to less than $5,000, $5,000 to less than $10,000, $10,000 to 
less than $20,000, $20,000 to less than $50,000, $50,000 to less than 
$200,000, $200,000 or more, and all order sizes combined, excluding 
orders with a notional value of $200,000 or more), and shall include 
the following columns of information:
    (i) The average order size in shares;
    (ii) The average notional order size;
    (iii) For executions of covered orders, the average midpoint;
    (iv) For executions of covered orders, the percentage of shares 
executed at the quote or better;
    (v) For executions of covered orders, the percentage of shares that 
received price improvement;
    (vi) For executions of covered orders, the share-weighted average 
percentage price improvement, calculated as the cumulative amount that 
prices were improved less the cumulative amount that prices were 
executed outside the quote divided by sum of the average midpoint times 
the number of shares executed;
    (vii) For executions of covered orders, the average percentage 
effective spread;
    (viii) For executions of covered orders, the average percentage 
quoted spread, calculated as the average quoted spread divided by the 
average midpoint for such orders;
    (ix) For executions of covered orders, the average effective spread 
divided by the average quoted spread, expressed as a percentage;
    (x) For executions of covered orders, the average percentage 
realized spread as calculated 15 seconds after the time of execution;
    (xi) For executions of covered orders, the average percentage 
realized spread as calculated 1 minute after the time of execution; and
    (xii) For executions of covered orders, the share-weighted 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 (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 (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 (a)(7) for the 
next calendar month.
* * * * *


Sec.  242.611  [Amended]

0
11. Amend Sec.  242.611 by, in paragraph (c), removing the text ``Sec.  
242.600(b)(38)'' and adding in its place ``Sec.  242.600(b)(47)''.

[[Page 26617]]

Sec.  242.614  [Amended]

0
12. Amend Sec.  242.614 by, in paragraphs (d)(1) through (3), removing 
the text ``Sec.  242.600(b)(20)'' and adding in its place ``Sec.  
242.600(b)(25)''.


Sec.  242.1000  [Amended]

0
13. Amend Sec.  242.1000, in the definition Plan processor, by removing 
the text ``Sec.  242.600(b)(67)'' and adding in its place ``Sec.  
242.600(b)(78)''.

    By the Commission.

    Dated: March 6, 2024.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-05556 Filed 4-12-24; 8:45 am]
BILLING CODE 8011-01-P