[Federal Register Volume 81, Number 144 (Wednesday, July 27, 2016)]
[Proposed Rules]
[Pages 49432-49511]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-16967]



[[Page 49431]]

Vol. 81

Wednesday,

No. 144

July 27, 2016

Part III





Securities and Exchange Commission





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17 CFR Parts 240 and 242





 Disclosure of Order Handling Information; Proposed Rule

  Federal Register / Vol. 81 , No. 144 / Wednesday, July 27, 2016 / 
Proposed Rules  

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 242

[Release No. 34-78309; File No. S7-14-16]
RIN 3235-AL67


Disclosure of Order Handling Information

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') is proposing to amend Rules 600 and 606 of Regulation National 
Market System (``Regulation NMS'') under the Securities Exchange Act of 
1934 (``Exchange Act'') to require additional disclosures by broker-
dealers to customers about the routing of their orders. Specifically, 
with respect to institutional orders, the Commission is proposing to 
amend Rule 606 of Regulation NMS to require a broker-dealer, upon 
request of its customer, to provide specific disclosures related to the 
routing and execution of the customer's institutional orders for the 
prior six months. The Commission also is proposing to amend Rule 606 of 
Regulation NMS to require a broker-dealer to make publicly available 
aggregated information with respect to its handling of customers' 
institutional orders for each calendar quarter. With respect to retail 
orders, the Commission is proposing to make targeted enhancements to 
current order routing disclosures under Rule 606 by requiring limit 
order information to be broken down into marketable and non-marketable 
categories, requiring the disclosure of 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 by a broker-dealer from certain venues, requiring broker-
dealers to describe any terms of payment for order flow arrangements 
and profit-sharing relationships with certain venues that may influence 
their order routing decisions, and eliminating the requirement to 
divide retail order routing information by listing market. In 
connection with these new requirements, the Commission is proposing to 
amend Rule 600 of Regulation NMS to include a number of newly defined 
terms which are used in the proposed amendments to Rule 606. The 
Commission is also proposing to amend Rules 605 and 606 of Regulation 
NMS to require that the public order execution and order routing 
reports be kept publicly available for a period of three years and to 
make conforming changes to Rule 607. Finally, the Commission is 
proposing to amend Rule 3a51-1(a) under the Exchange Act; Rule 13h-
1(a)(5) of Regulation 13D-G; Rule 105(b)(1) of Regulation M; Rules 
201(a) and 204(g) of Regulation SHO; Rules 600(b), 602(a)(5), 
607(a)(1), and 611(c) of Regulation NMS; and Rule 1000 of Regulation 
SCI, to update cross-references as a result of this proposed rule.

DATES: Comments should be received on or before September 26, 2016.

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
     Send an email to [email protected]. Please include 
File Number S7-14-16 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

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

All submissions should refer to File Number S7-14-16. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments 
are also available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE., Washington, DC 
20549-1090 on official business days between the hours of 10:00 a.m. 
and 3:00 p.m. All comments received will be posted without change; we 
do not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any materials will 
be made available on the Commission's Web site. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Theodore S. Venuti, Assistant 
Director, at (202) 551-5658, Arisa Tinaves Kettig, Senior Special 
Counsel, at (202) 551-5676, Steve Kuan, Special Counsel, at (202) 551-
5624, Amir Katz, Special Counsel, at (202) 551-7653, Chris Grobbel, 
Special Counsel, at (202) 551-5491, or Andrew Sioson, Attorney-Advisor, 
at (202) 551-7186 Division of Trading and Markets, Securities and 
Exchange Commission, 100 F Street, NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is proposing: (1) Amendments 
to Rules 600 and 606 under the Exchange Act [17 CFR 242.600 and 
202.606] to require additional disclosures by broker-dealers to 
customers about the routing of their orders; (2) amendments to Rule 605 
[17 CFR 242.605] to require that the public order execution and order 
routing reports be kept publicly available for a period of three years; 
and (3) conforming changes and updating cross-references in Rule 3a51-
1(a) under the Exchange Act [17 CFR 240.3a51-1(a)], Rule 13h-1(a)(5) of 
Regulation 13D-G [17 CFR 240.13h-1(a)(5)], Rule 105(b)(1) of Regulation 
M [17 CFR 242.105(b)(1)] Rules 201(a) and 204(g) of Regulation SHO [17 
CFR 242.201(a) and 242.204(g)], Rules 600(b), 602(a)(5), 605, 
607(a)(1), and 611(c) of Regulation NMS [17 CFR 242.600(b), 
242.602(a)(5), 242.605, 242.607(a)(1), and 242.611(c)], and Rule 1000 
of Regulation SCI [17 CFR 242.1000].

Table of Contents

I. Introduction
II. Current Practices and Regulation and the Need for Enhanced 
Disclosures
    A. Background on Rule 606
    B. Changes in Order Handling Practices
    C. Need for Enhanced Disclosures for Institutional Orders
    1. Market Complexity
    2. Assessing Best Execution
    3. Conflicts of Interest
    4. Information Leakage
    D. Need for Public Reporting of Aggregated Institutional Order 
Information
    E. Need for Enhanced Disclosures for Retail Orders
    F. Comments on Equity Market Structure
    1. General Need to Update Rule 606
    2. Need for Rule 606 to be Modernized to Maintain Pace with 
Technological Advances
    3. Requests for Specific Information and Standardized 
Disclosures
    4. Requests for Specific Disclosures for Institutional Orders
    5. Comments on Actionable Indications of Interest
III. Proposed Amendments to Rule 600, Rule 605, Rule 606, and Rule 
607
    A. Disclosures for Institutional Orders
    1. Definition of Institutional Order in Proposed Rule 600(b)(31)

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    2. Definition of Actionable Indication of Interest in Proposed 
Rule 600(b)(1)
    3. Scope and Format of Reports
    4. Report Content
    5. Public Report for Institutional Orders
    B. Disclosures for Retail Orders
    1. Marketable Limit Orders and Non-Marketable Limit Orders
    2. Net Payment for Order Flow and Transaction Fees and Rebates 
by Specified Venue
    3. Discussion of Arrangement Terms with a Specified Venue
    4. Additional Amendments to Retail Disclosures
    5. Amendment to Rule 600(b)(18) to rename ``Customer Order'' to 
``Retail Order''
    C. Amendment to Disclosure of Order Execution Information
IV. Paperwork Reduction Act
    A. Summary of Collection of Information
    1. Customer Requests for Information on Institutional Orders
    2. Public Aggregated Report on Institutional Orders
    3. Requirement to Document Methodologies for Categorizing 
Institutional Order Routing Strategies
    4. Amendment to Current Disclosures With Respect to Retail 
Orders
    5. Amendment to Current Disclosures under Rule 605
    B. Proposed Use of Information
    1. Customer Requests for Information on Institutional Orders
    2. Public Aggregated Report on Institutional Orders
    3. Requirement to Document Methodologies for Categorizing 
Institutional Order Routing Strategies
    4. Amendment to Current Disclosures With Respect to Retail 
Orders
    5. Amendment to Current Disclosures under Rule 605
    C. Respondents
    D. Total Initial and Annual Reporting and Recordkeeping Burdens
    1. Customer Requests for Information on Institutional Orders
    2. Public Aggregated Report on Institutional Orders
    3. Requirement to Document Methodologies for Categorizing 
Institutional Order Routing Strategies
    4. Amendment to Current Disclosures With Respect to Retail 
Orders
    5. Amendment to Current Disclosures under Rule 605
    E. Collection of Information is Mandatory
    F. Confidentiality of Responses to Collection of Information
    G. Retention Period for Recordkeeping Requirements
    H. Request for Comments
V. Economic Analysis
    A. Introduction
    B. Baseline
    1. Ad Hoc Reports for Institutional Orders
    2. Publication Period for Reports on Retail Orders Required by 
Current Rules 605 and 606
    3. Available Information on Conflicts of Interest
    4. Available Information on Execution Quality for Institutional 
and Retail Orders
    5. Format of Current Reports for Institutional and Retail Orders
    6. Quality of Broker-Dealer Routing Practices for Institutional 
Orders
    7. Use of Actionable IOIs in Institutional Orders
    8. Competition, Efficiency, and Capital Formation
    9. Request for Comment
    C. Costs and Benefits
    1. Disclosures for Institutional Orders
    2. Disclosures for Retail Orders
    3. Disclosure of Order Execution Information
    4. Structured Format of Reports
    5. Other Definitions in Proposed Amendments to Rule 600
    D. Alternatives Considered
    1. Definition of Institutional Order in Proposed Rule 606(b)(31)
    2. Limited or No Public Disclosure of Institutional Order 
Routing and Execution Quality (Proposed Rule 606(c))
    3. More Frequent Public Disclosure of Institutional Order 
Routing and Execution Information (Proposed Rule 606(c))
    4. Automatic Provision of Customer-Specific Institutional Order 
Handling Report (Proposed Rule 606(b)(3))
    5. Submission of Institutional Order Handling Reports (Proposed 
Rules 606(b)(3) and 606(c))
    6. Disaggregate Categories of NMS Stocks for Rule 606(a)
    7. Disclosure of Additional Information about Institutional 
Order Routing and Execution
    8. Institutional Order Handling Reports at the Stock Level 
(Proposed Rule 606(b)(3))
    9. Alternative to Three-Year Posting Period (Proposed Amendments 
to Rules 605(a)(2) and 606(a)(1), and Proposed Rule 606(c))
    10. Request for Comment
    E. Economic Effects and Effects on Efficiency, Competition, and 
Capital Formation
    1. Effects of Proposed Amendments on Efficiency and Competition
    2. Effects of Proposed Amendments on Capital Formation
    3. Request for Comment
VI. Consideration of Impact on the Economy
VII. Regulatory Flexibility Analysis
VIII. Statutory Authority and Text of the Proposed Rule Amendments

I. Introduction

    Institutional customers have a compelling interest in the order 
handling decisions of their executing brokers as they monitor the 
execution quality of their orders, both from the standpoint of the 
price received and to evaluate the potential negative effects of 
information leakage and conflicts of interest.\1\ This focus on order 
handling has intensified in recent years as routing and execution 
practices have evolved as markets have become more automated, 
dispersed, and complex.\2\ Historically, there was a substantial manual 
component involved in the routing and execution of institutional 
customers' orders. Today, however, institutional orders tend to be 
routed and executed using sophisticated order execution algorithms 
developed by broker-dealers or others that break up large institutional 
orders into smaller ``child'' orders, and smart order routing systems 
to route those child orders to the full range of trading centers in the 
national market system, including exchanges, ``dark pool'' alternative 
trading systems (``ATSs''), other ATSs, and internalizing broker-
dealers.\3\ These order routing and execution algorithms use a wide 
variety of methods, ranging from non-time-sensitive passive strategies 
to aggressive liquidity-taking strategies, to achieve the trading goals 
of the institutional customer. Although certain advantages flow from 
technological advancements and the increase in number of venues, the 
Commission preliminarily believes that the complexity of order 
execution algorithms and smart order routing systems, and the 
multiplicity of venues to which broker-dealers may route orders or send 
actionable indications of interest, have made it increasingly difficult 
for institutional customers to assess the impact particular order 
routing strategies may have on the quality of their executions, or the 
risks presented by any resulting information leakage or broker-dealer 
conflicts of interest.
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    \1\ An institutional customer includes, for example, pension 
funds, mutual funds, investment advisers, insurance companies, 
investment banks, and hedge funds.
    \2\ See Securities Exchange Act Release No. 73639 (November 19, 
2014), 79 FR 72252, 72397 (December 5, 2014) (``Regulation SCI 
Adopting Release'') (stating that markets have evolved ``to become 
significantly more dependent on sophisticated, complex, and 
interconnected technology''); see also Securities Exchange Act 
Release No. 61358 (January 14, 2010), 75 FR 3594 (January 21, 2010) 
(``Concept Release on Equity Market Structure'') (stating that ``the 
current market structure can be described as dispersed and complex: 
(1) Trading volume is dispersed among many highly automated trading 
centers that compete for order flow in the same stocks; and (2) 
trading centers offer a wide range of services that are designed to 
attract different types of market participants with varying trading 
needs'').
    \3\ A ``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. See 17 CFR 242.600(b)(78).
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    Changes to market structure and routing practices have led many 
institutional customers to demand more specific and detailed 
institutional order handling information from their broker-dealers. The 
Commission notes that for

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purposes of this proposing release, the use of ``institution'' or 
``institutional'' shall refer to an institutional order, as proposed to 
be defined in proposed Rule 600(b)(31),\4\ and the term ``institutional 
customer'' shall refer to a sender of an institutional order.
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    \4\ See infra Section III.A.1.
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    The Commission understands that institutional customer requests 
range from detailed information about the handling of specific 
institutional orders to more generic data about the order routing 
strategies pursued by the broker-dealer for institutional customers and 
the venues to which their orders are routed and executed. The level of 
detail of the information provided tends to vary by broker-dealer, as 
well as the particular institutional customer, some of whom may have 
the wherewithal and desire to digest and evaluate voluminous order 
handling information and some of whom may not.
    The Commission preliminarily believes that market-based efforts to 
provide institutional order handling transparency may not be sufficient 
insofar as smaller institutional customers may lack the bargaining 
power or the resources to demand relevant order handling information 
from their broker-dealers. In addition, while many institutional 
customers regularly conduct, directly or through a third-party vendor, 
transaction cost analysis (``TCA'') of their orders to assess execution 
quality against various benchmarks, the Commission preliminarily 
believes that the comprehensiveness of such analysis could be enhanced 
with more granular order handling information. The Commission also 
preliminarily believes that standardizing the baseline information 
provided by broker-dealers could help ensure the wide availability of 
meaningful order handling information that may be produced in an 
efficient and cost-effective manner.\5\
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    \5\ There have been recent efforts by representatives of broker-
dealers and institutional customers to develop a template of 
baseline order routing disclosure, and these efforts are reflected 
in a letter from the Investment Company Institute, the Managed Funds 
Association, and the Securities Industry and Financial Markets 
Association (collectively, the ``Associations''). See Letter to Mary 
Jo White, Chair, Commission, from Dorothy M. Donohue, Deputy General 
Counsel, Investment Company Institute, Stuart J. Kaswell, Executive 
Vice President & Managing Director, General Counsel, Managed Funds 
Association, and Randy Snook, Executive Vice President, Securities 
Industry and Financial Markets Association, dated October 23, 2014 
(``Associations Letter''), available at http://www.sec.gov/comments/s7-02-10/s70210-428.pdf.
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    In light of the foregoing, the Commission preliminarily believes 
that standardized baseline institutional order handling information 
should be required to be made available to the institutional customer 
upon request so that the institutional customer can more effectively 
assess the impact of order routing decisions on the quality of their 
executions, including the risks of information leakage and potential 
conflicts of interest.\6\ Further, the Commission preliminarily 
believes that public disclosure of institutional order handling 
information, on an aggregated basis, could assist market participants 
in comparing the routing services of multiple broker-dealers, and the 
relative merits of competing trading centers, and facilitate 
institutional customers' ability to make informed decisions when 
engaging the services of a broker-dealer. The Commission preliminarily 
believes that the proposal would further encourage broker-dealers to 
minimize information leakage when executing an institutional order. The 
Commission preliminarily believes that the potential benefits of public 
disclosure of aggregated institutional order handling information 
should justify any potential negative competitive impact such 
disclosure may have on broker-dealers.
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    \6\ See infra Sections II.C.3. and II.C.4.
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    The changes to market structure have impacted the market for 
customer order routing and execution services. Currently, a ``customer 
order'' means an order to buy or sell an NMS security that is not for 
the account of a broker-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.\7\ As such, the term ``customer 
order,'' when used in Regulation NMS, only refers to smaller-sized 
orders. As discussed in more detail below, the Commission is proposing 
to rename ``customer order'' to ``retail order'' and for purposes of 
this proposing release, the term ``retail customer'' shall refer to a 
sender of a retail order.
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    \7\ See 17 CFR 242.600(b)(18).
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    As discussed below, the rise in the number of trading centers and 
the introduction of new fee models for execution services have 
intensified competition for retail order flow and created new potential 
conflicts of interest for broker-dealers. The Commission preliminarily 
believes that simplified and enhanced disclosures for retail orders, 
particularly with respect to financial inducements from trading 
centers, should assist retail customers in evaluating better the order 
routing services of their broker-dealers. Additionally, public 
transparency of retail orders should drive competition as broker-
dealers seek to compete on the basis of the quality of their order 
routing and execution services as well as their ability to manage 
conflicts of interest.
    The Commission therefore is proposing amendments to Rules 600 \8\ 
and 606 \9\ of Regulation NMS to require, for the first time, 
disclosures by broker-dealers about their handling of institutional 
orders, and enhancements to existing disclosures with respect to retail 
orders.\10\ Specifically, with respect to institutional orders, the 
Commission is proposing to amend Rule 606 of Regulation NMS to require 
a broker-dealer, upon request of its customer, to provide specific 
disclosures, for the prior six months, broken down by calendar month, 
related to: (1) The handling of the customer's institutional orders at 
the broker-dealer; (2) the routing of the customer's institutional 
orders to various trading centers; (3) the execution of those orders, 
and the quality of execution; and (4) the extent to which such orders 
provided liquidity or removed liquidity, and the average transaction 
rebates received or fees paid by the broker-dealer. This information 
would be provided for each venue, and would further be divided into 
passive, neutral, and aggressive order routing strategies. In 
connection with this new requirement, the Commission is proposing to 
amend Rule 600 of Regulation NMS to include definitions of the terms 
``institutional order,'' ``actionable indication of interest,'' 
``orders providing liquidity,'' and ``orders removing liquidity,'' and 
to rename the defined term ``customer order'' to ``retail order.'' The 
Commission also is proposing to amend Rule 606 of Regulation NMS to 
require a broker-dealer to make publicly available the foregoing 
information, on an aggregated basis, for all of its customers' 
institutional orders, for each calendar quarter, broken down by 
calendar month, and keep such reports posted on an Internet Web site 
that is free and readily accessible to the public for a period of three 
years from the initial date of posting on the Internet Web site.
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    \8\ 17 CFR 242.600.
    \9\ 17 CFR 242.606.
    \10\ The Commission notes that the proposed amendments to Rule 
606, if adopted, would not limit any other obligations that the 
broker-dealer may have under applicable federal securities laws, 
rules, or regulations, including the anti-fraud provisions of the 
federal securities laws.
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    Further, with respect to retail orders, the Commission 
preliminarily believes that the existing Rule 606 disclosures should be 
updated to require that more relevant routing information is provided

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to retail customers. Specifically, the Commission is proposing to: (1) 
Require limit order information to be split into marketable \11\ and 
non-marketable \12\ categories; (2) require more detailed disclosure of 
the net aggregate amount of any payments received from or paid to 
certain trading centers; (3) require broker-dealers to describe any 
terms of payment for order flow arrangements and profit-sharing 
relationships with certain venues that may influence its order routing 
decisions; (4) require that broker-dealers keep retail order routing 
reports posted on an Internet Web site that is free and readily 
accessible to the public for a period of three years from the initial 
date of posting on the Internet Web site; and (5) eliminate the 
requirement to group retail order routing information by listing 
market.
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    \11\ A ``marketable limit order'' is 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. 17 CFR 
242.600(b)(39). ``National best bid and national best offer'' means, 
with respect to quotations for an NMS security, 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 pursuant 
to such plan 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). 17 CFR 242.600(b)(42).
    \12\ The Commission is proposing in new Rule 600(b)(51) to 
define ``non-marketable limit order'' to mean ``any limit order 
other than a marketable limit order'', as discussed in more detail 
below. See infra Section III.B.1.
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    Finally, consistent with the proposed amendments to Rule 606, the 
Commission is proposing to amend Rule 605 to require market centers 
\13\ to keep execution reports required by the rule posted on an 
Internet Web site that is free of charge and readily accessible to the 
public for a period of three years from the initial date of posting on 
the Internet Web site. With respect to Rule 607, the Commission is 
proposing to amend the rule text to reflect the renaming of the defined 
term ``customer order'' to ``retail order,'' but is making no 
substantive changes to the defined term. As noted above, the Commission 
is proposing amendments to other rules to update cross-references as a 
result of this proposal.\14\
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    \13\ A ``market center'' means any exchange market maker, OTC 
market maker, alternative trading system, national securities 
exchange, or national securities association. See 17 CFR 
242.600(b)(38).
    \14\ The Commission is proposing to amend Rule 3a51-1(a) under 
the Exchange Act; Rule 13h-1(a)(5) of Regulation 13D-G; Rule 
105(b)(1) of Regulation M; Rules 201(a) and 204(g) of Regulation 
SHO; Rules 600(b), 602(a)(5), 607(a)(1), and 611(c) of Regulation 
NMS; and Rule 1000 of Regulation SCI.
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    The release first provides relevant background on Rule 606 and then 
discusses the technological advances and regulatory changes that have 
prompted the proposal. The release then discusses, in detail, the 
proposed amendments to Rules 600, 605, 606, and 607 including the new 
institutional order handling disclosures that would be required from 
broker-dealers.

II. Current Practices and Regulation and the Need for Enhanced 
Disclosures

A. Background on Rule 606

    The Commission proposed and adopted Rule 11Ac1-6,\15\ now known as 
Rule 606 of Regulation NMS,\16\ in 2000, to improve public disclosure 
of order routing practices. Rule 606 arose out of the Commission's 
extended inquiry into market fragmentation, defined at the time as the 
trading of orders in multiple locations without interaction among those 
orders.\17\ In adopting Rule 606, the Commission stated that ``[i]n a 
fragmented market structure with many different market centers trading 
the same security, the order routing decision is critically important, 
both to the individual investor whose order is routed and to the 
efficiency of the market structure as a whole. The decision must be 
well-informed and fully subject to competitive forces.'' \18\ The 
Commission further stated that public disclosure of order routing 
practices ``could provoke more vigorous competition on . . . order 
routing performance.'' \19\
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    \15\ See Securities Exchange Act Release Nos. 43084 (July 28, 
2000), 65 FR 48406 (August 8, 2000) (``Rule 606 Predecessor 
Proposing Release'') and 43590 (November 17, 2000), 65 FR 75414 
(December 1, 2000) (``Rule 606 Predecessor Adopting Release'').
    \16\ The Commission re-designated Rule 11Ac1-6 as Rule 606 when 
adopting Regulation NMS in 2005. See Securities Exchange Act Release 
No. 51808 (June 9, 2005), 70 FR 37496, 37538 (June 29, 2005) 
(``Regulation NMS Adopting Release''). For clarity, when this 
release discusses the proposal of Rule 606 or the adoption of Rule 
606, it is referring to the Rule 606 Predecessor Proposing Release 
and Rule 606 Predecessor Adopting Release, supra note 15, 
respectively.
    \17\ See Securities Exchange Act Release No. 42450 (February 23, 
2000), 65 FR 10577 (February 28, 2000) (Commission request for 
comment, included in a notice of a proposed self-regulatory 
organization (``SRO'') rule change) (``Fragmentation Release'').
    \18\ See Rule 606 Predecessor Adopting Release, supra note 15, 
at 75415.
    \19\ Id. at 75417. Industry participants commenting in response 
to the Concept Release on Equity Market Structure, supra note 2, 
have expressed the view that increased order routing transparency 
has led to increased competition. See, e.g., Letters to Secretary, 
Commission, from Joan C. Conley, Senior Vice President and Corporate 
Secretary, The NASDAQ OMX Group, Inc., dated April 30, 2010 
(``NASDAQ Letter''), at 21 (stating that NASDAQ shares the 
Commission's belief that transparency promotes competition); from 
Christopher Nagy, Managing Director Order Strategy, Co-Head of 
Government Relations, TD Ameritrade and John S. Markle, Deputy 
General Counsel, Co-Head of Government Relations, TD Ameritrade, 
dated April 21, 2010 (``TD Ameritrade Letter''), at 3-4 (stating 
that added transparency has driven brokers to continuously seek 
better executions for clients).
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    In adopting Rule 606, the Commission limited its scope to smaller 
orders.\20\ Larger orders were excluded in recognition of the fact 
that, at the time, generalized information for order routing practices 
would be more useful for smaller orders, which tended to be handled in 
a more homogenous manner.\21\ Because institutional orders required 
more individualized, manual handling, they were excluded from Rule 606 
in recognition of the fact that, at that time, providing standardized 
order handling statistics would be neither practical nor useful in this 
context.\22\
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    \20\ The Commission limited the scope of Rule 606 to smaller 
orders by defining a customer order as 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. See 17 CFR 242.600(b)(18).
    \21\ See Rule 606 Predecessor Adopting Release, supra note 15, 
at 75426.
    \22\ See id.
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    Thus, in its current form, Rule 606(a) applies only to retail-sized 
orders, and requires every broker-dealer to publicly provide a 
quarterly report on its routing of non-directed orders \23\ in NMS 
securities.\24\ Currently, the report includes the following 
information, separated by listing market for NMS stocks,\25\ and in the 
aggregate for NMS securities that are option contracts: (1) The 
percentage of total retail orders that were non-directed orders, and 
the percentages of total non-directed orders that were market orders, 
limit orders, and other orders; (2) the identity of the ten venues to 
which the largest number of total non-directed orders were routed for 
execution and of any venue to which

[[Page 49436]]

five percent or more of such orders were routed (collectively, 
``Specified Venues'') and the percentage of total non-directed orders 
routed to each Specified Venue, and the percentages of total non-
directed market orders, total non-directed limit orders, and total non-
directed other orders that were routed to each Specified Venue; and (3) 
a discussion of the material aspects of the broker-dealer's 
relationship with each Specified Venue, including a description of any 
payment for order flow \26\ or profit-sharing relationship 
arrangements.\27\
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    \23\ A ``non-directed order'' means any customer order other 
than a directed order. See 17 CFR 242.600(b)(48). A ``directed 
order'' means a customer order that the customer specifically 
instructed the broker or dealer to route to a particular venue for 
execution. See 17 CFR 242.600(b)(19). See also supra note 7 and 
accompanying text. The Commission is proposing to rename ``customer 
order'' as ``retail order,'' which would carry through to these two 
definitions. See infra Section III.B.5.
    \24\ An ``NMS security'' is 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 17 CFR 242.600(b)(46).
    \25\ An ``NMS stock'' is any NMS security other than an option. 
See 17 CFR 242.600(b)(47).
    \26\ ``Payment for order flow'' has the meaning provided in 17 
CFR 240.10b-10. See 17 CFR 242.600(b)(54). ``Payment for order 
flow'' means any monetary payment, service, property, or other 
benefit that results in remuneration, compensation, or consideration 
to a broker or dealer from any broker or dealer, national securities 
exchange, registered securities association, or exchange member in 
return for the routing of customer orders by such broker or dealer 
to any broker or dealer, national securities exchange, registered 
securities association, or exchange member for execution, including 
but not limited to: research, clearance, custody, products or 
services; reciprocal agreements for the provision of order flow; 
adjustment of a broker or dealer's unfavorable trading errors; 
offers to participate as underwriter in public offerings; stock 
loans or shared interest accrued thereon; discounts, rebates, or any 
other reductions of or credits against any fee to, or expense or 
other financial obligation of, the broker or dealer routing a 
customer order that exceeds that fee, expense or financial 
obligation. See 17 CFR 240.10b-10(d)(8).
    \27\ A ``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. See 17 CFR 242.600(b)(56).
---------------------------------------------------------------------------

    Rule 606(b) currently requires every broker-dealer to provide 
customers, upon request, specific information about the routing of 
their orders. Specifically, upon request, every broker-dealer shall: 
(1) Disclose to its customer the identity of the venue to which the 
customer's orders were routed for execution in the six months prior to 
the request, whether the orders were directed orders or non-directed 
orders, and the time of the transactions, if any, that resulted from 
such orders; and (2) notify customers in writing at least annually of 
the availability of this information upon request.

B. Changes in Order Handling Practices

    U.S. equity market structure has changed significantly since the 
adoption of Rule 606. Today it is highly automated, dispersed among 
myriad trading centers, and more complex than it was in 2000.\28\ The 
primary drivers of this market transformation have been the rapid and 
ongoing evolution of technologies for generating, routing, and 
executing orders, and the impact of regulatory changes.\29\ In 2000, a 
large proportion of order flow in listed equity securities was routed 
to a few, mostly manual, trading centers, and it was rare that such 
orders would be re-routed to other venues.\30\ In contrast, today, 
trading in the U.S. equity markets is spread among a number of highly 
automated trading centers: 12 registered exchanges, more than 40 
ATSs,\31\ and over 200 over-the-counter (``OTC'') market-makers,\32\ 
and the routing and re-routing of orders to multiple venues is common. 
These venues offer a wide range of services and pricing structures that 
are designed to attract different types of market participants with 
varying trading needs.\33\
---------------------------------------------------------------------------

    \28\ See Concept Release on Equity Market Structure, supra note 
2, at 3594. See also Regulation SCI Adopting Release, supra note 2, 
at 72397.
    \29\ See Concept Release on Equity Market Structure, supra note 
2, at 3594 (``Changes in market structure also reflect the markets' 
response to regulatory actions such as Regulation NMS, adopted in 
2005, the Order Handling Rules, adopted in 1996, as well as 
enforcement actions, such as those addressing anti-competitive 
behavior by market makers in NASDAQ stocks'').
    \30\ See Fragmentation Release, supra note 17.
    \31\ Data compiled from Forms ATS-R filed with the Commission as 
of the end the fourth quarter of 2014.
    \32\ More than 200 broker-dealers (excluding ATSs) have 
identified themselves to the Financial Industry Regulatory Authority 
(``FINRA'') as market centers that must provide monthly reports on 
order execution quality under Rule 605 of Regulation NMS (list 
available at http://apps.finra.org/datadirectory/1/marketmaker.aspx).
    \33\ See Concept Release on Equity Market Structure, supra note 
2, at 3594.
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    According to a staff report published in 1994, prior to the 
emergence and growth of electronic markets, institutional customers 
would rely primarily on exchange floor brokers or upstairs block 
positioners to execute their large orders.\34\ Typically, exchange 
floor brokers or upstairs block positioners would negotiate large 
trades off the exchange (often referred to as ``upstairs'') and 
subsequently execute or ``print'' on the exchange--subject to auction 
market procedures allowing the limit order book or the trading crowd to 
participate in the trade and exposing the order to the market.\35\ The 
nature of floor trading activity and upstairs block positioning allowed 
broker-dealers to manually exercise judgment and expertise to achieve 
best execution, and typically involved strategies that were designed to 
conceal information about an institutional customer's trading interest 
to potential counterparties to minimize price impact.
---------------------------------------------------------------------------

    \34\ See Division of Market Regulation, SEC, Market 2000: An 
Examination of Current Equity Market Developments, at II-14 (January 
1994).
    \35\ Id. at II-14-15.
---------------------------------------------------------------------------

    In today's electronic markets, however, the manual handling of 
institutional orders is increasingly rare, and has been replaced by 
sophisticated institutional order execution algorithms and smart order 
routing systems. These sophisticated algorithms and systems decide the 
timing, pricing, and quantity of orders routed to the various trading 
centers.\36\ Broker-dealers often use order execution algorithms to 
divide a large ``parent'' order of an institutional customer into many 
smaller ``child'' orders, and route the child orders over time to 
different trading centers in accordance with a particular strategy.\37\ 
Such algorithms may be ``aggressive,'' and generally seek to take 
liquidity quickly at many different trading centers, or they may be 
``passive,'' and generally submit resting orders at one or more trading 
centers and await executions at favorable prices, or they may be 
``neutral,'' and seek to take liquidity or submit resting orders 
depending on market conditions.\38\ In addition, some broker-dealers 
utilize indications of interest to notify external liquidity providers 
of trading interest at that broker-dealer.
---------------------------------------------------------------------------

    \36\ See, e.g., Terrence Hendershott, Charles Jones, and Albert 
Menkveld, Does Algorithmic Trading Improve Liquidity, 66 Journal of 
Finance 1 (February 2011).
    \37\ See Concept Release on Equity Market Structure, supra note 
2, at 3602.
    \38\ See id.
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C. Need for Enhanced Disclosures for Institutional Orders

1. Market Complexity
    Institutional customers have long focused on the execution quality 
of their large orders, and the potential impacts from information 
leakage and conflicts of interest faced by their broker-dealers. While 
there is some indication that enhancements to electronic order routing 
systems and processes generally have led to improved execution quality 
in many cases,\39\ the operation of order routing systems and processes 
often is opaque to customers placing institutional orders, who may not 
have sufficient information to understand how, where, and why their 
orders are routed to specific venues, and whether particular order 
routing and execution strategies, whether or not selected by

[[Page 49437]]

the customer, are consistent with the customer's expectations.
---------------------------------------------------------------------------

    \39\ See, e.g., Letter to Secretary, Commission, from Greg 
O'Connor, Compliance Manager, Wolverine Trading, LLC, dated April 
21, 2010 (``Wolverine Trading Letter''), at 5 (stating that 
technological advancements have led to improved markets and 
executions as indicated by tighter spreads, lower trading costs, and 
more liquidity). See also Thierry Foucault and Albert J. Menkveld, 
Competition for Order Flow and Order Routing Systems, 63 Journal of 
Finance 119, 121 (February 2008) (discussing that utilization of 
smart order routers reduces the incidence of trade-throughs and may 
encourage provision of liquidity).
---------------------------------------------------------------------------

    As noted above, at the time of adoption of Rule 606, institutional 
orders generally were handled by an exchange floor broker or upstairs 
block positioner. The risks of information leakage and broker-dealer 
conflicts of interest existed with manual order handling, but because 
the execution alternatives were fewer and simpler, less data was 
necessary for institutional customers to evaluate those risks and 
evaluate broker-dealer performance. Now, however, because of the 
complexity of order execution algorithms and smart order routing 
systems, and the wide variety of venues to which broker-dealers may 
route institutional orders or send actionable indications of interest, 
access to data is important for institutional customers to assess the 
impact a broker-dealer's order routing strategies may have on the 
quality of their executions and the risks presented by any resulting 
information leakage or broker-dealer conflicts of interest.
    Institutional customers increasingly have been expressing concerns 
regarding the difficulty in obtaining and comparing certain information 
across broker-dealers and venues, and understanding how their 
institutional orders are handled by broker-dealers, and have called for 
enhanced order handling disclosures.\40\ Institutional customers have 
cited concerns, among other things, about the extent to which broker-
dealer routing decisions are influenced by incentives offered by 
trading centers to attract order flow, that inefficiencies in order 
execution algorithms and smart order routing systems may lead to 
information leakage, and that the complexity and opacity of order 
routing practices frustrate the ability to monitor execution quality. 
Importantly, a variety of other market participants, including broker-
dealers, also have expressed support for enhanced and consistent 
disclosure of institutional order handling information.\41\
---------------------------------------------------------------------------

    \40\ See Associations Letter, supra note 5, at 2.
    \41\ The Commission received letters addressing these issues in 
response to requests for comment on the Concept Release on Equity 
Market Structure, supra note 2 (comment letters available at http://www.sec.gov/comments/s7-02-10/s70210.shtml). See Letters to 
Secretary, Commission, from Christopher Nagy, CEO, and Dave Lauer, 
President, KOR Group LLC, dated September 23, 2014 (``KOR Trading 
Letter II''), at 1-2 (stating Rule 606 is severely outdated, has no 
coverage of large orders, and should be updated to cover all 
orders); from Richie Prager, Managing Director, Head of Trading & 
Liquidity Strategies, et al., BlackRock, Inc., dated September 12, 
2014 (``BlackRock Letter''), at 3 (stating broker-dealers should be 
required to provide periodic standardized reports on order routing 
and execution metrics to both retail and institutional investors); 
from Christopher Nagy, CEO, and Dave Lauer, President, KOR Trading 
LLC, dated April 4, 2014 (``KOR Trading Letter I''), at 2 (stating 
Rule 606 has become increasingly outdated as a result of the 
increasing complexity of order-types as well as the speed of routing 
and routing practices and Rule 606 should be updated to cover 100% 
of order flow received, including block transactions); from Kimberly 
Unger, Esq., Executive Director, Security Traders Association of New 
York, Inc., dated April 30, 2010 (``STA Letter''), at 8 (stating 
that since the adoption of Rule 606 in 2000, technological 
advancements have made some of the measurements in the Rule less 
meaningful and suggesting that 606 metrics be reviewed, amended, and 
updated, as needed); NASDAQ Letter, supra note 19, at 20 (stating 
Rule 606 has lagged behind technological advances that enhance 
market quality, which consequently renders the metrics utilized in 
Rule 606 less useful to investors, and further suggesting new 
metrics for inclusion on reports and refinements to current 
metrics); from Ann Vlcek, Managing Director and Associate General 
Counsel, Securities Industry and Financial Markets Association, 
dated April 29, 2010 (``SIFMA Letter I''), at 13 (stating that the 
Commission should direct broker-dealers to provide institutional 
clients with standardized execution venue statistical analysis 
reports); from O. Mason Hawkins, Richard W. Hussey, Deborah L. 
Craddock, Jeffrey D. Engelberg, and W. Douglas Schrank, Southeastern 
Asset Management, Inc., dated April 28, 2010 (``SAM Letter''), at 7 
(stating increased complexity in the marketplace has clouded order 
handling to the point where even educated customers are not 
completely confident as to how or why their orders are routed to 
specific venues in a specific way); from Janet M. Kissane, SVP--
Legal & Corporate Secretary, Office of the General Counsel, NYSE 
Euronext, dated April 23, 2010 (``NYSE Euronext Letter''), at 12, 
Appendix I at 3-4 (stating that U.S. equity market structure has 
changed substantially resulting in Rule 606 becoming outdated, and 
that Rule 606 reports do not capture information concerning block 
transactions and that the rule should be amended to include such 
information); Wolverine Trading Letter, supra note 39, at 4 (stating 
that the firm believes information currently required by Rule 606 
reports is not as meaningful in the context of today's markets and 
that Commission staff should determine the types of statistics to 
add in order to improve usefulness of the reports); from Dan 
Mathisson, Managing Director, Credit Suisse Securities (USA) LLC, 
dated April 21, 2010 (``Credit Suisse Letter''), at 9 (stating that 
equity markets have changed unequivocally since 2000 when Rule 606 
was adopted resulting in a need to update the Rule 606 reports); 
from Karrie McMillan, General Counsel, Investment Company Institute, 
dated April 21, 2010 (``ICI Letter''), at 8 (stating that currently 
institutional investors do not have ready access to complete 
information about their orders and the Commission should consider 
means to require new disclosures or enhance existing disclosures); 
from Michael Gitlin, Head of Global Trading, T. Rowe Price 
Associates, Inc.; David Oestreicher, Chief Legal Counsel, T. Rowe 
Price Associates, Inc.; and Christopher P. Hayes, Sr. Legal Counsel, 
T. Rowe Price Associates, Inc., dated April 21, 2010 (``T. Rowe 
Price Letter''), at 3 (supporting interest in revamping Rule 606 
reports to provide additional data related to trading volumes and 
venues to both large and small investors); from Jennifer S. Choi, 
Assistant General Counsel, Investment Adviser Association, dated 
April 20, 2010 (``IAA Letter''), at 4 (stating the exclusion of 
large orders from Rule 606 reports limits the value of such reports 
to institutional investors); from Seth Merrin, Chief Executive 
Officer, Liquidnet; Howard Meyerson, General Counsel, Liquidnet; and 
Vlad Khandros, Corporate Strategy, Liquidnet, dated March 26, 2010 
(``Liquidnet Letter''), at 2 (stating that institutional and retail 
investors do not have sufficient information regarding how their 
orders are handled, and empowering institutional traders with 
appropriate disclosures regarding the handling of large orders will 
empower institutions to make the best decisions for their 
customers). The Commission also received one letter relevant to this 
proposal in response to requests for comment on Securities Exchange 
Act Release No. 76474 (November 18, 2015), 80 FR 80997 (December 28, 
2015) (File No. S7-23-15) (``NMS Stock ATS Proposing Release'') 
(comment letter available at http://www.sec.gov/comments/s7-23-15/s72315.shtml). See Letter to Secretary, Commission, from David M. 
Weisberger, Managing Director, Markit, dated April 15, 2016 
(``Markit Letter''), at 6-7 (stating order routing statistics 
required under Rule 606 should be enhanced to include basic metrics 
of execution quality for all categories of executed orders, 
separately report on routed and executed orders broken down by 
marketability, report on unexecuted routed orders, quantify net fees 
paid and rebates received by marketability category, and standardize 
the interpretation of ``directed order''). A discussion of the 
letters relevant to this proposal is below. See infra Section II.F.
---------------------------------------------------------------------------

    In the absence of a Commission rule, some institutional customers 
today have taken steps to acquire more information about the nature and 
number of venues to which their orders are routed or exposed.\42\ For 
example, some institutional customers, using detailed questionnaires, 
request and receive information regarding order routing strategies used 
by their broker-dealers and the venues to which their broker-dealers 
route orders. In addition, more sophisticated institutional customers 
often request and receive granular data about the handling of 
individual orders.\43\ The level of detail of the information provided 
by broker-dealers tends to vary depending on both the broker-dealer and 
the particular institutional customer, some of which may have the 
ability and desire to digest and evaluate voluminous individual order 
handling information and some of which may not. Of concern to the 
Commission, however, is the risk that some smaller institutional 
customers may not have the bargaining power to demand relevant order 
handling information from their broker-dealers. The Commission also 
understands that while some broker-dealers are willing and able to 
provide order handling information, the non-standardized and non-
transparent nature of the data limits its effectiveness. Moreover, from 
the standpoint of the broker-dealers, responding to different 
institutional customers could be time-consuming and costly, as the 
broker-dealers typically need to prepare custom responses to

[[Page 49438]]

different questions from each institutional customer who requests order 
handling information.\44\ Accordingly, the Commission preliminarily 
believes that by requiring standardization of such reports, order 
handling data could potentially be generated in a more efficient and 
cost-effective manner, and provided as a matter of course to the 
benefit of all institutional customers.
---------------------------------------------------------------------------

    \42\ See Associations Letter, supra note 5, at 2.
    \43\ See, e.g., Memorandum from the Division of Trading and 
Markets regarding a March 4, 2011, meeting with representatives of 
Morgan Stanley with regard to the Concept Release on Equity Market 
Structure, dated May 7, 2011 (``TM Memo re Morgan Stanley I'').
    \44\ The Commission acknowledges that some institutional 
customers, particularly those that are larger and more 
sophisticated, may continue to request a customized report, even 
with the availability of standardized reports. The Commission 
understands that broker-dealers may respond to such requests for 
competitive reasons or provide such benefits as a service to its 
customers. Accordingly, the potential cost and time savings benefits 
of standardized reports would be reduced for these broker-dealers.
---------------------------------------------------------------------------

2. Assessing Best Execution
    Broker-dealers have a variety of types of institutional customers 
that use their order routing services, including pension funds, mutual 
funds, investment advisers, insurance companies, investment banks, and 
hedge funds.\45\ Due to the large size in which they trade, 
institutional customers generally are focused on ensuring that their 
broker-dealers are achieving best execution for their orders. Broker-
dealers are legally required to obtain best execution of all customers' 
orders.\46\ FINRA rules specifically require FINRA members to use 
reasonable diligence to ascertain the best market for the security, and 
to buy or sell in that market so that the resultant price to the 
customer is as favorable as possible under prevailing market 
conditions.\47\ Under FINRA's rules, some of the factors a FINRA member 
must consider in determining whether it has used ``reasonable 
diligence'' are: (1) The character of the market for the security, such 
as the price, volatility, relative liquidity, and pressure on available 
communications; (2) the size and type of transaction; (3) the number of 
markets checked; (4) the accessibility of the quotation; and (5) the 
terms and conditions of the order which result in the transaction.\48\
---------------------------------------------------------------------------

    \45\ See supra note 1.
    \46\ A broker-dealer's duty of best execution derives from 
common law agency principles and fiduciary obligations, and is 
incorporated in self-regulatory organization rules and, through 
judicial and SEC decisions, the antifraud provisions of the federal 
securities laws. See Regulation NMS Adopting Release, supra note 16, 
at 37538. FINRA has codified a duty of best execution into its 
rules. See FINRA Rule 5310. Accordingly, violations by a broker of 
its duty of best execution expose the broker to potential liability 
under the antifraud provisions of the Exchange Act as well as 
potential discipline under applicable self-regulatory organization 
rules.
    \47\ See FINRA Rule 5310(a)(1) (Best Execution and 
Interpositioning).
    \48\ Id.
---------------------------------------------------------------------------

    Some institutional customers have direct relationships with their 
broker-dealers, whereas other institutional customers, such as mutual 
funds and pension funds, often employ investment advisers to buy and 
sell securities on their behalf. Investment advisers are fiduciaries to 
their clients (e.g., mutual funds, pension funds) and have an 
obligation to act in the best interests of their clients.\49\ Several 
obligations flow from an investment adviser's fiduciary duties, 
including, among other things, the obligation to seek best execution of 
clients' transactions where the investment adviser has the authority to 
select broker-dealers to execute client transactions.\50\ As discussed 
above, however, the Commission preliminarily believes it has become 
more challenging in today's highly automated, complex, and dispersed 
markets for institutional customers and their advisers, in the absence 
of additional, standardized disclosure, to monitor the extent to which 
their broker-dealers are achieving best execution.
---------------------------------------------------------------------------

    \49\ See, e.g., Section 206(2) of the Investment Advisers Act of 
1940 that prohibits an investment adviser from engaging in any 
transaction, practice, or course of business, which operates as a 
fraud or deceit upon any client or prospective client. As such, 
investment advisers must act in ``utmost good faith,'' provide full 
and fair disclosure of all material facts, and employ reasonable 
care to avoid misleading clients and prospective clients. SEC v. 
Capital Gains Research Bureau, Inc., 375 U.S. 180, 194, 201 (1963).
    \50\ See Interpretive Release Concerning the Scope of Section 
28(e) of the Securities Exchange Act of 1934 and Related Matters, 
Securities Exchange Act Release No. 23170 (April 23, 1986). An 
investment adviser must seek to obtain the execution of client 
transactions in such a manner that the client's total cost or 
proceeds are the most favorable under the circumstances. In 
particular, when seeking best execution, an adviser should consider 
the full range and quality of a broker's services when selecting 
broker-dealers to execute client trades, including, among other 
things, the broker's execution capability, commission rate, 
financial responsibility, responsiveness to the adviser, and the 
value of any research provided. See id. See also Delaware Mgmt. Co., 
43 SEC 392, 396 (1967).
---------------------------------------------------------------------------

    Today, broker-dealers are not required by rule to disclose specific 
order handling information regarding institutional orders. Instead, as 
noted above, the order handling information obtained by institutional 
customers is the subject of individualized negotiations with their 
broker-dealers, with the result that only a subset of institutional 
customers obtain order handling information and the scope of the 
information received varies widely. Accordingly, institutional 
customers and their advisers today monitor broker-dealers for best 
execution with substantially different levels of information, and 
potentially with varying degrees of effectiveness. For example, larger 
institutional customers may be better able to leverage their market 
size and position to obtain more detailed and complete disclosures from 
their broker-dealers, whereas smaller institutional customers may lack 
sufficient bargaining power to do so.
    The Commission preliminarily believes that requiring enhanced order 
handling disclosures for all institutional orders would not only place 
small institutional customers on a more level playing field with large 
institutional customers, but also would create a uniform baseline for 
all institutional customers to obtain information on how large orders 
are handled. Widespread institutional access to standardized 
information could help institutional customers to more effectively 
assess the performance of their broker-dealers in handling their 
orders. This, in turn, could help improve the quality of broker-dealer 
routing practices, by, among other things, introducing more competitive 
forces so that broker-dealers are actively competing with each other to 
offer routing services that minimize information leakage and mitigate 
conflicts of interest.
3. Conflicts of Interest
    The Commission has recognized that in a market structure with many 
competing trading centers, broker-dealers play a critical role in 
deciding where to route a customer's non-directed orders.\51\ The 
Commission also has noted that a competitive environment may spur a 
trading center to offer economic incentives to broker-dealers to induce 
the routing of order flow to that trading center.\52\ The Commission 
has recognized that broker-dealer order routing practices can 
significantly affect the competition among markets, and in adopting 
Rule 606 noted that the purpose of requiring disclosures concerning the 
relationships between a broker-dealer and the venues to which it routes 
orders was to inform customers to potential conflicts of interest that 
may influence the broker-dealer's order routing practices.\53\ The 
Commission further explained that providing quantitative data to 
customers would provide them a clearer

[[Page 49439]]

understanding of a broker-dealer's order routing practices.\54\ While 
these previous statements were made in the context of retail order 
routing, the Commission preliminarily believes they are equally 
applicable to institutional order routing in today's equity market.
---------------------------------------------------------------------------

    \51\ See Fragmentation Release, supra note 17, at 10582.
    \52\ Id.
    \53\ See Rule 606 Predecessor Adopting Release, supra note 15, 
at 75427. The Commission has historically taken a disclosure-based 
approach when addressing conflicts of interest that arise from 
economic and other incentives provided to broker-dealers to induce 
the routing of order flow to a trading center, rather than 
prohibiting such incentives. See, e.g., id.
    \54\ See id.
---------------------------------------------------------------------------

    There are a number of potential conflicts of interest that arise 
for broker-dealers in the handling of institutional orders that may 
influence their order routing practices. One potential conflict of 
interest a broker-dealer may face in the handling of institutional 
orders involves the different pricing structures of trading centers. A 
prevalent pricing model in the current market structure is the so-
called ``maker-taker'' model, which involves the use of access fees and 
rebates.\55\ To incentivize market participants to provide liquidity, a 
trading center employing a maker-taker fee structure generally pays a 
per-share rebate to its members or participants to encourage them to 
display non-marketable liquidity-providing orders on its limit order 
book. If an execution occurs, the broker-dealer placing the liquidity-
providing order (the ``maker'') generally receives a rebate. In 
contrast, the marketable order that removes liquidity (the ``taker'') 
generally is charged a slightly higher fee, to fund the rebate to the 
maker and provide a profit for the trading center.\56\
---------------------------------------------------------------------------

    \55\ See, e.g., Memorandum from the SEC Division of Trading and 
Markets to the SEC Equity Market Structure Advisory Committee 
(October 20, 2015) (``Maker-Taker Memo''), available at https://www.sec.gov/spotlight/emsac/memo-maker-taker-fees-on-equities-exchanges.pdf. See also Stanislav Dolgopolov, The Maker-Taker 
Pricing Model and Its Impact on Securities Market Structure, 8 Va. 
L. & Bus. Rev. 231, 232-33 (June 27, 2014) (``Dolgopolov''), 
available at http://bit.ly/1mfme9M.
    \56\ In contrast to the widespread typical maker-taker model 
described above, a few trading venues have adopted an inverted 
taker-maker pricing model, in which market participants are assessed 
a fee to provide liquidity in securities and provided a rebate to 
remove liquidity in securities. See, e.g., NASDAQ OMX BX Fee 
Schedule (as of September 2015).
---------------------------------------------------------------------------

    Broker-dealers that are members of an exchange or participants of 
an ATS with a maker-taker model pay fees to, and receive rebates from, 
the venue for each order, including an institutional order, that is 
executed on it, but generally do not directly pass those fees or 
rebates back to their institutional customers.\57\ In situations where 
a broker-dealer can earn a rebate or pay a lesser fee for routing its 
customer's orders to a particular venue, a conflict of interest may 
exist between the broker-dealer's duty of best execution and its own 
direct economic interest.\58\ Understanding how a broker-dealer manages 
this conflict of interest to ensure that its own self-interest does not 
compromise its best execution obligations is pertinent to institutional 
customers in evaluating execution quality.\59\
---------------------------------------------------------------------------

    \57\ See, e.g., Robert Battalio, Shane A. Corwin, and Robert 
Jennings, Can Brokers Have it All? On the Relation between Make-Take 
Fees and Limit Order Execution Quality, at 3 (March 31, 2015) 
(``Battalio, Corwin, and Jennings Paper''), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2367462.
    \58\ See, e.g., Maker-Taker Memo, supra note 55, at 16. Finance 
professors Robert Battalio, Shane Corwin, and Robert Jennings' 
analysis of selected market data has suggested that a significant 
number of retail firms route non-marketable orders to the venue 
offering the highest rebate, and do so in a manner that the authors 
felt might not be consistent with the brokers' duty of best 
execution. See Battalio, Corwin, and Jennings Paper, supra note 57, 
at 31. Payment for order flow, including payments made to retail 
brokers from wholesale broker-dealers, presents a similar conflict 
of interest. The sale of order flow has been described by some 
industry participants as a revenue center that permits firms to 
receive payments from market makers for such order flow when they 
would otherwise have to pay taker fees. See, e.g., Letter to Joseph 
Dear, Chairman, Investor Advisory Committee, SEC from Joseph Saluzzi 
and Sal Arnuk, Partners and Co-founders, Themis Trading LLC, dated 
January 27, 2014, available at https://www.sec.gov/comments/265-28/26528-55.pdf, at 2.
    \59\ See, e.g., Maker-Taker Memo, supra note 55, at 18. This 
conflict may present itself despite the obligation of FINRA members 
to conduct a regular and rigorous review of their order routing to 
evaluate which trading venues offer the most favorable terms of 
execution, including execution price, execution speed, and the 
likelihood that the trade will be executed. See, e.g., FINRA Rule 
5310, Supplementary Material .09(b).
---------------------------------------------------------------------------

    For example, with respect to non-marketable orders, the trading 
centers that pay the highest rebate for providing liquidity generally 
charge the highest fee for removing liquidity.\60\ These venues are 
generally lower on the routing table \61\ for broker-dealers seeking to 
remove liquidity due to the high take fee.\62\ Thus, if a broker-dealer 
places an order seeking to provide liquidity at such a venue, the order 
may not receive an execution (or receive an execution only when the 
market moves against the order) due to the venue's low position on 
routing tables for removing liquidity because of the venue's high take 
fee. High rebate venues also are likely to attract a large number of 
non-marketable orders, so that the customer queue position, and 
likelihood of execution, may be lower than on low rebate venues.
---------------------------------------------------------------------------

    \60\ See, e.g., Maker-Taker Memo, supra note 55, at 18.
    \61\ Routing table refers to a broker-dealer's automated process 
for determining the specific trading venues to which a broker-dealer 
routes orders and the sequence in which the orders are routed.
    \62\ See, e.g., Battalio, Corwin, and Jennings Paper, supra note 
57, at 1; Maker-Taker Memo, supra note 55, at 18.
---------------------------------------------------------------------------

    A similar conflict of interest may exist for marketable orders.\63\ 
Broker-dealers may seek to minimize trading costs by first routing 
orders to trading centers with the lowest take fees. However, these 
venues are likely to offer liquidity providers relatively low rebates 
so the available liquidity may be less than at a high rebate venue. 
Accordingly, the liquidity available to a marketable order routed to a 
low rebate venue may offer less size or fewer opportunities for price 
improvement than may be available at high rebate venues. Even where the 
broker-dealer ultimately routes a marketable order to other high take 
fee venues, prices can move quickly in today's highly automated, 
electronic markets, and broker-dealers may miss trading opportunities 
for an institutional customer by prioritizing low take fee venues in 
their routing tables.
---------------------------------------------------------------------------

    \63\ See, e.g., Maker-Taker Memo, supra note 55, at 19.
---------------------------------------------------------------------------

    Another potential conflict of interest may arise when a broker-
dealer internalizes order flow,\64\ routes order flow to affiliated 
venues, or routes order flow to venues with which it has payment for 
order flow arrangements. While constrained by its best execution 
obligation, a broker-dealer still may be incentivized to internalize 
customer order flow or route to an affiliated venue so that it can 
benefit from the execution by, among other things, capturing the 
trading profits or transaction fees. Internalization or execution at 
affiliated venues, however, may not offer the most favorable terms of 
execution. Likewise, a broker-dealer may be incentivized to first route 
customer order flow to venues with which it receives payment for order 
flow. Again, execution at such venues may not maximize the best 
execution opportunities of institutional orders. Accordingly, 
opportunities for internalization, or execution at affiliated venues or 
those with which the broker-dealers has payment for order flow 
arrangements, create additional potential conflicts of interest between 
the broker-dealer's duty of best execution and its own direct economic 
interest.\65\
---------------------------------------------------------------------------

    \64\ Internalization is the process in which a broker-dealer 
fills an order to buy a security from its own inventory, or fills an 
order to sell by taking a security into its inventory.
    \65\ The Commission notes that it recently proposed amendments 
to the regulatory requirements in Regulation ATS of the Exchange Act 
applicable to certain ATSs that would require detailed public 
disclosures about the trading operations of the ATS and the 
activities of the broker-dealer that operates the ATS and its 
affiliates. See NMS Stock ATS Proposing Release, supra note 41.
---------------------------------------------------------------------------

    As discussed further below, the Commission preliminarily believes

[[Page 49440]]

these conflicts of interest could be better evaluated if institutional 
customers had access to additional information about their broker-
dealers' order handling practices.
4. Information Leakage
    The Commission has acknowledged ``the need of investors executing 
large size trades to control the information flow concerning their 
transactions.'' \66\ Executing a large order in today's complex 
electronic markets poses many of the same issues and risks for 
institutional customers as existed in the manual markets they replaced, 
but also poses new challenges because of the variety of ways in which 
information leakage can occur in today's equity market structure. As a 
result, it continues to be challenging for institutional customers to 
trade in large size while minimizing the risks from information 
leakage. As noted above, institutional customers historically would use 
exchange floor brokers or upstairs block positioners to execute large 
orders.\67\ In today's electronic markets, however, the manual handling 
of institutional orders is increasingly rare, and has been replaced by 
sophisticated institutional order execution algorithms and smart order 
routing systems. At the same time, sophisticated market participants 
closely monitor order and execution activity throughout the markets, 
looking for patterns that signal the existence of a large institutional 
order, so that they can use that information to their trading 
advantage.
---------------------------------------------------------------------------

    \66\ See Securities Exchange Act Release No. 60997 (November 13, 
2009), 74 FR 61208, 61219 (November 23, 2009) (``Regulation of Non-
Public Trading Interest Proposing Release''). For example, Rule 
604(b) of Regulation NMS exempts specialists and over-the-counter 
market makers from displaying customer block size orders. See 17 CFR 
242.604(b)(4). A block size order is an order of at least 10,000 
shares or for a quantity of stock having a market value of at least 
$200,000. 17 CFR 242.600(b)(9).
    \67\ See supra notes 34-35 and accompanying text.
---------------------------------------------------------------------------

    Each time an order is routed to a venue, and each time an 
actionable indication of interest is sent to a market participant, 
information is revealed about that order and the potential existence of 
a larger institutional order from which it may be derived. Accordingly, 
broker-dealers must balance the need to sufficiently expose the 
customer's trading interest to achieve execution, with the risk that 
such exposure might cause prices to move in a less favorable direction 
to the detriment of execution quality. Indeed, institutional customers 
have expressed concern that excessive routing \68\ of their orders may 
increase the risk of information leakage without a commensurate benefit 
to execution quality.\69\ Because information leakage may lead to 
higher execution costs for large size orders, the Commission 
preliminarily believes that additional disclosure would inform 
investors as to whether a broker-dealer's order routing strategy is 
potentially resulting in excessive routing and information leakage. As 
noted above, the Commission preliminarily believes that institutional 
order handling now has become more susceptible to the type of standard 
disclosures originally contemplated by Rule 606, and technological 
developments have made it easier for broker-dealers to produce it. 
Accordingly, standardized order handling disclosures should improve the 
ability of institutional customers to assess the potential risk of 
information leakage of their orders through a more detailed assessment 
of the number and types of venues to which their broker-dealers are 
routing their orders or transmitting actionable indications of 
interest, and the quality of executions that result therefrom.
---------------------------------------------------------------------------

    \68\ In this context, excessive routing occurs when an order is 
routed more than may be necessary to obtain full execution of the 
order. Each additional route of an order reveals information about 
that order.
    \69\ See, e.g., Jacob Bunge, A Suspect Emerges in Stock-Trade 
Hiccups: Regulation NMS, Wall Street Journal, January 27, 2014 
(``Bunge Article''), available at http://www.wsj.com/articles/SB10001424052702303281504579219962494432336 (noting that in order to 
purchase 2.5 million shares of a stock, an institutional investor's 
brokers had to offer to purchase 750 million shares of the stock).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the amendments to Rule 
606 it is proposing today would help institutional customers more 
efficiently and effectively operate in the current equity market 
structure. As discussed in more detail below, the required disclosures 
would provide standardized information for institutional customers so 
that they can better: (1) Discern where their orders are exposed, 
routed, and executed; (2) assess their broker-dealers for best 
execution by examining order execution statistics; (3) monitor 
conflicts of interest of their broker-dealers with the additional 
financial incentives disclosures; and (4) assess information leakage 
with the routing of their orders.

D. Need for Public Reporting of Aggregated Institutional Order 
Information

    As discussed above, there are no legal requirements for a broker-
dealer to disclose institutional order handling information to its 
customers, either privately or publicly. The Commission preliminarily 
believes that the dearth of public information about each broker-
dealer's institutional order handling practices may make efficient and 
effective comparisons about the nature and quality of services offered 
by broker-dealers more difficult. Without required public disclosure of 
aggregated institutional order handling information, institutional 
customers do not have information that could be used to evaluate, among 
other things, the venues to which broker-dealers route orders, the 
execution quality achieved at such venues, and the overall fees paid 
and rebates received for such executions. Public information on a 
broker-dealer's institutional order handling practices could both 
assist institutional customers in selecting one or more broker-dealers 
for order routing services and foster increased competition among 
broker-dealers to provide order routing services. Indeed, if 
institutional order handling information were publicly available to 
review and analyze, the Commission preliminarily believes that 
additional competitive forces could be brought to bear on broker-dealer 
institutional order routing services, thereby potentially enhancing the 
quality of such services.\70\
---------------------------------------------------------------------------

    \70\ In adopting Rule 606 in 2000, the Commission stated that 
public disclosure of order execution and order routing information 
could provoke more vigorous competition on execution quality and 
order routing performance. See Rule 606 Predecessor Adopting 
Release, supra note 15, at 75417.
---------------------------------------------------------------------------

E. Need for Enhanced Disclosures for Retail Orders

    As discussed above, the U.S. equity markets have evolved in recent 
years to become more automated, dispersed, and complex, and the 
resulting competition among trading centers has intensified practices 
to attract order flow, including retail order flow. Historically, 
trading centers have offered payment for order flow or other financial 
inducements to broker-dealers based upon whether the retail order flow 
is marketable or non-marketable. As a result, broker-dealers generally 
handle marketable and non-marketable retail orders differently. Indeed, 
whether a retail order is marketable or non-marketable will often 
determine where the broker-dealer routes the order. Certain broker-
dealers route a large portion of marketable retail orders to OTC market 
makers with whom they have payment for order flow or other 
arrangements.\71\ Non-

[[Page 49441]]

marketable retail orders, on the other hand, are more frequently routed 
to exchanges with a ``maker-taker'' fee schedule, to capture a rebate 
when the non-marketable order is executed.\72\
---------------------------------------------------------------------------

    \71\ See Concept Release on Equity Market Structure, supra note 
2, at 3606 (noting that Rule 606 statistics reveal that brokers with 
significant retail customer accounts send the great majority of non-
directed marketable orders to OTC market makers that internalize 
executions, often pursuant to payment for order flow arrangements).
    \72\ As an example, during a fiscal quarter one large retail 
broker-dealer routed all non-marketable orders to one of two venues 
that ``offered the highest rebates available in the market.'' See 
Conflicts of Interest, Investor Loss of Confidence, and High Speed 
Trading in U.S. Stock Markets: Hearing Before the Permanent 
Subcommittee on Investigations of the Committee on Homeland Security 
and Governmental Affairs, U.S. Senate, 113th Cong. 48 (2014) 
(``Senate PSI Hearing'') (testimony of Steven Quirk, Senior Vice 
President, TD Ameritrade). In addition to fee incentives that may 
affect routing decisions, another reason non-marketable retail 
orders may be routed to exchanges is the requirements of Rule 604 of 
Regulation NMS. Rule 604 of Regulation NMS requires, among other 
things, exchange specialists and OTC market makers to immediately 
display in their bid or offer both the price and the full size of 
each customer limit order that would improve their quoted price in a 
particular security. See 17 CFR 242.604.
---------------------------------------------------------------------------

    Currently, Rule 606(a) does not require broker-dealers to segment 
their quarterly disclosures for limit orders between marketable and 
non-marketable orders. By only showing aggregated data on retail limit 
orders, customers have less visibility into the extent to which broker-
dealers differentiate between marketable and non-marketable limit 
orders in their routing practices, and, if so, the potential impact of 
such practices. Accordingly, the Commission preliminarily believes that 
customers could better evaluate execution quality and potential 
conflicts of interest if broker-dealers were required to separately 
disclose more comprehensive information about how they route marketable 
and non-marketable limit orders to individual trading centers.
    In addition, financial inducements to attract order flow from 
broker-dealers that handle retail orders have become more prevalent and 
for some broker-dealers such inducements may be a significant source of 
revenue.\73\ The Commission understands that most broker-dealers that 
handle a significant amount of retail orders receive payment for order 
flow in connection with the routing of retail orders or are affiliated 
with an OTC market maker that executes the orders.\74\ The Commission 
preliminarily believes that providing market participants with greater 
disclosure regarding the specific financial inducements received by a 
broker-dealer from various trading centers would enable market 
participants to better assess potential conflicts of interest its 
broker-dealers face when routing retail orders.
---------------------------------------------------------------------------

    \73\ See, e.g., Bradley Hope and Julie Steinberg, Payments to 
Big Brokers Under Fresh Scrutiny, Wall Street Journal, June 13, 
2014, available at http://blogs.wsj.com/moneybeat/2014/06/13/payments-to-big-brokers-under-fresh-scrutiny/ (stating that TD 
Ameritrade received $236 million in payment for order flow in 2013; 
that a spokesman for Charles Schwab Corporation estimated payment 
for order flow revenues of $100 million in 2013; and that E*Trade 
Financial Corporation stated in a regulatory filing it received 
$72.5 million in such revenues in 2013).
    \74\ Id.
---------------------------------------------------------------------------

    Under the quarterly disclosure obligations in current Rule 606(a), 
broker-dealers are required to discuss the material aspects of their 
relationship with each Specified Venue, including a description of any 
arrangement for payment for order flow or profit-sharing relationship. 
The current disclosure informs the market participants of a potential 
conflict of interest the broker-dealer may face, but the current rule 
does not require the broker-dealer to disclose specifics on the 
conflict, including financial inducements received from each Specified 
Venue, or transaction rebates received from exchanges and other trading 
centers.\75\ The lack of detailed disclosure on the specifics of the 
financial inducements received from each Specified Venue make it more 
difficult for customers to assess a broker-dealer's management of any 
conflict of interest and the quality of its broker-dealer's routing and 
execution services.
---------------------------------------------------------------------------

    \75\ See Rule 606(a); see also Rule 606 Predecessor Adopting 
Release, supra note 15, at 75427.
---------------------------------------------------------------------------

    Accordingly, the Commission preliminarily believes that requiring 
broker-dealers to report more detailed disclosure on the payments 
received and fees paid for marketable limit orders, non-marketable 
limit orders, and other order types at each Specified Venue would 
enable market participants to better assess the extent to which the 
broker-dealer is effectively managing the potential conflicts of 
interest, as well as the quality of their broker-dealer's retail order 
routing and execution services. The Commission also preliminarily 
believes that the description of any payment for order flow 
arrangements and profit-sharing relationships required to be disclosed 
in the quarterly report should be more comprehensive. As such, the 
Commission preliminarily believes that it would be appropriate to 
require broker-dealers to describe in their quarterly disclosure any 
terms of payment for order flow arrangements and profit-sharing 
relationships with each Specified Venue that may influence their order 
routing decisions.
    Separately, in adopting Rule 606, the Commission required that 
retail routing reports be divided into three separate sections for NMS 
stocks listed on: NYSE, NASDAQ, and American Stock Exchange LLC.\76\ 
The listing markets are now dominated by electronic trading and the 
handling of NMS stocks no longer varies materially based on the primary 
listing market.\77\ As such, the Commission preliminarily believes that 
the requirement to separate the retail routing reports by primary 
listing market is outdated and does not provide useful information to 
customers. Accordingly, the Commission preliminarily believes that 
requiring retail routing reports to disclose the required information 
for NMS stocks as a whole would better inform market participants about 
the manner in which retail orders are routed in today's markets and 
should simplify the burdens to comply with the rule.
---------------------------------------------------------------------------

    \76\ See Rule 606 Predecessor Adopting Release, supra note 15. 
The American Stock Exchange is now known as NYSE MKT LLC. In October 
2008, the American Stock Exchange LLC was renamed ``NYSE Alternext 
US LLC.'' See Securities Exchange Act Release No. 58673 (September 
29, 2008), 73 FR 57707 (October 3, 2008) (SR-Amex-2008-62). In March 
2009, NYSE Alternext US LLC was renamed ``NYSE Amex LLC.'' See 
Securities Exchange Act Release No. 59575 (March 13, 2009), 74 FR 
11803 (March 19, 2009) (SR-NYSEALTR-2009-24). In May 2012, NYSE Amex 
LLC was renamed ``NYSE MKT LLC.'' See Securities Exchange Act 
Release No. 67037 (May 21, 2012), 77 FR 31415 (May 25, 2012) (SR-
NYSEAmex-2012-32).
    \77\ See Letter to Secretary, Commission, from Manisha Kimmel, 
Managing Director, Financial Information Forum, dated October 22, 
2014 (``FIF Letter''), at 3 (noting that with the introduction of 
automated trading centers and smart order routing as a result of 
Regulation NMS, order routing practices are no longer based on 
listing market).
---------------------------------------------------------------------------

F. Comments on Equity Market Structure

    The Commission periodically has examined the regulatory regime for 
order routing disclosure. The Commission published the Concept Release 
on Equity Market Structure in 2010, which requested comment on a wide 
range of issues. Among the issues specifically highlighted for comment 
were: (1) Whether Rule 606 should be updated and, if so, in what 
respects; (2) whether Rule 606 reports continue to provide useful 
information for investors and their broker-dealers in assessing the 
quality of order execution and routing practices; (3) whether Rule 606 
should be updated to address the interests of institutional customers 
in efficiently executing large orders and, if so, what metrics would be 
useful; (4) whether institutional customers have sufficient information 
about the smart order routing services and order execution algorithms 
offered by their broker-dealers; and (5) whether a regulatory 
initiative to improve disclosure of these broker-dealer services would 
be useful

[[Page 49442]]

and, if so, what type of initiative the Commission should pursue.\78\
---------------------------------------------------------------------------

    \78\ See Concept Release on Equity Market Structure, supra note 
2.
---------------------------------------------------------------------------

    The Commission received twenty-eight comment letters \79\ that 
directly addressed order routing disclosures. The commenters provided a 
wide range of recommendations and many commenters made multiple 
recommendations regarding order routing disclosures.
---------------------------------------------------------------------------

    \79\ See Letters to Secretary, Commission, from Michael J. 
Friedman, General Counsel & Chief Compliance Officer, Trillium, 
dated November 7, 2014 (``Trillium Letter''); from Theodore R. Lazo, 
Managing Director and Associate General Counsel, SIFMA, dated 
October 24, 2014 (``SIFMA Letter II''); Associations Letter, supra 
note 5; KOR Trading Letter II, supra note 41; FIF Letter, supra note 
77; BlackRock Letter, supra note 41; from Micah Hauptman, Financial 
Services Counsel, Consumer Federation of America, dated September 9, 
2014 (``CFA Letter''); KOR Trading Letter I, supra note 41; from 
Senator Edward E. Kaufman, United States Senate, dated August 5, 
2010 (``Kaufman Letter''); from Greg Tusar, Managing Director, 
Goldman Sachs Execution & Clearing, L.P and Matthew Lavicka, 
Managing Director, Goldman, Sachs & Co., dated June 25, 2010 
(``Goldman Sachs Letter II''); from James J. Angel, Ph.D., CFA, 
Associate Professor of Finance, Georgetown University, McDonough 
School of Business, dated April 30, 2010 (``Angel Letter II''); STA 
Letter, supra note 41; NASDAQ Letter, supra note 19; SIFMA Letter I, 
supra note 41; SAM Letter, supra note 41; from Eric W. Hess, Esq., 
General Counsel for Direct Edge, dated April 28, 2010 (``Direct Edge 
Letter''); NYSE Euronext Letter, supra note 41; from Jonathan D. 
Corpina, President, Organization of Independent Floor Brokers; 
Jennifer Lee, Vice President, Organization of Independent Floor 
Brokers; and Stephen O'Shaughnessy, Director, Organization of 
Independent Floor Brokers, dated April 21, 2010 (``IFB Letter''); 
Wolverine Trading Letter, supra note 39; Credit Suisse Letter, supra 
note 41; ICI Letter, supra note 41; T. Rowe Price Letter, supra note 
41; TD Ameritrade Letter, supra note 19; IAA Letter, supra note 41; 
from Alan R. Shapiro, President and Chairman, The Transaction 
Auditing Group, Inc., dated April 19, 2010 (``TAG Letter''); 
Liquidnet Letter, supra note 41; from James J. Angel, Associate 
Professor, McDonough School of Business, Georgetown University; 
Lawrence E. Harris, Fred V. Keenan Chair in Finance, Professor of 
Finance and Business Economics, Marshall School of Business, 
University of Southern California; Chester S. Spatt, Pamela R. and 
Kenneth B. Dunn Professor of Finance, Director, Center for Financial 
Markets, Tepper School of Business, Carnegie Mellon University, 
dated February 23, 2010 (``Angel Letter I''). See also TM Memo re 
Morgan Stanley I, supra note 43; Memorandum from the Division of 
Trading and Markets regarding a May 22, 2013, meeting with 
representatives of Morgan Stanley, dated May 22, 2013 (``TM Memo re 
Morgan Stanley II''); Memorandum from the Division of Trading and 
Markets regarding an October 1, 2015, meeting with representatives 
of Morgan Stanley, dated October 1, 2015 (``TM Memo re Morgan 
Stanley III''); Memorandum from the Office of Commissioner Walter 
regarding a June 30, 2010, meeting with representatives of the 
Managed Funds Association, dated July 19, 2010 (``Walter Memo''). 
The Commission also received one letter relevant to this proposal in 
response to requests for comment on the NMS Stock ATS Proposing 
Release, supra note 41. See Markit Letter, supra note 41.
---------------------------------------------------------------------------

1. General Need to Update Rule 606
    A few commenters referred generally to existing drawbacks in Rule 
606 and the need for improvements to Rule 606 without making specific 
recommendations. These commenters raised concerns regarding certain 
conflicts of interest present in order routing practices and the 
sufficiency of current disclosures under Rule 606, and stated that 
improvements to Rule 606 would provide more insight to investors and 
that the utility of Rule 606 was limited by a lack of disclosure.\80\ 
Most commenters focused on specific recommendations to update various 
aspects of Rule 606.
---------------------------------------------------------------------------

    \80\ See IFB Letter, supra note 79, at 2 (questioning the 
existing inherent conflicts in the payment for order flow practice 
and asking whether disclosure requirements under existing Rule 606 
are legally sufficient, and also noting that the required 
disclosures under Rule 606 do not shed light on fiduciary duties); 
Direct Edge Letter, supra note 79, at 2 (stating that ``improvements 
to existing Rules 605 and 606 can be made to provide more detailed 
insight to investors''); TAG Letter, supra note 79, at 3 (stating 
``utility of the combination of Rules 605 and 606 to the individual 
investor is limited since the Rule 606 routing percentages coupled 
with the overall execution quality statistics in Rule 605 only give 
a general indication as to the results an individual investor can 
expect,'' and ``[r]outing information and the associated material 
aspects of the relationship concerning the broker's arrangements, if 
any, with the various trading centers to which they route does not 
provide sufficient data to assess and compare'').
---------------------------------------------------------------------------

2. Need for Rule 606 to be Modernized to Maintain Pace with 
Technological Advances
    Many commenters cited technological changes in market structure as 
the basis for updating Rule 606.\81\ These commenters touched upon the 
common theme that the disclosures required by Rule 606 had not kept 
pace with the technological advances that had taken place since the 
Rule's inception.
---------------------------------------------------------------------------

    \81\ See, e.g., NASDAQ Letter, supra note 19, at 20-21 (noting 
that Rule 606 has ``never been amended despite changes that have 
revolutionized trading and the national market system, including the 
advent of decimal trading, the demise of trading floors and other 
manual trading, proliferation of private linkages, adoption of 
Regulation NMS, refinement of smart routers, modernization of high 
frequency trading and automation of dark pools,'' stating that 605 
and 606 have ``lagged behind technological advances that enhance 
market quality and consequently render the metrics utilized in Rule 
605 and 606 less useful to investors,'' and questioning whether Rule 
606 continues ``to provide the level of transparency necessary to 
exert meaningful pressure on market centers to provide superior 
execution quality and routing practices.''); NYSE Euronext Letter, 
supra note 41, at 12 (commenting that ``as detailed in the Concept 
Release [on Equity Market Structure], the U.S. equity market 
structure has changed substantially and, as a result, we believe 
[Rule 606 has] become outdated''); see also KOR Trading Letter II, 
supra note 41, at 2, 5 (commenting that ``[o]ver time and in 
particular with the adoption of Regulation NMS, [Rules 605 and 606] 
became increasingly outdated,'' and that Rule 606 has ``eroded due 
to the increasing complexity of order-types as well as speed and 
routing practices in today's marketplace''); BlackRock Letter, supra 
note 41, at 3 (commenting that ``rising complexity in market 
structure has made the existing reporting inadequate''); CFA Letter, 
supra note 79, at 21 (stating ``it is unreasonable to expect that 
given the changes in speed, technology, complexity, and dark trading 
in our markets, retail investors would ever utilize them 
productively''); KOR Trading Letter I, supra note 41, at 1 (noting 
that while outdated, Rule 606 serves as the only current means to 
analyze routing behavior); STA Letter, supra note 41, at 8 
(commenting that ``technological advances have made some of the 
measurements in the rule less meaningful'' and suggesting that Rule 
606 metrics be reviewed, amended, and updated, as needed); SIFMA 
Letter I, supra note 41, at 16 (commenting that in its current form, 
Rule 606 does not provide ``useful and meaningful comparative 
information to market participants, particularly individual 
investors, or regulators, and that the [rule] should be either 
modified or rescinded in light of market developments''); SAM 
Letter, supra note 41, at 7 (noting that while order handling used 
to be a transparent and simple process, ``transparency has been 
sacrificed in the name of technological advancement and the 
evolution of market microstructure,'' and stating that the 
``enormous complexity introduced by this process has clouded order 
handling to the point where even educated customers are never 
completely confident how or why their orders are routed to specific 
venues in a specific way''); Wolverine Trading Letter, supra note 
39, at 4 (noting that ``the information currently required by [Rule 
606] reports is not as meaningful in the context of today's 
markets'' and that Commission staff should determine the types of 
statistics to add in order to improve usefulness of the reports); 
Credit Suisse Letter, supra note 41, at 9 (stating with regard to 
Rule 606 that ``equity markets have unequivocally changed since 2000 
when the rules were adopted, resulting in the need to update the 
reports,'' and providing the example that ``the shortest execution 
report time category in the reports is 0-9 seconds. In today's 
trading, where market centers have begun clocking their executions 
in microseconds (millionths of a second) because milliseconds 
(thousandths of a second) were too slow, categorizing a 9 second 
execution in the top speed category renders the reports less 
meaningful than intended''); ICI Letter, supra note 41, at 7 (noting 
that ``complexities in the current market structure and the 
associated difficulties in assessing market performance for 
investors''); TM Memo re Morgan Stanley III, supra note 79 (noting 
that ``Order Handling and Execution Disclosure Rules have not been 
updated to address technological advances'').
---------------------------------------------------------------------------

3. Requests for Specific Information and Standardized Disclosures
    Most commenters identified specific metrics that broker-dealers 
should disclose, proposed model templates for disclosure, or called for 
disclosures to be made in a standardized fashion. Commenters generally 
requested additional information regarding order type usage and fill 
rates, marketable and non-marketable limit orders, and the use of 
indications of interest (``IOI''). Many commenters also requested more 
detailed disclosure of payment for order flow, including fees paid and 
rebates received.\82\
---------------------------------------------------------------------------

    \82\ See, e.g., Markit Letter, supra note 41, at 6 (Rule 606 
statistics should be enhanced to include basic metrics of execution 
quality for all categories of executed orders, separately report on 
routed and executed orders broken down by marketability, and 
quantify net fees paid and rebates received by marketability 
category); Associations Letter, supra note 5, at Annex A (attaching 
proposed template for enumerated, customer-specific institutional 
order routing disclosure); BlackRock Letter, supra note 41, at 3 
(stating that revised Rule 605/606 ``disclosures should provide 
greater transparency on marketable and non-marketable limit orders, 
order fill rates, sub-second execution horizons, pre-/post-trade 
price movement, alternative order type usage and total fees/rebates 
paid or received'' and that such ``metrics should also be available 
in a standardized template for individual customer activity, not 
just at an aggregate level by broker-dealer''); KOR Trading Letter 
I, supra note 41, at 5 (proposing a list of updates to Rule 606 
including, et al., information on marketable limit orders, total 
payments or charges to broker-dealers, reporting of the execution 
venue of all orders, and require average payments to be reported out 
to one one-hundredth of one penny (i.e., four decimal places)); 
Goldman Sachs Letter II, supra note 79, at 10-11 (proposing 
disclosure of order routing information for orders that do not 
receive execution); Angel Letter II, supra note 79, at 7-9 
(providing sample broker ``report card'' with eight metrics 
including percentage of orders executed inside the bid-ask spread); 
SAM Letter, supra note 41, at 7 (proposing eight categories of 
information that brokers/venues should disclose, including aggregate 
broker-level detail regarding specific venue market share based on 
both shares routed and shares executed and ``payments, rebates, fees 
and fee breakpoints (all costs and payment for order flow 
arrangements) related to execution venues (routing broker or routing 
venue to venue)''); ICI Letter, supra note 41, at 7 (proposing the 
Commission require improved disclosure regarding order routing, 
including policies and procedures regarding the dissemination of 
information about a customer's order and trade information to 
facilitate a trade, including the use of IOIs, ``external venues to 
which a broker routes, . . . the percentage of shares executed at 
each external venue, any ownership and other affiliations between 
the broker and any venues to which the broker routes orders,'' and 
``payments and other incentives provided or received (such as 
rebates) to direct order flow to particular trading venues''); TD 
Ameritrade Letter, supra note 19, at 7-8 (recommending, among other 
things, that Rule 606 disclosures include order type categories for 
'' ``Opening,'' ``Marketable Limit,'' ``Odd-lot,'' ``Mixed Lot,'' 
``Stop Orders'' and ``IOC/IOI'' and ``Spreads'' for Options,'' and 
``require brokers that internalize order-flow to include additional 
disclosure of payments made and overall profitability generated by 
the internalizing subsidiary internalizing that order-flow''); see 
also Trillium Letter, supra note 79, at 3 (suggesting that ``Rule 
606(b) should be enhanced to simply require brokers to disclose the 
unabridged order logs of requesting customers''); SIFMA Letter II, 
supra note 79, at 13 (suggesting that the Commission should consider 
a rule to ``require broker-dealers to publish on their Web sites, on 
a monthly basis, a standardized disclosure report that provides an 
overview of key macro issues that are of interest to clients, 
potentially including: (i) Venues accessed, (ii) order types used on 
exchanges, (iii) order types supported on the broker-dealer's ATS 
(if applicable), (iv) fill rates (including internalization numbers, 
if applicable), (v) location of ATS/co-location footprint, and (vi) 
market data structure''); FIF Letter, supra note 77, at 3 
(suggesting that market open, market close, stop orders, and odd 
lots be removed from the ``other'' category and listed in their own 
categories); KOR Trading Letter II, supra note 41, at 2 (suggesting 
Rule 606 should be expanded to mandate uniform disclosure); CFA 
Letter, supra note 79, at 21 (suggesting the reporting metrics in 
Rule 606 ``should be modernized to provide the most relevant 
information that will allow market participants, regulators, and 
third-party analysts to assess the quality of order execution 
practices''); TM Memo re Morgan Stanley II, supra note 79, 
PowerPoint at 6 (suggesting Rule 606 should be modified to require 
standardized reports providing an ``order life cycle audit trail, 
not just ultimate execution or first route venue''); Walter Memo, 
supra note 79, at 50-51 (the MFA suggested that Rule 606 could be 
updated to require a brokerage firm to ``provide statistics giving 
execution times along with the percentages of orders filled at the 
quote, better than the quote, and worse than the quote, for 
different size buckets including odd lots''); STA Letter, supra note 
41, at 8 (suggesting a ``standardized set of metrics which might 
include revised speed of execution data, linkages and access to 
markets and other measurable data the disclosure of which will 
provide investors and traders with adequate information upon which 
to make execution and routing decisions''); NYSE Euronext Letter, 
supra note 41, at Appendix I (suggesting that the ``percentage of 
volume routed and executed internally by a broker-dealer should be 
indicated, and the criteria used in order routing decisions should 
be identified''); IAA Letter, supra note 41, at 3-4 (noting the 
format and the presentation of information in 606 reports make the 
information difficult to analyze); Liquidnet Letter, supra note 41, 
Annex F, at F-1 to F-3 (suggesting the Commission consider modifying 
Rule 606 reports to ``include data on execution quality for orders 
received and handled by the routing broker, in particular, data 
regarding execution time and price improvement''); Kaufman Letter, 
supra note 79, at 6 (suggesting generally that ``brokers should be 
required to provide detailed descriptions of their order-routing 
procedures, including information on payments and rebates 
received''); TM Memo re Morgan Stanley III, supra note 79 (including 
a proposed venue analysis template with enumerated, specific 
disclosures to be reported).

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

[[Page 49443]]

    Some commenters expressed concern regarding information leakage and 
identified various metrics that could help customers determine whether 
a broker-dealer's routing strategy leaves orders vulnerable to 
information leakage.\83\ Additionally, several industry commenters 
recommended disclosing separately routing statistics for marketable and 
non-marketable orders.\84\
---------------------------------------------------------------------------

    \83\ See, e.g., ICI Letter, supra note 41, at 8-9 (stating that 
broker-dealers should be required to disclose policies and 
procedures to control leakage of information regarding a customer's 
order and other confidential information and policies and procedures 
regarding the dissemination of information about a customer's order 
and trade information to facilitate a trade, including the use of 
indications of interest); Liquidnet Letter, supra note 41, at 2 
(stating that if institutional investors are appropriately informed 
as to how broker-dealers route their orders, they will make the best 
decisions as to how their large orders should be handled).
    \84\ See BlackRock Letter, supra note 41, at 3 (stating that 
revised Rule 605/606 disclosures should provide greater transparency 
on, among other things, marketable and non-marketable limit orders 
and order fill rates); KOR Trading Letter I, supra note 41, at 5 
(proposing a list of updates to Rule 606 including requiring 
disclosure of statistics on marketable limit orders and greater 
transparency around broker-dealer internal order routing practices 
and decisions); TD Ameritrade Letter, supra note 19, at 6-7 
(proposing to change the order classification in Rule 606 
disclosures to include, among other things ``Marketable Limit'').
---------------------------------------------------------------------------

4. Requests for Specific Disclosures for Institutional Orders
    A number of commenters recommended specific order routing 
disclosures for institutional customers or questioned the usefulness of 
the current disclosure requirements to retail or institutional 
customers given that large orders are excluded from the rule.\85\ Many 
commenters called specifically for the disclosure of order routing 
information to institutional customers, noting in various ways that the 
existing Rule 606 disclosures do not cover large orders and as a result 
institutional customers may not receive meaningful information about 
how their orders are routed.
---------------------------------------------------------------------------

    \85\ See Associations Letter, supra note 5 (calling for 
customer-specific order routing disclosures for institutional 
investors); SIFMA Letter II, supra note 79, at 13 (stating that the 
Commission should require broker-dealers to provide standardized 
reports to institutional clients); KOR Trading Letter II, supra note 
41, at 1 (stating that the public would be well served by 
``expanding Rule 606 to cover all orders and mandating uniform 
disclosure''); BlackRock Letter, supra note 41, at 3 (stating that 
``[b]roker-dealers should be required to provide periodic 
standardized reports on order routing and execution metrics to 
retail and institutional investors''); NYSE Euronext Letter, supra 
note 41, at 12 (noting that ``Rule 606 reports do not capture 
information concerning large block transactions''); ICI Letter, 
supra note 41, at 10 (noting that Rule 606 was drafted primarily 
with the interests of individual investors in mind and large-sized 
orders are excluded from the rule); T. Rowe Price Letter, supra note 
41, at 3 (opining that Rule 606 reports are ``rarely used by 
institutional investors''); IAA Letter, supra note 41, at 4 (stating 
that the ``exclusion of large orders in these [Rule 606] reports 
limits the value of these reports to institutional investors''); 
Liquidnet Letter, supra note 41, at 2 (stating that 
``[i]nstitutional and retail investors do not have sufficient 
information regarding how their orders are handled'' and suggesting 
Rule 606 be modified to ``[m]andate disclosure of specific order 
routing practices by institutional brokers''); TM Memo re Morgan 
Stanley III, supra note 79 (suggesting that broker-dealers should be 
required to ``[p]rovide institutional clients with mandated 
transparency around order handling practices in today's 
environment'' including an ``objective and meaningful standardized 
venue analysis template'').
---------------------------------------------------------------------------

5. Comments on Actionable Indications of Interest
    As noted above, some comments on the Concept Release on Equity 
Market Structure called for the disclosure of information relating to a 
broker-dealer's use of IOIs.\86\ The Commission has considered these 
comments, in addition to comments noted above on the Regulation of Non-
Public Trading Interest Proposing Release, and is proposing to define 
actionable IOI.\87\
---------------------------------------------------------------------------

    \86\ See TD Ameritrade Letter, supra note 19, at 6 (stating that 
the order classification status should be changed to include IOIs); 
ICI Letter, supra note 41, at 8 (suggesting the Commission consider 
requiring disclosure of policies and procedures regarding the 
dissemination of information about a customer's order and trade 
information to facilitate a trade, including the use of 
``indications of interest'' or ``IOIs''); KOR Trading Letter II, 
supra note 41, at 1 (stating Rule 606 should be expanded to include 
information on IOIs on dark pools).
    \87\ See infra Section III.A.10.
---------------------------------------------------------------------------

    As discussed below, the Commission proposes to define the term 
``actionable

[[Page 49444]]

indication of interest'' (``actionable IOI'').\88\ In 2009, the 
Commission proposed rules to regulate non-public trading interest,\89\ 
which described characteristics of actionable IOI.\90\ The Commission 
received a number of comment letters that addressed the 
characteristics.\91\ Most of these commenters either noted in some form 
that the proposal did not expressly define ``actionable IOI'' or 
criticized the guidance.\92\ A few of these commenters offered their 
own definitions or understanding of an actionable IOI.\93\
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    \88\ See proposed Rule 600(b)(1).
    \89\ See Regulation of Non-Public Trading Interest Proposing 
Release, supra note 66, at 61219. Among other things, the Commission 
proposed to amend the Exchange Act quoting requirements to apply 
expressly to actionable IOIs. See id., at 61211.
    \90\ ``[A]n IOI would be actionable if it effectively alerted 
the recipient that the dark pool currently has trading interest in a 
particular symbol, side (buy or sell), size (minimum of a round lot 
of trading interest), and price (equal to or better than the 
national best bid for buying interest and the national best offer 
for selling interest).'' Id., at 61226.
    \91\ See Letters to Elizabeth M. Murphy, Secretary, Commission, 
from Senior Vice President--Legal & Corporate Secretary Office of 
the General Counsel, NYSE Euronext, dated February 22, 2010 (``NYSE 
Euronext IOI Letter''); from John A. McCarthy, General Counsel, 
GETCO, LLC, dated February 22, 2010 (``GETCO Letter''); from P. Mats 
Goebels, Managing Director and General Counsel, Investment 
Technology Group, Inc., dated February 22, 2010 (``ITG Letter''); 
from Vivian A. Maese, Esq., General Counsel and Corporate Secretary, 
BIDS Trading, LP, New York, New York, dated February 18, 2010 
(``BIDS Trading Letter''); from Greg Tusar, Managing Director, 
Goldman Sachs Execution & Clearing, L.P. and Matthew Lavicka, 
Managing Director, Goldman Sachs & Co., dated February 17, 2010 
(``Goldman Sachs Letter''); from Kimberly Unger, Esq., Executive 
Director, Security Traders Association of New York, Inc., New York, 
New York, dated February 17, 2010 (``STA IOI Letter''); from Patrick 
D. Armstrong, Co-President, Alliance of Floor Brokers, New York, New 
York, dated January 29, 2010 (``AFB Letter''); from Matthew K. 
Samelson, Principal, Woodbine Associates, Stamford, Connecticut, 
dated October 23, 2009 (``Woodbine Letter'').
    \92\ See NYSE Euronext IOI Letter, supra note 91, at 4 (stating 
that the Commission should provide clear guidance as to what 
constitutes an actionable IOI, perhaps in the form of a non-
exclusive list of examples); ITG Letter, supra note 91, at 3 
(stating that that the Commission should provide a more precise and 
predictable definition of ``actionable IOI''); BIDS Trading Letter, 
supra note 91, at 2 (noting the uncertainty regarding the definition 
of an ``actionable'' IOI); Goldman Sachs Letter, supra note 91, at 2 
(expressing concern that an explicit definition of actionable IOIs 
will not be sufficiently broad to encompass the evolving range of 
messaging and communications that might satisfy the definition of an 
actionable IOI); STA IOI Letter, supra note 91, at 2 (stating that 
the proposed guidance appears to deem an IOI actionable with 
specific mention of price, size, or side, and that such a definition 
is too broad); AFB Letter, supra note 91, at 2 (noting that the 
Commission's proposal does not specifically define ``actionable 
IOI''); Woodbine Letter, supra note 91, at 2-3 (stating that the 
Commission's guidance on what constitutes an ``actionable IOI'' is 
not clear).
    \93\ See GETCO Letter, supra note 91, at 3 (actionable IOIs 
explicitly or implicitly convey information that there is actionable 
trading interest in a symbol); AFB Letter, supra note 91, at 2 (an 
actionable IOI is a bid or offer that can be accessed by one set of 
market participants that is not publicly disseminated).
---------------------------------------------------------------------------

    The Commission has considered these comments discussed in this 
Section II.F., and, for the reasons set forth throughout this release, 
is proposing the amendments to Rules 600, 605, 606, and 607 as 
described herein. Moreover, as noted earlier, the Commission is 
proposing amendments to other rules to update cross-references as a 
result of this proposal.\94\
---------------------------------------------------------------------------

    \94\ The Commission is proposing to amend Rule 3a51-1(a) under 
the Exchange Act; Rule 13h-1(a)(5) of Regulation 13D-G; Rule 
105(b)(1) of Regulation M; Rules 201(a) and 204(g) of Regulation 
SHO; Rules 600(b), 602(a)(5), 607(a)(1), and 611(c) of Regulation 
NMS; and Rule 1000 of Regulation SCI.
---------------------------------------------------------------------------

III. Proposed Amendments to Rule 600, Rule 605, Rule 606, and Rule 607

A. Disclosures for Institutional Orders

    The Commission proposes to amend Rule 606 to require a broker-
dealer that receives institutional orders in NMS stocks to, upon 
request, provide customer-specific reports regarding the venues to 
which the institutional orders are either routed or exposed through an 
actionable IOI.\95\ Such disclosures would provide a broad range of 
statistical data regarding the broker-dealer's handling of 
institutional orders, including order routing and execution information 
for those orders at each trading center in the aggregate and by order 
routing strategy. The disclosure of such information would provide 
customers with standardized information about institutional order 
routing and order execution quality and serve as a baseline for further 
analysis and comparison of broker-dealers. In addition, the disclosures 
would assist customers in reviewing order routing practices, assessing 
execution quality, managing potential conflicts of interest, and 
handling information leakage. The Commission preliminarily believes 
that increased, uniform transparency should assist customers in 
determining the quality of their broker-dealer's services.
---------------------------------------------------------------------------

    \95\ See proposed Rule 606(b)(3).
---------------------------------------------------------------------------

1. Definition of Institutional Order in Proposed Rule 600(b)(31)
    Currently, Rule 606 of Regulation NMS limits the required public 
disclosure of a broker-dealer's order routing information to non-
directed orders in NMS securities that are in amounts less than (i) 
$200,000 for NMS stocks, and (ii) $50,000 for option contracts.\96\ In 
proposing Rule 606, the Commission discussed the thresholds in 
connection with its proposed definition of ``customer order'' \97\ and 
noted that ``[l]arge orders are excluded in recognition of the fact 
that statistics for where orders are routed and general descriptions of 
order routing practices are more useful for smaller orders that tend to 
be homogenous.'' \98\ Thus, while customers and market participants 
have access to publicly-available order execution quality statistics 
and order routing information for small orders pursuant to Rule 605 and 
606 of Regulation NMS,\99\ institutional customers have observed that 
there is a lack of corresponding information for larger orders.
---------------------------------------------------------------------------

    \96\ See 17 CFR 242.606. See also supra note 7 and accompanying 
text.
    \97\ See supra note 7 and accompanying text.
    \98\ See Rule 606 Predecessor Proposing Release, supra note 15, 
at 48417. The Commission cited the heterogeneity of larger orders, 
and the difficulty in effectively reducing that heterogeneous 
universe into summary statistics, as the primary reason for 
excluding those orders from the coverage of the Rule. See supra 
notes 21 and 22 and accompanying text. Today, institutional orders 
are still not homogenous; however the manner in which they are 
handled has become increasingly systematized, thus making it more 
practical to categorize them. The Commission preliminarily believes 
that the current market structure and advances in routing and 
execution technology, which automatically and electronically record 
order routing information, have made statistics for where 
institutional orders are routed more useful and disclosure of such 
statistics more practicable.
    \99\ 17 CFR 242.605-606.
---------------------------------------------------------------------------

    To facilitate enhanced transparency around the handling of larger 
orders in NMS stocks, the Commission is proposing to amend Rule 600 to 
include a definition of ``institutional order.'' \100\ Specifically, 
under proposed Rule 600(b)(31) of Regulation NMS, an institutional 
order would be defined as an order to buy or sell a quantity of an NMS 
stock having a market value of at least $200,000, provided that such 
order is not for the account of a broker-dealer.\101\
---------------------------------------------------------------------------

    \100\ See proposed Rule 600(b)(31).
    \101\ As proposed, the definition of institutional order would 
only apply to orders for NMS stocks, and, therefore, would not 
include orders in NMS securities that are options contracts. Due to 
differences in the current market structure for NMS securities that 
are options contracts, in particular the lack of an over-the-counter 
market in listed options, the Commission preliminarily believes that 
the same market structure complexities do not exist at this time to 
warrant the institutional order handling disclosures proposed 
herein. See Securities Exchange Act Release No. 61902 (April 14, 
2010), 75 FR 20738, 20740 (April 20, 2010) (stating that all orders 
in the listed options market are currently executed on registered 
national securities exchanges). Specifically, since listed options 
are limited to trading on the 14 registered options exchanges, the 
number of venues to which listed options could be routed and 
executed is significantly less than the over 253 venues for NMS 
stocks. See supra notes 31-32 and accompanying text. In addition, 
the broker-dealer ownership and affiliation concerns with over-the-
counter venues do not exist in the listed options market. The 
Commission preliminarily believes that at this time the current 
listed options market structure does not present the same concerns 
regarding fiduciary responsibilities, information leakage, and 
conflicts of interest as the market structure for NMS stocks.

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

[[Page 49445]]

    The proposed definition of ``institutional order'' is intended to 
complement the current definition of ``customer order.'' \102\ The 
proposed dollar threshold for an institutional order would dovetail 
with the definition of ``customer order'' such that all orders in NMS 
stocks routed by broker-dealers for their customers, whether retail- or 
institutional-sized, would be encompassed by order routing disclosure 
rules.\103\ As noted above, institutional orders are generally divided 
into smaller orders and routed to various trading centers. The 
Commission notes that, as discussed below, the proposed institutional 
order handling reports would include the routing of all smaller orders 
derived from institutional orders.
---------------------------------------------------------------------------

    \102\ See infra Section III.A.1.
    \103\ See id. The Commission notes that the proposed definition 
of ``institutional order'' was referred to as ``large orders'' in 
the Rule 606 Predecessor Proposing Release and Rule 606 Predecessor 
Adopting Release. See supra note 15.
---------------------------------------------------------------------------

    The Commission preliminarily believes that defining institutional 
order in relation to the dollar amount of the order is an appropriate 
means to differentiate between small orders that are typically 
characterized as orders of $200,000 or less and larger-sized orders 
that are generally categorized as orders of $200,000 or more.\104\ 
Since ``customer order'' is currently defined using $200,000 as an 
upper threshold, the Commission preliminarily believes that market 
participants are accustomed to considering an order of $200,000 or more 
as an institutional order rather than a customer order. In addition, 
the Commission preliminarily believes that rather than proposing a new 
monetary value to define large-sized orders generally placed by 
institutional customers, administration would be more straightforward 
for broker-dealers using a defined standard that is commonly recognized 
in the industry. Therefore, the Commission preliminarily believes that 
the $200,000 threshold continues to be a reasonable threshold to 
accommodate such distinction between small orders and large orders, 
which are generally handled in a different manner by broker-
dealers.\105\
---------------------------------------------------------------------------

    \104\ See, e.g., 17 CFR 242.606 (defining block size with 
respect to an order to include an order for a quantity of stock 
having a market value of at least $200,000).
    \105\ As detailed below, the Commission is proposing new 
disclosures in Rule 606 that would apply to institutional orders.
---------------------------------------------------------------------------

    The Commission requests comment on the expansion of Rule 606 to 
include institutional orders and the definition of ``institutional 
order'' in proposed Rule 600(b)(31). In particular, the Commission 
solicits comment on the following:
    1. Do commenters believe Rule 606 should be expanded to include 
institutional orders? Why or why not? Should the Commission consider an 
alternative approach? Why or why not?
    2. Do commenters believe it is useful or necessary to define an 
institutional order? Do commenters believe that the proposed definition 
of institutional order should include securities other than NMS stocks? 
For example, should NMS securities that are options contracts be 
included? Why or why not? Should non-NMS securities, such as securities 
traded only in the OTC market, be included? Why or why not? Would 
including these types of securities in the definition of institutional 
order be useful to institutional customers? If so, how? Please explain 
and provide support for your view.
    3. Do commenters believe that dollar value is the proper criterion 
for defining an institutional order? If so, is $200,000 the appropriate 
amount? Why or why not? If not, should it be higher or lower? If so, 
what amount? Are there other order characteristics the Commission 
should consider to distinguish between retail and institutional orders, 
in addition to, or instead of, a dollar threshold? Should the criteria 
be different for different types of stocks? For example, would $200,000 
capture large-sized orders for liquid or illiquid stocks, high-priced 
or low-priced stocks, large capitalization or small capitalization 
stocks? Please explain and provide data to support your argument.
    4. Should the Commission define an institutional order based on the 
number of shares instead of a market value? Why or why not? For 
example, would 10,000 shares be an appropriate criterion for defining 
an institutional order, regardless of dollar value? Should it be more 
or less? Please explain and provide data.
    5. Should the Commission require broker-dealers to make the 
disclosures proposed in Rule 606(b)-(c) for all orders, irrespective of 
dollar amount? Why or why not? Please explain.
    6. Should the definition of institutional order reflect a different 
threshold, such as order size or market value, for various types of NMS 
stocks, such as common stock and exchange-traded products? If so, what 
thresholds are appropriate and for which NMS stocks? If possible, 
please provide data and analysis to support your view.
    7. Should the definition of institutional order incorporate 
multiple metrics, such as a certain market value of the order plus a 
certain number of shares for the order? If possible, please provide 
data and analysis to support your view.
    8. Do commenters believe that customers should be able to designate 
which orders qualify as an institutional order? For example, should a 
customer be able to designate smaller orders sent to a broker-dealer as 
an institutional order? If so, how would that be done? Should 
institutional order be defined as a combination of customers 
designating institutional orders and a threshold, i.e., if either 
requirement is satisfied, it would then be defined as an institutional 
order? Please provide support for your arguments.
    9. Do commenters have alternative definitions for an institutional 
order, or modifications to the proposed definition? Please explain and 
provide supporting data, if possible.
    10. Instead of defining institutional order, do commenters believe 
that there are alternative approaches that the Commission should 
consider in structuring order handling disclosures for large orders? If 
so, please explain the approach in detail, including the benefits and 
costs of the approach.
2. Definition of Actionable Indication of Interest in Proposed Rule 
600(b)(1)
    To further facilitate the institutional order disclosure regime, 
the Commission proposes to amend Rule 600 to include a definition of 
``actionable indication of interest.'' \106\ As the Commission 
indicated in 2009, an actionable IOI is a privately transmitted message 
by certain trading centers, such as an ATS or an internalizing broker-
dealer, to selected market participants to attract immediately 
executable order flow to such trading centers, and functions in some 
respects similarly to a displayed order or a quotation.\107\ As such, 
actionable IOIs can be used by: (1) A trading center to generate 
trading volume, which in turn could prompt market participants to send 
more orders to such venue; (2) market participants that submit orders 
to a trading center to receive executions through the use of actionable 
IOIs to attract contra side liquidity; and (3) a trading center to

[[Page 49446]]

generate transaction fees from the executions.
---------------------------------------------------------------------------

    \106\ See proposed Rule 600(b)(1).
    \107\ See Regulation of Non-Public Trading Interest Proposing 
Release, supra note 66, at 61210 (describing actionable IOIs as 
privately transmitted messages to selected market participants 
intended to ``attract immediately executable order flow'' and 
comparing their function to ``displayed quotations'').
---------------------------------------------------------------------------

    Under proposed Rule 600(b)(1) of Regulation NMS, an actionable IOI 
would be defined as ``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: (1) 
Symbol; (2) side (buy or sell); (3) 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 (4) a size that is at least equal to one round 
lot.'' \108\ The Commission preliminarily believes that for an IOI to 
be actionable it must contain information sufficient to attract 
immediately executable orders to the venue sending the indication of 
interest. The Commission preliminarily believes that the four elements 
contained in the proposed definition of actionable IOI (symbol, side, 
price, and size) are all necessary pieces of information for an 
external liquidity provider to respond with an order to execute against 
the order at the venue sending the indication of interest. Indeed, if 
one of the four elements is not explicitly or implicitly conveyed, an 
external liquidity provider would not have sufficient information to 
decide whether to respond to the IOI or to ensure the order it sends in 
response to the IOI would be immediately executable.\109\ Without the 
symbol, an external liquidity provider would not know the security for 
which to send an order. Without the side, an external liquidity 
provider would not know whether to send a buy order or a sell order. 
Without the price, an external liquidity provider would not know where 
to price its order to ensure the order is immediately executable. 
Without the size, an external liquidity provider would not know the 
number of shares it could expect to receive from responding to the IOI.
---------------------------------------------------------------------------

    \108\ See proposed Rule 600(b)(1).
    \109\ See Regulation of Non-Public Trading Interest Proposing 
Release, supra note 66, at 61210-11 (discussing the four elements of 
an actionable IOI and the inferences a trader can make to reasonably 
conclude that the order it sends in response to the indication of 
interest will result in an execution).
---------------------------------------------------------------------------

    A determination of whether an IOI implicitly conveys information--
and thus contains each of the four elements to make such IOI 
actionable--involves a consideration of all of the facts and 
circumstances, including the course of dealing between the IOI sender 
and the recipient. For example, a message that alerts the recipient 
that there is trading interest in a particular symbol and side at the 
venue sending the IOI generally would be considered ``actionable'' even 
though it does not explicitly specify the price and size if, through 
the course of dealings, the recipient could expect to respond and 
receive an execution equal to or better than the applicable national 
best bid or offer for at least one round lot. The Commission notes that 
the proposed definition is substantively similar to the Commission's 
description of actionable IOIs in the Regulation of Non-Public Trading 
Release in 2009.\110\
---------------------------------------------------------------------------

    \110\ See Regulation of Non-Public Trading Interest Proposing 
Release, supra note 66. See also supra Section II.F.5. discussing 
comments received and discussion relating to actionable IOI.
---------------------------------------------------------------------------

    When used in the context of the proposed institutional order 
handling report, the proposed definition of actionable IOI would 
require a broker-dealer to disclose its activity that communicates to 
external liquidity providers to send an order to the broker-dealer in 
response to a customer's institutional order. The Commission 
preliminarily believes information about a broker-dealer's use of 
actionable IOIs in executing institutional orders will be useful to 
customers assessing the broker-dealer's order handling decisions, 
particularly in regards to analyzing information leakage because, when 
``actionable IOIs are intended to attract immediately executable order 
flow to the trading venue,'' \111\ actionable IOIs ``function quite 
similarly to displayed quotations'' \112\ and thus have the capacity to 
communicate information about the existence of an institutional order. 
In addition, as discussed in greater detail above,\113\ the Commission 
notes that certain commenters on the Concept Release on Equity Market 
Structure specifically requested that Rule 606 be expanded to require 
the disclosure of information related to the use of actionable 
IOIs.\114\ The Commission also notes that some commenters on the 
Regulation of Non-Public Trading Interest Release raised concerns about 
the Commission's description of an actionable IOI, including whether 
the description of an actionable IOI could be clearer and more 
precise.\115\ A few commenters also differed on whether the 
Commission's description of an actionable IOI was too broad or not 
broad enough to encompass all intended messaging activity that could 
result in an execution.\116\ The Commission has considered these 
comments. The Commission preliminarily believes on balance that, in the 
context of the reporting regime proposed in this release, it remains 
appropriate to look to the description of actionable IOI contained in 
the Regulation of Non-Public Trading Interest Release and preliminarily 
believes that description would capture the necessary information to 
make an IOI actionable and therefore the functional equivalent of an 
order. Accordingly, the Commission is using the description of an 
actionable IOI contained in the Regulation of Non-Public Trading 
Interest Release as the basis for the proposed definition of actionable 
IOI in Rule 600(b)(1) of Regulation NMS. In addition, for the reasons 
stated below, the Commission preliminarily believes that the proposed 
definition of actionable IOI captures the types of activity that would 
be pertinent for customers in evaluating how a broker-dealer handles 
its institutional orders.
---------------------------------------------------------------------------

    \111\ See Regulation of Non-Public Trading Interest Proposing 
Release, supra note 66, at 61210.
    \112\ Id.
    \113\ See supra Section II.F.5.
    \114\ See supra note 92.
    \115\ See id.
    \116\ See id.
---------------------------------------------------------------------------

    One purpose of the proposed amendments to Rule 606 is to reflect 
how large orders are handled and how information is shared and 
dispersed among the marketplace. The Commission has previously noted 
that because actionable IOIs convey similar information as an order, a 
response to an actionable IOI may result in an execution at the venue 
of the IOI sender.\117\ As such, the Commission preliminarily believes 
that actionable IOIs, as proposed to be defined, function quite 
similarly to an order or a displayed quotation.\118\ Given this 
similarity, the Commission preliminarily believes that a rule that did 
not capture information related to the use of actionable IOIs in this 
manner would leave customers without information that could help them 
have a more complete understanding of how broker-dealers handle their 
institutional orders. If an IOI contains, explicitly or implicitly, the 
four criteria of the proposed definition of actionable IOI, then it is 
the functional equivalent to an order or a quotation. Because of this, 
the Commission preliminarily believes that the proposed definition of 
actionable IOI will capture information that could be used by customers 
to better understand how broker-dealers handle their institutional 
orders, particularly in regards to information leakage, and will be 
important to customers in evaluating the order handling and execution 
practices of their broker-dealers.
---------------------------------------------------------------------------

    \117\ See Regulation of Non-Public Trading Interest Proposing 
Release, supra note 66, at 61210-11.
    \118\ See id.
---------------------------------------------------------------------------

    Separately, the Commission notes that as a result of the Commission 
proposing both the definitions of institutional order and actionable 
indications of

[[Page 49447]]

interest, the Commission is also proposing to renumber the existing 
definitions in Rule 600(b) accordingly, and update other rules to 
change cross-references.
    The Commission requests comment on the proposed definition of 
``actionable indication of interest,'' as well as the other proposed 
changes to Rule 600(b) noted above. In particular, the Commission 
solicits comment on the following:
    11. Do commenters believe that a symbol is a necessary element to 
include in the definition of actionable IOI? Is the side (buy or sell) 
a necessary element to include in the definition of actionable IOI? 
Should price be an element in the definition of actionable IOI or is it 
assumed that it would be equal to or better than the applicable 
national best bid or offer? Is size a necessary element to define an 
actionable IOI? Should an actionable IOI be defined to require only a 
subset of these elements, or should any of the proposed elements be 
modified? If so, which elements and why? Are there alternative 
definitions that would capture the activity of a broker-dealer 
communicating to external liquidity providers that should be included 
as part of the required disclosure? Are there other elements or factors 
that the Commission should consider in the definition of actionable 
IOI? Should any of the proposed elements be omitted? Why or why not?
    12. Do commenters believe that an IOI can be ``actionable'' even if 
a subset of the elements (symbol, side, price, and size) is conveyed 
implicitly? Should broker-dealers be required to disclose information 
about actionable IOIs where one, some, or all of the elements are 
conveyed implicitly? Why or why not? Would broker-dealers be able to 
program automated systems to identify as actionable IOIs instances in 
which information is being conveyed implicitly, such as through a 
course of dealing between a liquidity provider and the broker-dealer?
    13. Do commenters believe there are other types of indications of 
interest that should be required to be disclosed? If so, what types and 
how would they be defined?
    14. Do commenters believe actionable IOIs are linked to specific 
orders at the broker-dealer, such that when the external liquidity 
provider responds to an actionable IOI with a contra-side order, the 
broker-dealer will be able to match both sides of the trade?
    15. Do commenters believe that there are alternative approaches to 
defining an actionable IOI? If so, please explain each approach in 
detail, including the benefits and costs of the approach.
3. Scope and Format of Reports
    The Commission understands that customers increasingly are 
requesting institutional order handling information to better 
understand and assess order routing strategies, best execution, 
potential conflicts of interest, and the risk of information leakage. 
The Commission understands that many broker-dealers currently respond 
to such requests by providing reports on their institutional order 
handling to customers. However, the Commission understands that these 
reports often contain non-standardized terms, and often are not 
presented in a uniform manner to allow for effective comparison across 
different broker-dealers and trading centers.\119\
---------------------------------------------------------------------------

    \119\ See Associations Letter, supra note 5, at 2.
---------------------------------------------------------------------------

    The Commission preliminarily believes that requiring broker-dealers 
to disclose standardized customer-specific institutional order handling 
information to their customers would facilitate the ability for such 
customers to assess broker-dealers' order handling practices and how 
such practices affect best execution, potential conflicts of interest, 
the potential for information leakage, and execution quality generally. 
The proposed disclosures described below effectively would set a 
baseline for disclosure of customer-specific institutional order 
handling information that all customers, regardless of size, could 
receive from their broker-dealers upon request. The Commission 
preliminarily believes that the proposed disclosures would provide 
needed transparency into broker-dealer institutional order handling 
practices, and would promote discussions between broker-dealers and 
customers regarding the broker-dealer's institutional order handling 
practices and the effect such practices have on execution quality. In 
addition, the Commission preliminarily believes that the proposed 
disclosures would allow customers to better compare institutional order 
handling practices across multiple broker-dealers, which should provide 
a basis for more informed decision making when customers engage the 
order routing services of broker-dealers.
    Specifically, the Commission is proposing to amend Rule 606(b) of 
Regulation NMS to require that a broker-dealer, on request of a 
customer that places, directly or indirectly, an institutional order 
with it, disclose to such customer within seven business days of 
receiving the request, a report on its handling of institutional orders 
for that customer that contains information for the prior six months, 
broken down by calendar month.\120\ The Commission preliminarily 
believes that requiring broker-dealers to provide the customer-specific 
reports within seven business days will ensure that all institutional 
customers, regardless of size, receive their order handling information 
in a timeframe that would allow them to act in a timely fashion in 
response to the information contained in the report. The Commission 
also preliminarily believes that broker-dealers will develop technical 
processes to produce these reports in an automated manner,\121\ and as 
such, requiring a response to an individual customer request within 
seven business days would not be unduly burdensome and should provide a 
sufficient amount of time for broker-dealers to generate the required 
disclosure and respond to customer requests. Separately, the Commission 
notes that the proposed requirement to provide customer-specific 
institutional order handling information for the prior six months is 
consistent with the reporting period currently required for customer-
specific reports on retail order routing.\122\ The Commission 
preliminarily believes that a six-month reporting period is also 
appropriate for institutional orders, as it would provide individual 
customers with the most recent months of institutional order handling 
data and would cover the full period contained in the broker-dealer's 
last public aggregated institutional order handling report.\123\
---------------------------------------------------------------------------

    \120\ See proposed Rule 606(b)(3).
    \121\ See infra Section IV.A.1.
    \122\ See Rule 606(b)(1).
    \123\ See proposed Rule 606(c). See also Rule 606 Predecessor 
Adopting Release, supra note 15, at 75430 n.81 (discussing the six-
month reporting period for reports on customer-specific retail order 
routing).
---------------------------------------------------------------------------

    The proposed report would cover instances where an institutional 
order is handled either directly by the broker-dealer or indirectly 
through systems provided by the broker-dealer. For example, an 
institutional order would have been placed with a broker-dealer if a 
broker-dealer receives an institutional order directly from a customer 
and works to execute the order itself, as well as if a broker-dealer 
receives an institutional order indirectly from a customer, where the 
customer self-directs its institutional order by entering it into a 
routing system or execution algorithm provided by the broker-dealer.
    The Commission notes that the proposal would require a broker-
dealer to provide a report ``on request of a customer that places, 
directly or

[[Page 49448]]

indirectly, an institutional order with the broker or dealer . . . .'' 
\124\ Accordingly, a broker-dealer must provide a report under the 
proposed rule to the customer placing the order with the broker-dealer, 
who may be acting on behalf of others and thus not be the ultimate 
beneficiary of any resulting transactions.\125\ The Commission 
preliminarily believes that requiring the reports to be provided to the 
customer that places an institutional order with the broker-dealer is 
appropriate because it would require the broker-dealer to provide the 
report to the person that is responsible for making the routing and 
execution decisions for such institutional order. For example, if an 
investment adviser, as the customer of a broker-dealer, places 
institutional orders with a broker-dealer that represents trading 
interest from multiple underlying clients of the investment adviser, 
the investment adviser, as the customer of the broker-dealer, would be 
the sole entity to whom the broker-dealer is required to provide a 
report under the proposed rule; and not the multiple underlying clients 
of the investment adviser.
---------------------------------------------------------------------------

    \124\ See id.
    \125\ The Commission notes that ``customer'' is broadly defined 
as ``any person that is not a broker or dealer'' in Rule 600(b)(16). 
However, for the purposes of the proposed amendments to Rule 606, 
which are to provide detailed information about order routing and 
execution quality to the person responsible for assuring the 
effectiveness of this function, the Commission preliminarily 
believes that it is appropriate to view the customer placing the 
order with the broker-dealer, whether the account holder or an 
investment adviser or other fiduciary, as the ``customer.''
---------------------------------------------------------------------------

    Separately, the Commission notes that while the proposed rule would 
allow a customer that places, directly or indirectly, an institutional 
order with a broker-dealer to request and receive its institutional 
order handling report, it would not limit the number of times a 
customer could place a request. The proposed rule also would not 
preclude a customer from making a standing request to its broker-
dealer, whereby the customer would automatically receive a recurring 
report on an periodic basis without the need to make repeated requests 
for its institutional order handling reports. However, the Commission 
does not intend for the proposed rule to duplicate information the 
broker-dealer has previously provided the customer pursuant to a prior 
request under the proposed rule. For example, if a broker-dealer 
provides a report to a customer for the prior six months, and that 
customer requests an additional report the following month, the broker-
dealer would only need to provide a report for the latest month. In 
addition, the Commission acknowledges that broker-dealers may need to 
configure their systems to capture the information necessary to produce 
the proposed institutional order handling reports and, therefore, may 
not have the ability to produce historical reports about the routing of 
orders and executions that occurred before such systems are updated. 
Accordingly, the Commission would not require broker-dealers to produce 
institutional handling reports containing information to cover months 
before broker-dealers are required to comply with such rule, if 
adopted.
    For purposes of the report, the handling of an institutional order 
would include the handling of all smaller orders derived from the 
institutional orders.\126\ As noted above, institutional orders are 
generally divided into smaller orders and routed to various trading 
centers. For the disclosure to be meaningful and complete, the 
Commission preliminarily believes that the routing of each child order 
derived from an institutional parent order should be required to be 
included in the report. The Commission understands that current 
technologies employed by broker-dealers typically are able to track 
child orders and link such child orders back to the parent order,\127\ 
thus minimizing burdens associated with this component of the proposed 
rule.
---------------------------------------------------------------------------

    \126\ See proposed Rule 606(b)(3). The Commission notes that an 
order would only be required to be included in the proposed report 
if it met the definition, and thus the size threshold, of an 
institutional order when received by the broker-dealer.
    \127\ Broker-dealers have developed their own systems allowing 
for tracking and linking of child orders to parent orders. Third-
party software enables this, as well. See, e.g., Advanced Orders 
Panel, Interactive Brokers, available at https://www.interactivebrokers.com/en/software/tws/usersguidebook/mosaic/advanced_orders_panel.htm; Viewing Child Orders, Trading 
Technologies, available at https://www.tradingtechnologies.com/help/xtrader/viewing-child-orders/; Smart Order Routing, StreamBase, 
available at http://www.streambase.com/industries/capitalmarkets/smart-order-routing/.
---------------------------------------------------------------------------

    The Commission is further proposing to require that the report be 
made available using an eXtensible Markup Language (XML) schema and 
associated PDF renderer to be published on the Commission's Web 
site.\128\ Requiring the report to be provided in XML should result in 
the data in the report being provided in a consistent, structured 
format. XML is an open standard \129\ that defines, or ``tags,'' data 
using standard definitions. The tags establish a consistent structure 
of identity and context. This consistent structure can be automatically 
recognized and processed by a variety of software applications such as 
databases, financial reporting systems, and spreadsheets, and then made 
immediately available to the end-user to search, aggregate, compare, 
and analyze. In addition, the XML schema could be easily updated to 
reflect any changes to the open standard. The Commission preliminarily 
believes that requiring the report be provided in in an XML format 
would provide the customers and the public (in the case of public 
reports) with data about order handling practices in a format that 
would facilitate search capabilities, and statistical and comparative 
analyses across broker-dealers and date ranges. Absent this 
requirement, any customers or members of the public seeking to use the 
information would need either to spend time manually collecting the 
data and manually entering the data into a format that allows for 
analysis, thus increasing the time needed to analyze the data, or incur 
the cost of subscribing to a financial service provider that 
specializes in this data aggregation and comparison process. Further, 
manual entering of data may lead to errors, thereby potentially 
reducing data quality and usability. By proposing to require the use of 
an XML format so that the information would be more readily available, 
customers might be able to better use the information to compare 
execution quality of broker-dealers, thereby allowing them to select 
broker-dealers that are a better match to their preferences. The 
Commission is also proposing that the report be provided in PDF format 
using the associated PDF renderer published on the Commission's Web 
site so that the report would also be provided in a human-readable 
format for those customers who prefer only to review individual reports 
and not necessarily aggregate or conduct large-scale analysis on the 
data. Like XML, PDF is also an open standard. By using the associated 
PDF renderer published on the Commission's Web site, the XML data will 
be instantly presentable in a PDF format and consistently presented 
across filings.
---------------------------------------------------------------------------

    \128\ See proposed Rule 606(b)(3). The Commission's schema is a 
set of custom XML tags and XML restrictions designed by the 
Commission to reflect the proposed disclosures in Rule 606.
    \129\ The term ``open standard'' is generally applied to 
technological specifications that are widely available to the 
public, royalty-free, at no cost.
---------------------------------------------------------------------------

    The Commission seeks comment generally on the report format 
proposed in Rule 606(b)(3). In particular, the Commission solicits 
comment on the following:

[[Page 49449]]

    16. Do commenters believe the proposed scope of the institutional 
order handling report is practicable and appropriate? Why or why not? 
Please explain and provide data, if possible.
    17. Do commenters believe that it is appropriate to view the 
customer placing the order with the broker-dealer, whether the account 
holder or an investment adviser or other fiduciary, as the ``customer'' 
for purposes of the proposed amendments to Rule 606? Should entities 
other than the customer placing the order with the broker-dealer be 
entitled to receive the report? For example, if an investment adviser 
represents multiple underlying clients, should each underlying client 
be entitled to receive the report? Please explain.
    18. Do commenters believe that broker-dealers should be required to 
provide the customer-specific report on institutional order handling in 
the proposed format? Why or why not? Do commenters believe broker-
dealers should be required to provide the report in a structured XML 
format? Would such a format facilitate comparison of the data across 
broker-dealers? If not, why not? Do commenters believe broker-dealers 
should be required to also provide the report in an instantly readable 
PDF format? If not, why not? Are there other formats or alternative 
methods to provide the customer-specific reports that the Commission 
should consider? If so, please explain and provide data.
    19. Do commenters believe that seven business days is a reasonable 
amount of time for a broker-dealer to respond to a customer request for 
institutional order handling information? If not, what would be a 
reasonable amount of time?
    20. The Commission notes that Rule 606(b)(2) requires that broker-
dealers notify their customers annually, in writing, of the 
availability of a report on the routing of retail orders. Should the 
Commission include a similar requirement for a report on the handling 
of institutional orders?
    21. Do commenters believe that the rule should include a de minimis 
exemption for broker-dealers that receive, in the aggregate, less than 
a certain threshold number or dollar value of institutional orders? Why 
or why not? If so, what would be the appropriate threshold number or 
dollar value of institutional orders a broker-dealer should need to 
receive from all customers in the aggregate before it would be required 
to provide customer-specific order handling disclosures to any 
customer? Please explain and provide data, if possible.
    22. Do commenters believe that the rule should be applicable, with 
respect to disclosures to any particular customer, only if a broker-
dealer receives greater than a certain threshold number or dollar value 
of institutional orders from that customer? Why or why not? What would 
be the appropriate threshold number or dollar value of institutional 
orders from a particular customer before a broker-dealer should be 
required to provide customer-specific order handling disclosures to the 
particular customer? Please explain and provide data, if possible.
    23. Do commenters believe that the required disclosure regarding 
the handling of an institutional order should include the handling of 
all smaller (child) orders derived from the institutional order? Why or 
why not?
    24. Do commenters believe that the rule should cover institutional 
orders placed both directly and indirectly with a broker-dealer? Should 
the rule only cover orders placed directly with a broker-dealer? Why or 
why not?
    25. Do commenters believe that the rule should specify the number 
of times a broker-dealer is required by the rule to respond to a 
customer request for a report on the handling of its institutional 
orders? Why or why not? If yes, what should the number of times be? 
Alternatively, do commenters believe that broker-dealers should be 
required to provide customers with institutional orders ongoing access 
to order handling reports through a secure portal on their Web sites? 
Why or why not? How would this impact broker-dealers' compliance costs, 
or the accessibility to customers of order handling reports? Please 
explain.
    26. As noted above, the proposed rule would not preclude customers 
from making standing requests for their broker-dealers to provide them 
order handling reports on a specified regular basis. Do commenters 
believe broker-dealers should be required to automatically provide 
reports to customers with respect to their institutional orders, 
without the customer making a specific request? If so, how frequently 
should this information be provided (e.g., every month, three months, 
six months, annually)? Please explain. To what extent would 
automatically providing reports facilitate the dissemination of order 
handling information to customers that might not otherwise take the 
time to request it? On the other hand, to what extent would 
automatically providing reports require order handling information to 
be provided to customers that they might not want or use? If order 
handling reports are required to be automatically provided, should 
customers be permitted to opt out from receiving certain information or 
reports in their entirety? Should a requirement to automatically 
provide reports exclude customers with only a de minimis number of 
institutional orders? If so, what would be an appropriate de minimis 
level? How would a requirement to automatically provide customers with 
reports rather than provide them upon request change the costs for 
broker-dealers? Considering that broker-dealers that handle 
institutional orders would need to be prepared to provide reports to 
customers on request, and therefore would need to develop the 
technology to produce such reports in an automated manner, what would 
be the incremental costs for them to run the reports for all customers 
on a periodic basis? Would there be any benefits from broker-dealers 
running the reports for all customers on a periodic basis? Would the 
broker-dealer experience lower costs from manually providing the 
reports solely upon request? Would other costs be involved? Please 
explain and provide data.
    As noted above, the Commission is proposing to require that the 
institutional order handling reports be broken down by calendar 
month.\130\ The Commission understands that trading centers frequently 
change their fee structures, including the amount of fees and rebates, 
to attract order flow, and such changes typically occur at the 
beginning of a calendar month. The Commission preliminarily believes 
these changes in fee structures at trading centers may affect a broker-
dealer's routing decisions. The Commission therefore preliminarily 
believes that if customer-specific reports on institutional order 
handling reflected data over a longer period of time, the aggregated 
information contained in the reports may not be as illustrative or as 
useful in informing customers as to how fee structures potentially 
affected the broker-dealer's routing behavior.
---------------------------------------------------------------------------

    \130\ See id.
---------------------------------------------------------------------------

    For example, if a change in a trading center's pricing structure 
occurs at the beginning of a calendar month, and the report on a 
customer's institutional order handling reflected aggregated data for 
the past six months, then any change in broker-dealer routing behavior 
as a result of the change in trading center pricing would be harder to 
detect as the change in data would be diluted and averaged over a 
period of months. The Commission preliminarily believes that by 
requiring the reports to be broken down by calendar month would enable

[[Page 49450]]

customers to better assess a broker-dealer's institutional order 
handling practices and any changes in routing behavior in response to 
internal or external factors. In addition, for those with a fiduciary 
responsibility to monitor for best execution, monthly detail would help 
facilitate regular and more precise review to evaluate whether their 
selected broker-dealers are providing satisfactory execution quality.
    As proposed, Rule 606(b)(3) requires that the broker-dealer's 
report reflect aggregated information regarding the handling of a 
customer's institutional orders for the prior six months, broken down 
by calendar month. Additionally, the Commission preliminarily believes 
that, if a customer places an institutional order that identifies the 
particular account for which the order was submitted, the broker-dealer 
would be well-positioned to provide the customer, upon request, a 
report broken down by account. The Commission preliminarily believes 
that, because the proposed disclosures will aggregate information to be 
disclosed to a specific customer across all of the customer's 
institutional orders, the risk that such disclosures would reveal 
sensitive, proprietary information about broker-dealers' order handling 
techniques should be minimal. The Commission is cognizant of the 
concerns broker-dealers would have if such disclosures revealed 
proprietary order handling techniques, and preliminarily believes that 
aggregated customer-specific order handling information would not 
enable a customer to reverse-engineer proprietary order handling 
techniques.
    The Commission requests comment on this proposed requirement. In 
particular, the Commission solicits comment on the following:
    27. Is six months an appropriate timeframe for the reporting period 
for customer-specific order handling information? Would a longer or 
shorter time period (e.g., quarterly) be more appropriate? How soon 
after month-end should the customer-specific order handling report be 
provided (e.g., two-weeks after the end of the preceding month)? Please 
explain.
    28. Do commenters believe that aggregated information, broken down 
by calendar month, is a useful format for the customer? Should the data 
be required to be provided in a more granular or broader manner? For 
example, would it be more useful for institutional customers to receive 
data about the handling of their institutional orders on a stock-by-
stock basis rather than aggregated? Please provide support for your 
arguments and describe any costs and benefits associated with an 
alternative format.
    29. Does aggregating of all of a customer's institutional orders 
into a single report adequately prevent sensitive, proprietary 
information from being revealed? If not, why not? Could aggregated 
institutional order disclosures allow a customer or competitors to 
reverse engineer a broker-dealer's order handling techniques?
    30. As noted above, the Commission preliminarily believes that, if 
a customer places an institutional order that identifies the particular 
account for which the order was submitted, the broker-dealer would be 
well-positioned to provide the customer, upon request, a report broken 
down by account. Do commenters believe that the rule should require a 
broker-dealer to provide, upon request, a report broken down by 
account, if the customer identifies the particular account for which 
the order was submitted? Why or why not? Please discuss the benefits 
and costs with such an account-by-account approach.
    Finally, to provide a standardized format for the proposed 
institutional order handling report, the Commission proposes that the 
disclosures regarding institutional orders a broker-dealer executes 
internally or routes to other venues be made in chart form with certain 
rows and columns of required information.\131\ Specifically, the 
Commission proposes to require that each report contain rows that would 
be categorized by venue and by order routing strategy category, as 
described in more detail below, for each venue.\132\ In addition, the 
Commission proposes to require that each report contain certain columns 
of information, as described below in more detail, for each of the 
required rows.\133\ Thus, each report would be formatted so that a 
customer would be readily able to observe their order activity at a 
particular venue, as further subdivided by order routing strategy 
category for that venue.
---------------------------------------------------------------------------

    \131\ See supra note 41. See, e.g., SIFMA Letter II, supra note 
79, at 13 (stating that the Commission should direct broker-dealers 
to provide institutional clients with standardized execution venue 
reports); BlackRock Letter, supra note 41, at 3 (stating broker-
dealers should be required to provide periodic standardized reports 
on order routing and execution metrics to both retail and 
institutional investors).
    \132\ See proposed Rule 606(b)(3).
    \133\ See proposed Rule 606(b)(3)(i)-(iv).
---------------------------------------------------------------------------

    The Commission preliminarily believes it is important for customers 
to understand the venues where their institutional orders are exposed 
and executed,\134\ and that segmenting the institutional order handling 
report by venue would be useful for customers to understand where their 
institutional orders are routed and executed. As proposed, the report 
would present the order handling information in a manner that would 
allow customers to readily compare venues. For purposes of the 
institutional order handling report, a venue would be any trading 
center \135\ to which an order is routed or where an order is executed.
---------------------------------------------------------------------------

    \134\ See supra note 65.
    \135\ See supra note 3.
---------------------------------------------------------------------------

    The Commission also proposes to require that the institutional 
order handling report be categorized by order routing strategy category 
for institutional orders for each venue.\136\ The Commission 
preliminarily believes that order routing strategies for institutional 
orders can be categorized into three general strategy categories: (1) A 
``passive order routing strategy,'' which emphasizes the minimization 
of price impact over the speed of execution of the entire institutional 
order; (2) a ``neutral order routing strategy,'' which is relatively 
neutral between the minimization of price impact and speed of execution 
of the entire institutional order; and (3) an ``aggressive order 
routing strategy,'' which emphasizes speed of execution of the entire 
institutional order over the minimization of price impact.\137\ The 
Commission is not aware of any generally accepted definitions or 
metrics to define these order routing strategies, and the proposed rule 
does not further define these three order routing strategy categories. 
Rather, by providing a general description, the Commission would afford 
broker-dealers flexibility to determine how to group their various 
order routing strategies for institutional orders into the three 
categories for reporting purposes, according to the general description 
provided in the proposed rule. A broker-dealer would be required to 
assign each order routing strategy that it uses for institutional 
orders to one of the three categories in a consistent manner for each 
report it prepares pursuant to the proposed rule, and would be required 
to document the specific methodologies it relies upon for making such 
assignments.\138\ The Commission is proposing to require every broker-
dealer to preserve a copy of the methodologies used to assign its order 
routing strategies and maintain such copy as part of its books and 
records in a manner consistent with Rule 17a-4(b) under the Exchange

[[Page 49451]]

Act.\139\ Once a broker-dealer's strategies are assigned a category, 
the broker-dealer shall promptly update such assignments any time an 
existing strategy is amended or a new strategy is created that would 
change such assignment.\140\
---------------------------------------------------------------------------

    \136\ See proposed Rule 606(b)(3).
    \137\ See proposed Rule 606(b)(3)(v).
    \138\ See id.
    \139\ See id.
    \140\ See id.
---------------------------------------------------------------------------

    The Commission acknowledges that categorization of order routing 
strategies for institutional orders would be an internal process for a 
broker-dealer, and, therefore, the methodologies for such process would 
likely not be entirely consistent across broker-dealers, which could 
result in an order routing strategy being placed in a different 
category by different broker-dealers. Such inconsistency could make it 
difficult for institutional customers to effectively compare 
institutional order handling reports across their broker-dealers. 
However, the Commission preliminarily believes that the potential 
inconsistencies of categorization would only occur at the margins among 
order routing strategies, where characteristics of the strategy could 
be viewed differently by different broker-dealers. For example, one 
broker-dealer might reasonably classify a mixed strategy that mostly 
provides liquidity as being ``neutral,'' whereas another broker-dealer 
might reasonably categorize the same strategy as ``passive.'' Even if 
broker-dealers differ at the margins in their categorization of similar 
order routing strategies, the Commission preliminarily believes that 
grouping order routing strategies by these three broad categories would 
still allow for meaningful comparison of order handling practices 
across broker-dealers.
    The Commission recognizes that customers may have different 
investment strategies and provide specific order handling instructions 
that will affect how a broker-dealer handles an institutional order and 
utilizes various venues. The Commission preliminarily believes that if 
it were to require that the disclosures be categorized only by venue, 
the disclosures would contain aggregated order routing strategy data 
that might be less useful in analyzing how a broker-dealer implements 
the customer's trading decisions. The Commission preliminarily believes 
that disclosing the proposed institutional order handling information 
by category of order routing strategy should allow customers to better 
evaluate a broker-dealer's order handling practices for orders that are 
handled using similar strategies.
    In addition, a customer's order handling instructions may vary at 
particular points in time depending on a number of different factors. 
For instance, at certain times a customer may need to quickly liquidate 
or acquire a position, in which case an aggressive order routing 
strategy may be appropriate. At other times, speed may not be a primary 
concern and thus a passive order routing strategy may be appropriate. 
Because these types of order routing strategies use different methods 
to liquidate or acquire a position, the order routing strategies may 
use venues for different purposes. The Commission preliminarily 
believes that disclosing the required institutional order handling 
information by passive, neutral, and aggressive strategy for each venue 
will provide more transparency to customers and a means to understand 
better which venues are being used as part of a particular strategy. 
Moreover, the Commission preliminarily believes that the three broad 
categories should provide a means for customers to ascertain whether a 
broker-dealer in the aggregate is handling its institutional orders 
pursuant to its instructions. For example, if a customer instructs its 
broker-dealer to use mostly passive order routing strategies, the 
customer could use the institutional order handling report to monitor 
the use of passive, neutral and aggressive order routing strategies 
during the reporting period. Finally, the Commission preliminarily 
believes that, notwithstanding the limitations on comparisons described 
above, categorizing the proposed institutional order handling 
information by these three strategies would allow a customer to compare 
order routing strategies across its broker-dealers.
    The Commission acknowledges that broker-dealers may want to prevent 
other market participants from reverse engineering their proprietary 
order routing strategies. Thus, the Commission is not proposing to 
require broker-dealers to disclose detailed methodologies of their 
order routing strategies. Rather, the Commission is proposing to 
require broker-dealers to group their various order routing strategies 
for institutional orders into three categories \141\--passive, neutral, 
aggressive--which it preliminarily believes should provide valuable 
transparency to customers while not disclosing proprietary aspects of a 
broker-dealer's order routing strategies.
---------------------------------------------------------------------------

    \141\ See id.
---------------------------------------------------------------------------

    The Commission requests comment on its proposal that the customer-
specific institutional order handling report be categorized by venue 
and order routing strategy category. In particular, the Commission 
solicits comment on the following:
    31. Do commenters believe that disclosure by venues and order 
routing strategies would be useful to customers placing institutional 
orders? Are there other ways to categorize the disclosures than by 
venue and order routing strategies that would be more useful to 
institutional customers? If so, please explain. Should the Commission 
consider other methods in providing customer-specific institutional 
order handling reports? If so, please explain the alternative approach 
and provide data, if possible.
    32. Do commenters believe that disclosure of order routing 
strategies categorized by passive, neutral, and aggressive would be 
useful? Should any of these proposed categories be modified or deleted? 
Are there other categories of strategies that would be more meaningful? 
Please explain and provide data to support your arguments.
    33. Are broker-dealers able to classify their order routing 
strategies into the three proposed strategy categories? Are there other 
strategy categories that should be considered?
    34. Do commenters believe that customers would have sufficient 
information to meaningfully compare how their institutional orders were 
handled by different broker-dealers in light of the fact that each 
broker-dealer would establish its own categorization of routing 
strategies?
    35. Do commenters agree that potential inconsistencies of 
categorization will only occur at the margins and grouping order 
routing strategies by the three broad categories would still allow for 
meaningful comparison of order handling practices across broker-
dealers?
    36. Do commenters believe that broker-dealers would be able to 
produce their order handling statistics in such a manner to favor one 
strategy over another in an effort to enhance the perception of the 
services provided? If so, should modifications or additions be made to 
address this? Further, please explain and provide data, if possible.
    37. Should the Commission further define the three order routing 
strategies, and if so, how? Should routing strategies be defined at 
all? If not, how should order handling practices be expressed to allow 
for an effective comparison? Do commenters believe that there is 
benefit in having the strategies listed if there is no common 
definition among broker-dealers? Would the report still be useful to 
customers placing institutional orders in

[[Page 49452]]

evaluating their broker-dealers, but not comparing broker-dealers? 
Please support your arguments.
    38. Are there other methodologies that the Commission should 
consider that would allow institutional customers to meaningfully 
compare order handling practices across broker-dealers? If so, please 
explain and provide support, if possible.
    39. Would the lack of a more precise definition for the three order 
routing strategies affect the ability of broker-dealers to produce 
automated reports?
    40. Would the lack of a more precise definition impact the ability 
of customers to compare order handling practices across broker-dealers?
    41. Would disclosing information about the use of the three order 
routing strategies potentially reveal broker-dealers' sensitive 
proprietary information? Please be specific about what information and 
the impact of disclosure.
    42. Under the proposal, broker-dealers would be required to 
document the specific methodologies they rely upon for making 
assignments of institutional orders to the three order routing 
strategies. Should these methodologies be made available, in the normal 
course or upon request, to customers and/or the public? Would 
disclosure of this information be useful to customers? When a broker-
dealer changes its methodology, should it be required to notify its 
customers or the public of the change, and/or should it be required to 
restate prior reports ``as if'' such new methodology had been in place? 
Would such restatements be useful to customers or potential customers? 
If so, how? Should such restatements be required for certain material 
changes in methodology? If so, for which prior reports should 
restatements be made (e.g., the most recently provided report)? Even if 
the broker-dealer's methodology is not provided to customers or the 
public, should they be notified if and when such methodology changes? 
Why or why not? Please explain. Would transparency regarding the 
methodologies create risks with respect to sensitive proprietary 
information of the broker-dealers? If yes, please identify the specific 
information linked to the risk.
    43. Do commenters believe that the Commission should specify how 
broker-dealers would address a misclassification of a particular order 
routing strategy? If so, how should broker-dealers be required to 
address the misclassification? For example, do commenters believe that 
broker-dealers should be required to promptly provide corrected reports 
to customers and the public? Similarly, should the Commission specify 
how a broker-dealer would address situations in which it determines 
that any data in a previously provided order handling report is 
inaccurate? For example, do commenters believe that broker-dealers 
should be required to promptly furnish corrected reports to customers 
and/or promptly correct any publicly available reports? Why or why not? 
Would the dissemination of corrected reports be useful to customers 
placing institutional orders, and if so for which prior reports would 
it be useful? Separately, do commenters believe that there should be a 
materiality threshold for corrections to either the misclassification 
of order routing strategies or any other inaccuracy in data provided? 
If so, what would be an appropriate threshold? Please explain and 
provide data to support your arguments, if possible. As an alternative 
to a materiality standard, are there other measures that should 
determine whether a misclassification or other inaccuracy would 
necessitate a corrected report? For example, if the misclassification 
or other inaccuracy could impede trend analysis, should that 
necessitate a corrected report? Please explain.
4. Report Content
a. Information on the Customer's Order Flow With the Reporting Broker-
Dealer
    The Commission also proposes that the report include information on 
the customer's order flow with the broker-dealer. Specifically, the 
Commission proposes to require disclosure of: (1) Total number of 
shares of institutional orders sent to the broker-dealer by the 
customer during the reporting period; (2) total number of shares 
executed by the broker-dealer as principal for its own account; (3) 
total number of institutional orders exposed by the broker-dealer 
through an actionable IOI; and (4) venue or venues to which 
institutional orders were exposed by the broker-dealer through an 
actionable IOI.\142\ The Commission preliminarily believes that this 
information would be useful for customers to evaluate how much order 
flow the broker-dealer received from the customer during the reporting 
period, the methods the broker-dealer used to achieve executions for 
such order flow at the broker-dealer, the management of a broker-
dealer's conflicts of interests, and the risk of information leakage 
associated with such methods.
---------------------------------------------------------------------------

    \142\ See proposed Rule 606(b)(3).
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    The Commission preliminarily believes that it is important to 
require disclosure of the total number of shares of institutional 
orders sent to the broker-dealer by the customer during the reporting 
period to allow the customer to more easily compare the number of 
shares sent to the broker-dealer versus the number of shares routed by 
the broker-dealer. As noted above, a broker-dealer often will route 
orders numerous times, such that the aggregate order total may exceed 
the total size of the customer's original order flow. Although the 
information concerning institutional orders sent by the customer to the 
broker-dealer should be known by the customer, providing the customer 
with the amount of shares for the customer that the broker-dealer 
received over the period covered by the report should put in context 
other data provided in the institutional order handling report. Thus, 
the Commission preliminarily believes that a broker-dealer should be 
required to disclose the total number of shares of institutional orders 
sent by the customer to the broker-dealer. Moreover, because many 
customers use multiple broker-dealers to execute their institutional 
orders, requiring each broker-dealer to disclose the total number of 
shares of institutional orders sent by each customer would allow 
customers to more readily understand how much of their order flow was 
handled by a broker-dealer during the reporting period, which should 
help customers in comparing the order handling reports of their various 
broker-dealers.
    The Commission further proposes that the report disclose the total 
number of shares executed by the broker-dealer as principal.\143\ While 
customers currently receive disclosure of the number of shares executed 
by a broker-dealer as principal for each transaction pursuant to Rule 
10b-10,\144\ the Commission preliminarily believes that including the 
total number of shares executed by the broker-dealer as principal in 
the institutional order handling report, which would be an aggregate 
number of every transaction for the reporting period, would be useful 
to the customer so that such data would be in the same report as the 
other data the Commission is proposing to require for institutional 
orders. Such disclosure would allow customers to understand how often a

[[Page 49453]]

broker-dealer trades against its institutional orders, and what order 
routing strategies lead to this type of activity. The Commission 
preliminarily believes that this data on the volume of institutional 
orders interacting with the broker-dealer as principal could be 
relevant to customers considering potential conflicts of interest their 
broker-dealers face when trading as principal against their orders, and 
their broker-dealers' compliance with best execution obligations.
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    \143\ See proposed Rule 606(b)(3).
    \144\ See 17 CFR 240.10b-10. Further, the Commission 
preliminarily believes that it would be more efficient to require 
broker-dealers to include this as a line item in the proposed 
institutional order handling report than for customers to obtain 
information from the proposed reports, obtain information from Rule 
10b-10 required disclosures, and combine the two to perform 
necessary analysis to evaluate order handling quality.
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    The Commission also proposes to require disclosure of the total 
number of institutional orders exposed by the broker-dealer through 
actionable IOIs as well as the venue or venues to which such orders 
were exposed. The Commission preliminarily believes that transparency 
into the method of exposing an institutional order through the use of 
actionable IOIs would provide useful information to customers. As 
discussed above, the Commission understands that broker-dealers may use 
actionable IOIs to attract trading interest from external liquidity 
providers. For example, before a broker-dealer routes an institutional 
order to another trading center, the broker-dealer may send an 
actionable IOI to select external liquidity providers to communicate to 
such liquidity providers to send orders to the broker-dealer to trade 
with the institutional order that is represented by the actionable IOI 
at the broker-dealer. While the use of actionable IOIs in this manner 
by broker-dealers may be beneficial in executing institutional orders, 
actionable IOIs also may reveal information that could be detrimental 
to the execution quality of the institutional order. The Commission 
preliminarily believes that identifying the total number of 
institutional orders exposed by a broker-dealer though actionable IOIs 
in the order handling disclosures \145\ should give customers a more 
complete view of how their broker-dealers handle their institutional 
orders and allow them to better evaluate how their broker-dealer 
manages information leakage.
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    \145\ See proposed Rule 606(b)(3)(i)(B).
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    The Commission also proposes that broker-dealers disclose the venue 
or venues that were sent actionable IOIs. Venues that receive the 
actionable IOIs, such as external liquidity providers that trade 
proprietarily, could, but are not required to, respond to the 
actionable IOI by sending an order to the broker-dealer to execute 
against the trading interest represented by the actionable IOI. The 
Commission preliminarily believes that disclosure of institutional 
orders routed to a venue would not, alone, adequately capture a broker-
dealer's order handling practices. As such, the Commission 
preliminarily believes that disclosure of the specific venue or venues 
that a broker-dealer exposed an institutional order by an actionable 
IOI would be useful for the customer to further assess the extent, if 
any, of information leakage of their orders and potential conflicts of 
interest facing their broker-dealers. Specifically, the Commission 
preliminarily believes that such information will enable customers to 
assess whether their broker-dealers are exposing their institutional 
orders to select market participants with affiliations, business 
relationships, or other incentives.
    The Commission seeks comment on the disclosure of the reporting 
broker-dealer's information. In particular, the Commission solicits 
comment on the following:
    44. Do commenters believe that disclosing the total number shares 
sent to a broker-dealer would be useful to customers placing 
institutional orders? Why or why not?
    45. Do commenters believe that disclosure of the total number of 
shares executed by the broker-dealer as principal would facilitate 
understanding the broker-dealer's ability to manage its best execution 
obligations? Should additional or different information be required 
regarding institutional orders that are executed by the broker-dealer 
as principal? Please explain whether and how such additional or 
different information would be useful.
    46. Do commenters believe that disclosure of the total number of 
shares executed by the broker-dealer as principal would be useful to 
customers for purposes of evaluating conflicts of interest? Why or why 
not?
    47. Do commenters believe that the institutional order handling 
report should disclose the total number of institutional orders exposed 
through an actionable IOI? Is this data useful for customers to 
evaluate their broker-dealers' institutional order handling practices? 
Why or why not? Would such disclosure guide customers in better 
understanding the potential of information leakage of their 
institutional orders?
    48. Do commenters believe that broker-dealers should disclose the 
venues to which it sends actionable IOIs? Would this information help 
customers understand how financial incentives or business relationships 
might impact their orders? Would this information help customers 
evaluate the risk of information leakage?
    49. Do commenters believe there are other data points that would be 
useful to customers that should be disclosed on institutional order 
handling reports? If yes, please explain how such data would be useful 
to customers.
b. Information on Order Routing
    Within the venue and order routing strategy segmentations described 
above, the Commission proposes to require disclosure of information 
with respect to order routing.\146\ The Commission preliminarily 
believes that information regarding order routing and the size of 
orders routed, both the aggregate and average order size, would be 
useful for customers to understand where and how their institutional 
orders are being routed or exposed to assess the risk of information 
leakage and any potential conflicts of interest on the part of their 
broker-dealers. The Commission proposes to require, within each venue 
and strategy category, disclosure of: (1) Total shares routed; (2) 
total shares routed marked immediate or cancel (``IOC''); \147\ (3) 
total shares routed that were further routable; and (4) average order 
size routed.\148\
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    \146\ See proposed Rule 606(b)(3).
    \147\ An order marked IOC will execute immediately at a trading 
center if liquidity is available at or better than the limit price 
of the order or otherwise will be immediately canceled. See Concept 
Release on Equity Market Structure, supra note 2, at 3607 n. 69.
    \148\ See proposed Rule 606(b)(3)(i).
---------------------------------------------------------------------------

    Disclosing total shares routed \149\ for each of the required 
categories would allow customers to readily compare the total shares 
sent to the broker-dealer, as described above, with the total shares 
routed by the broker-dealer, which would shed light on the number of 
shares needed to be routed to fill the institutional orders as well as 
the potential for information leakage. In addition, disclosing the 
total shares routed to each venue in total as well as by order routing 
strategy would provide a customer with information on which venues were 
used in the process of executing its institutional orders, which 
strategies were used for each venue, and the extent of such use. The 
strategies disclosure, coupled with information on fill rates and fee 
models as further described below, would allow customers to determine 
whether its broker-dealers are routing orders consistent with the 
customer's trading objectives. For example, if a broker-dealer routes a 
significant portion of aggressive orders to a venue that pays a rebate 
for removing liquidity and the broker-dealer receives a low fill rate 
from that venue, the customer could ask the broker-dealer why it routes 
orders seeking liquidity to a venue that rarely

[[Page 49454]]

executes those orders and whether doing so is consistent with the 
customer's trading objectives.
---------------------------------------------------------------------------

    \149\ See proposed Rule 606(b)(3)(i)(A).
---------------------------------------------------------------------------

    The proposed rule would also require disclosure of the total number 
of shares routed marked IOC,\150\ and the total number of shares routed 
that were further routable.\151\ The Commission preliminarily believes 
that requiring disclosure of these two order characteristics would 
provide customers a greater understanding of the kind of order flow a 
broker-dealer sends to each venue and how a broker-dealer uses a venue. 
For example, orders that are marked IOC are orders that seek to access 
liquidity at a venue rather than provide liquidity by posting to the 
venue's book. If no contra side interest is available at the venue at 
the order's limit price, the order will be canceled back to the broker-
dealer. A customer could compare the number of shares routed to a venue 
marked as IOC with the total shares routed to a venue to understand 
whether the broker-dealer allows its orders to rest on a venue's book 
or is primarily seeking to access liquidity at a venue. The Commission 
is also proposing to require that the broker-dealer disclose the total 
shares routed that are marked IOC by order routing strategy, which 
would highlight how the broker-dealer utilizes IOC orders in its 
various order routing strategies. For example, a customer could assess 
the rate at which a broker-dealer uses IOC orders by order routing 
strategy and determine if such rate is consistent with its trading 
objectives.
---------------------------------------------------------------------------

    \150\ See proposed Rule 606(b)(3)(i)(B).
    \151\ See proposed Rule 606(b)(3)(i)(C).
---------------------------------------------------------------------------

    In addition, requiring the total shares routed that were further 
routable would allow the customer to understand whether the broker-
dealer allows its orders to be routed by the venue to other venues. 
Such ``re-routing'' of orders creates the potential for information 
leakage every time an order is routed on to another venue. Moreover, 
customers would be able to determine whether their broker-dealers are 
in control of the routing of their orders or are relinquishing control 
of order routing to another entity. In addition, disclosure by order 
routing strategy would highlight how the broker-dealer utilizes 
routable orders in its various order routing strategies. For example, a 
customer could assess the rate at which a broker-dealer uses routable 
orders by order routing strategy and determine if such rate is 
consistent with its trading objectives.
    Finally, the report would require the disclosure of average order 
size routed.\152\ The Commission preliminarily believes that requiring 
disclosure of the average order size routed would provide the customer 
with information on the nature of a venue, how a venue is being used by 
a broker-dealer, and possibly what type of participants use a 
venue.\153\ For example, if the average order size routed to a venue is 
relatively large, a customer may infer that the venue caters to market 
participants that are willing to trade in larger size. In addition, a 
customer could compare the average order size routed to a venue to the 
average fill size at the venue, as described below, to assess the size 
of orders routed relative to the potential execution. If the average 
fill size is relatively equivalent to the average order size routed, 
the customer may infer that the broker-dealer routed the order in a 
manner that minimized information leakage. If the average order size 
routed is greater than the average fill size, the customer may infer 
that the broker-dealer needed to route the order multiple times to 
receive full execution of the order. As noted in Section II.C.4., each 
additional route of an order reveals information about that order and 
such information leakage might cause prices to move in a less favorable 
direction to the detriment of execution quality. In addition, 
disclosure of average order size routed by order routing strategy for 
each venue would allow a customer to better understand the size of 
orders routed by strategy and determine if such size is consistent with 
its trading objectives.
---------------------------------------------------------------------------

    \152\ See proposed Rule 606(b)(3)(i)(D).
    \153\ See Laura Tuttle, Division of Economic and Risk Analysis, 
SEC, OTC Trading: Description of Non-ATS OTC Trading in National 
Market System Stocks, March 2014, available at http://www.sec.gov/marketstructure/research/otc_trading_march_2014.pdf (stating that 
order and trade sizes can provide information on how a venue is 
being used by traders, and possibly what type of participants use a 
venue). The Commission notes that it recently proposed amendments to 
regulatory requirements in Regulation ATS that would assist in 
enabling customers to obtain further detail on the nature of certain 
trading centers. See supra note 65.
---------------------------------------------------------------------------

    The Commission requests comment generally on the order routing 
information proposed in Rule 606(b)(3)(i). In particular, the 
Commission solicits comment on the following:
    50. Do commenters believe that disclosure of the four data points 
(total shares routed, total shares routed marked immediate or cancel, 
total shares routed that were further routable, and average order size 
routed) as proposed in Rule 606(b)(3)(i)(A)-(D) by both venue and 
strategy is useful? Should the four data points be defined? Are there 
other factors or order life cycle audit trail information that should 
be included in order routing information? Should some of the proposed 
factors be modified or eliminated? If so, which one(s) and why?
    51. Do commenters believe it is useful to customers to know the 
total shares marked IOC and that were routed? Would the cancellation 
rate of orders be useful to customers placing institutional orders? Are 
there other order types for which disclosure should be required? If so, 
which types and why? Should broker-dealers be required to disclose all 
order types used to execute customer orders? Please explain.
    52. Do commenters believe that orders that are not only routable, 
but are in fact routed on should also be required to be disclosed? 
Would such re-routing information be useful to customers in determining 
whether their broker-dealers are in control of the routing of their 
orders or are relinquishing control of order routing to another entity? 
Do commenters believe that such re-rerouting information is retrievable 
for broker-dealers? Why or why not?
c. Information on Order Execution
    Within the venue and order routing strategy segmentations described 
above, the Commission also proposes to require disclosure of 
information with respect to order execution.\154\ The Commission 
preliminarily believes that information regarding how institutional 
orders are executed, including fees paid and rebates received for 
executions, is important for customers to better understand and assess 
broker-dealer performance. The Commission proposes to require 
disclosure of: (1) Total shares executed; (2) fill rate; \155\ (3) 
average fill size; \156\ (4) average net execution fee or rebate; \157\ 
(5) total number of shares executed at the midpoint; (6) percentage of 
shares executed at the midpoint; (7) total number of shares executed 
that were priced on the side of the spread more favorable to the 
institutional order; (8) percentage of total shares executed that were 
priced on the side of the spread more favorable to the institutional 
order; (9) total number of shares executed that were priced on the side 
of the spread less favorable to the institutional order; and (10) 
percentage of total shares executed that were priced

[[Page 49455]]

on the side of the spread less favorable to the institutional 
order.\158\
---------------------------------------------------------------------------

    \154\ See proposed Rule 606(b)(3)(ii).
    \155\ Fill rate would be calculated by the shares executed 
divided by the shares routed.
    \156\ Average fill size would be the average size, by number of 
shares, of each order executed on the venue.
    \157\ The fee and rebate would be measured in cents per 100 
shares, specified to four decimal places.
    \158\ See proposed Rule 606(b)(3)(ii).
---------------------------------------------------------------------------

    Disclosing the total shares executed \159\ would provide customers 
with the means to understand how much of its order flow was executed at 
a particular venue and readily compare such information across venues. 
In addition, since the institutional order handling report would also 
be categorized by order routing strategy, disclosing the total shares 
executed would provide customers with the means to understand how much 
of its order flow was executed using passive, neutral, and aggressive 
order routing strategies at each venue. Requiring broker-dealers to 
disclose the total shares executed pursuant to order routing strategies 
could provide customers with more detailed information than they may 
currently receive from their TCA provider. Typically, third-party TCA 
providers do not have access to routing information and therefore would 
not be able to incorporate such information into their TCA offerings.
---------------------------------------------------------------------------

    \159\ See proposed Rule 606(b)(3)(ii)(A).
---------------------------------------------------------------------------

    The Commission preliminarily believes that disclosure of the fill 
rate \160\ would show customers, on a percentage basis, how much of 
their order flow was executed compared to how much of their order flow 
was routed. While customers could compute the fill rate by dividing the 
number of shares executed by the number of shares routed, the 
Commission preliminarily believes that it is useful for the fill rate 
to be disclosed in a separate column of information to allow customers 
to readily compare fill rates without required computations. Such 
execution information would provide customers the opportunity to assess 
how effective a venue is in filling its institutional orders as well as 
how effective particular order routing strategies are at the various 
venues. The fill rate is an important piece of execution information 
that helps customers in assessing execution quality received at a 
trading center, given the customers' strategy. For example, if a 
broker-dealer's aggressive order routing strategies routinely route to 
a venue with a low fill rate, it could prompt a discussion between the 
customer and the broker-dealer to understand the reasons why the 
broker-dealer favors such a low fill rate venue when using such 
strategies. While the broker-dealer may be able to explain its order 
handling practices without the disclosed information, there is 
currently very little transparency on the order handling decisions.
---------------------------------------------------------------------------

    \160\ See proposed Rule 606(b)(3)(ii)(B).
---------------------------------------------------------------------------

    The Commission notes that providing customers' fill rate and 
average fill size \161\ at each venue would allow customers to assess 
whether their broker-dealers are routing its orders to venues that can 
effectively execute the order. This information could be particularly 
useful to customers in comparing their fill rate to the average fill 
size at each venue across its broker-dealers and across a particular 
broker-dealer. For example, if a broker-dealer routinely routes orders 
to a venue with low fill rates, the customer could request from its 
broker-dealer more details regarding such venue, such as the existence 
of any preexisting business relationship or affiliation. Further, if a 
broker-dealer regularly routes orders with large average order size to 
a venue with a high fill rate but a low average fill size, such 
information may indicate to the customer that the broker-dealer might 
not be routing the customer's institutional orders in a manner designed 
to minimize information leakage, because the broker-dealer would need 
to continue to route additional orders to fill the order. Moreover, 
requiring the disclosure pursuant to order routing strategies would 
result in greater transparency into order handling decisions.
---------------------------------------------------------------------------

    \161\ See proposed Rule 606(b)(3)(ii)(C).
---------------------------------------------------------------------------

    As proposed, the report would provide data on the average net 
execution fee or rebate (cents per 100 shares, specified to four 
decimal places).\162\ The average net execution fee or rebate would 
disclose to customers potential economic incentives a broker-dealer 
faces when handling institutional orders. Providing customers with 
details on the economic incentives of broker-dealers at trading centers 
would allow customers to more effectively assess any potential 
conflicts of interest its broker-dealers face when routing its 
institutional orders. For example, with such information, a customer 
would be able to compare the average net execution fee or rebate on 
particular venues in light of other order handling information at the 
venues like the total shares routed and the fill rate. If a broker-
dealer routes a large number of shares to a venue with a low fill rate 
but that venue provides a significant rebate for orders executed, a 
customer may seek to inquire about the benefits of routing such a large 
amount of order flow to that venue.
---------------------------------------------------------------------------

    \162\ See proposed Rule 606(b)(3)(ii)(D).
---------------------------------------------------------------------------

    The Commission acknowledges that, depending on the arrangement 
between a broker-dealer and its institutional customer, a broker-dealer 
may directly pass on execution fees and rebates to its institutional 
customer. In such instance, any economic incentives to route orders to 
certain trading centers would not present a potential conflict of 
interest, as the broker-dealer would not be benefiting from receipt of 
fees or rebates. The Commission preliminarily believes that a broker-
dealer that directly passes on execution fees or rebates to its 
customers should nonetheless provide the average net execution fee or 
rebate in the report so that, among other things, the customer has a 
means to verify that no conflict of interest existed between the 
broker-dealer and a particular trading center through comparing the 
execution fees and rebates it received directly through its broker-
dealer to the average net execution fee or rebate disclosed in the 
report.
    Moreover, broker-dealers would be required to disclose the average 
net execution fee or rebate by order routing strategy. Such disclosure 
would allow customers to assess whether there are conflicts of interest 
in the broker-dealer's routing decision. For example, if in connection 
with an aggressive order routing strategy, the broker-dealer routinely 
routes orders that remove liquidity to venues with rebates for removing 
liquidity but a low fill rate, it may indicate to the customer that the 
broker-dealer may not be acting consistent with the customer's trading 
objectives.
    The report would further disclose the total number of shares 
executed at the midpoint and the percentage of shares executed at the 
midpoint.\163\ Many trading centers offer users the ability to post 
orders at the midpoint of the NBBO, and incoming marketable orders can 
execute against such orders.\164\ Midpoint execution information would 
provide a customer with greater information on the execution quality of 
the venue and the type of liquidity resting at a venue. For example, 
the midpoint is generally considered to be a higher quality execution 
than the NBBO because both the buyer and the

[[Page 49456]]

seller receive price improvement over the best displayed price, and an 
order at the midpoint generally has less impact on price since the 
execution does not remove the best displayed price.\165\ Customers 
would be able to examine when they receive midpoint price improvement 
and at which venues. Coupled with the other required disclosures such 
as the average net execution fee or rebate and fill rate, customers 
could further assess the potential for conflicts of interest facing 
their broker-dealers that may affect the broker-dealer's institutional 
order routing practices. For example, if a broker-dealer routes a large 
number of shares to a venue that provides a significant rebate for 
orders executed but where the customer receives a low fill rate and a 
low percentage of its shares executed at the midpoint, a customer may 
seek to question the broker-dealer regarding the benefits of routing 
such a large amount of order flow to that venue. As proposed, broker-
dealers would also be required to disclose the total number of shares 
executed at the midpoint and the percentage of shares executed at the 
midpoint by order routing strategy, which should allow customers 
greater insights into which order routing strategies generate midpoint 
executions and which venues are providing midpoint executions.
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    \163\ See proposed Rule 606(b)(3)(ii)(E)-(F). The midpoint would 
be the price halfway between the national best bid and national best 
offer.
    \164\ See, e.g., Rule 11.9(c)(9) of the Bats BZX Exchange, Inc. 
(``Bats BZX'') (defining Midpoint Peg Order); Rule 4702(d) of The 
NASDAQ Stock Market LLC (defining Midpoint Pegging); Robert P. 
Bartlett, III and Justin McCrary, Dark Trading at the Midpoint: 
Pricing Rules, Order Flow and Price Discovery (February 12, 2015) 
(``Bartlett and McCrary Paper''), available at http://www.stern.nyu.edu/sites/default/files/assets/documents/2%20Bartlett%20and%20McCrary%20Shall%20We%20Haggle.pdf (describing 
midpoint trading on non-exchange venues).
    \165\ See, e.g., Bartlett and McCrary Paper, supra note 164 
(stating that midpoint of the NBBO is a form of trading that is 
generally considered to have significant benefits for institutional 
investors).
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    The report would also require disclosure of the total number and 
percentage of shares executed that were priced on the side of the 
spread more favorable to the institutional order and the total number 
and percentage of shares executed that were priced on the side of the 
spread less favorable to the institutional order.\166\ Information with 
respect to which side of the spread orders executed on would help 
customers assess the execution quality their institutional orders 
received, which in connection with the order routing strategy 
disclosures and the fees and rebates disclosures, would allow customers 
to better evaluate the performance of its broker-dealers. For example, 
if the customer's strategy is to be passive, but its broker-dealer is 
frequently routing orders to a venue or venues that are taking 
liquidity at the side of the spread less favorable to the institutional 
order, then the customer could further inquire about the broker-
dealer's rationale for routing to such venue. The Commission 
preliminarily believes that requiring these granular details of how 
institutional shares are executed should provide customers with more 
information to evaluate the quality of their broker-dealers' order 
handling services.
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    \166\ See proposed Rule 606(b)(3)(ii)(G)-(J).
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    Comment is generally requested on order execution information as 
proposed in Rule 606(b)(3)(ii). In particular, the Commission solicits 
comment on the following:
    53. Should any of the terms in proposed Rule 606(b)(3)(ii) be 
defined? Should the information proposed to be required be modified in 
any way, should additional information related to order execution be 
required, or should any proposed requirement be omitted? Please 
explain.
    54. Do commenters believe that the required order execution 
information would be useful to institutional customers? Please explain 
with respect to each of the proposed institutional order disclosure 
categories.
    55. Do commenters believe that disclosures regarding fill rates and 
average fill size would assist institutional customers in understanding 
how much of their orders are executed at a venue versus routed on to 
another venue? Are there other data that would be useful in analyzing 
order execution?
    56. Would disclosures related to execution fees and rebates be 
useful to institutional customers? Would this information support an 
evaluation of a broker-dealer's potential economic incentives and/or 
conflicts of interest to route and/or execute orders at a particular 
venue? Please provide support for your arguments.
    57. Do commenters believe that the total number and percentage of 
shares executed at the midpoint indicate higher quality executions? 
Would this information be useful to customers interested in examining 
their institutional order execution quality? Please explain.
    58. Do commenters believe that information on the shares executed 
on the side of the spread favorable or less favorable to the 
institutional order would be useful to institutional customers in 
analyzing their broker-dealer's order handling practices? What other 
order execution data, if any, would be useful to customers? Would 
information on shares executed against displayed or undisplayed 
liquidity be useful? Should any of the proposed requirements be 
modified or eliminated? If so, which ones and why? Please provide 
support for your arguments.
    59. Do commenters believe that the proposed data points outlined 
above would provide customers with meaningful information? Would the 
proposed disclosures allow customers to better assess the execution 
quality of their broker-dealer? Would the report further permit 
customers to compare execution quality among multiple broker-dealers 
across the market? Would the report, as proposed, allow customers to 
more easily monitor for best execution?
d. Information on Orders That Provided Liquidity
    In addition to the order routing and execution data detailed above, 
the Commission proposes to require disclosure of information on 
institutional orders that provided liquidity within the venue and order 
routing strategy segmentations described above.\167\ In connection with 
this new requirement, the Commission proposes to define the term 
``orders providing liquidity'' to mean ``orders that were executed 
against after resting at a trading center.'' \168\ Generally, orders 
providing liquidity are submitted as non-marketable limit orders and 
are kept in a limit order book awaiting execution. The Commission 
preliminarily believes that by defining ``orders providing liquidity'' 
and ``orders removing liquidity'' (described in more detail below), 
broker-dealers would be able to classify orders pursuant to a 
standardized description for disclosure purposes.
---------------------------------------------------------------------------

    \167\ See proposed Rule 606(b)(3)(iii).
    \168\ See proposed Rule 600(b)(55).
---------------------------------------------------------------------------

    The Commission preliminarily believes that disclosure of 
information on institutional orders that provided liquidity is 
important for customers to better understand to which venues the 
broker-dealer routes liquidity providing orders, how long it takes to 
execute such orders at each venue, and the fees paid to or rebates 
received by the broker-dealer at each venue for liquidity providing 
orders. The Commission proposes to require disclosure of: (1) Total 
number of shares executed of orders providing liquidity; (2) percentage 
of shares executed of orders providing liquidity; (3) average time 
between order entry and execution or cancellation for orders providing 
liquidity (in milliseconds); and (4) the average net execution rebate 
or fee for shares of orders providing liquidity (cents per 100 shares, 
specified to four decimal places).\169\
---------------------------------------------------------------------------

    \169\ See proposed Rule 606(b)(3)(iii).
---------------------------------------------------------------------------

    The information on orders that provided liquidity would include the 
total number of shares executed of orders providing liquidity and the

[[Page 49457]]

percentage of shares executed of orders providing liquidity.\170\ The 
Commission preliminarily believes that the total number of shares 
executed of institutional orders providing liquidity would inform an 
institutional customer of how much of its order flow provided liquidity 
at each venue and by order routing strategy. Such information is 
important for an institutional customer to understand how a broker-
dealer is implementing its order execution and routing strategies and 
at what venues. The Commission also preliminarily believes that the 
percentage of shares executed of orders providing liquidity would be 
useful for an institutional customer to readily assess the amount of 
shares that provided liquidity at a venue in comparison to the total 
number of shares executed at the venue. Since broker-dealers would also 
be required to disclose this information by order routing strategy, 
institutional customers would have further data to better understand 
and analyze how a broker-dealer routes orders for various strategies 
and the potential effect on execution quality.
---------------------------------------------------------------------------

    \170\ See proposed Rule 606(b)(3)(iii)(A)-(B).
---------------------------------------------------------------------------

    The institutional order handling report also would require data on 
the average time between order entry and execution or cancellation for 
orders that provided liquidity prior to execution or cancellation.\171\ 
The average time between order entry and execution or cancellation for 
orders that provided liquidity would be measured in milliseconds, 
which, due to the speed of trading in today's equity markets, the 
Commission preliminarily believes is an appropriate measure. Disclosing 
the average length of time orders rest at venues before they are either 
executed or canceled could provide insight into how a broker-dealer 
utilized venues when seeking to execute institutional orders, 
specifically how long orders rest on order books before receiving an 
execution or being canceled and sent back to the broker-dealer for 
further handling. The Commission preliminarily believes that depending 
on the order routing strategy, the average length of time that orders 
are posted to a venue, and thus providing liquidity, could help 
indicate empirically whether the broker-dealer is appropriately 
implementing a customer's desired order routing strategy. For example, 
if a customer wanted its broker-dealer to handle its institutional 
order using a neutral order routing strategy, such strategy would 
generally seek to provide liquidity and not aggressively cross the 
spread, but speed of execution would still be of relative concern. A 
venue that pays a significant rebate for shares of orders providing 
liquidity would most likely have a deep book as many liquidity 
providing orders would post on that venue's book in order to receive 
the rebate. Due to the depth of book, the likelihood of receiving an 
execution for a liquidity providing order on that venue could be low 
and the average time between order entry and execution or cancellation 
for orders that provided liquidity could be relatively long. In 
combination with the average net execution rebate or fee for shares 
that provided liquidity, described below, customers could use the 
average time between order entry and execution or cancellation for 
orders being posted at that venue to assess how their broker-dealers 
are implementing order routing strategies or whether their broker-
dealers may be influenced by the high rebate at such venue, in conflict 
with the customer's interests.
---------------------------------------------------------------------------

    \171\ See proposed Rule 606(b)(3)(iii)(C).
---------------------------------------------------------------------------

    The report would also contain the average net execution rebate or 
fee for shares of orders providing liquidity.\172\ The Commission 
proposes that the average net execution rebate or fee would be 
calculated in cents per 100 shares, specified to four decimal places, 
to correspond to current industry execution rebate and fee practices 
\173\ and to ensure consistency in reporting among broker-dealers.\174\ 
The Commission preliminarily believes that disclosing the average net 
execution rebate or fee for shares of orders providing liquidity at 
each venue and by order routing strategy would allow customers to 
assess potential conflicts of interest from economic incentives facing 
their broker-dealers with regard to the venues to which broker-dealers 
route orders and the order routing strategies that use those venues. 
For example, if a broker-dealer routes orders that provide liquidity to 
the venues with the highest rebate, and orders that remove liquidity to 
the venues with the lowest take fee, a customer could then examine the 
fill rates at those venues to determine whether there is potential for 
conflicts of interest with respect to the broker-dealer's own economic 
interest.\175\ The Commission preliminarily believes that this 
information will be useful for customers to understand, and assess the 
potential effect of, economic incentives on execution quality.
---------------------------------------------------------------------------

    \172\ See proposed Rule 606(b)(3)(iii)(D).
    \173\ See, e.g., Bats BZX Exchange, Inc. Fee Schedule, available 
at http://www.batstrading.com/support/fee_schedule/bzx/; Rule 7018 
of The NASDAQ Stock Market LLC, available at http://nasdaq.cchwallstreet.com/NASDAQTools/PlatformViewer.asp?selectednode=chp%5F1%5F1%5F4%5F6&manual=%2Fnasdaq%2Fmain%2Fnasdaq%2Dequityrules%2F (pricing execution fees and rebates 
to four decimal places).
    \174\ See proposed Rule 606(b)(3)(iii)(D).
    \175\ Typically, broker-dealers pay fees and receive rebates 
that result from routing orders of retail customers. For orders from 
institutional customers, it depends on the arrangement between an 
institutional customer and a broker-dealer: the broker-dealer may 
pay fees and receive rebates that result from routing orders of the 
institutional customer, or the broker-dealer may pass those fees and 
rebates through to the institutional customer. In the case where a 
broker-dealer passes the fees and rebates through to the customer, 
there would not be potential conflicts of interest in the broker-
dealer's order routing decisions with respect to fees and rebates.
---------------------------------------------------------------------------

    The Commission requests comment on the disclosure requirements 
pertaining to institutional orders that provide liquidity as proposed 
in Rule 606(b)(3)(iii). In particular, the Commission solicits comment 
on the following:
    60. The Commission proposes to define ``orders providing 
liquidity.'' Do commenters believe that this term should be defined? Is 
the proposed definition useful to broker-dealers in categorizing an 
order for reporting purposes? Should it be modified in any way, 
including adding additional criteria? Why or why not?
    61. Do commenters believe that the total number of shares executed 
of orders providing liquidity is the appropriate data to inform 
customers how much of its order flow provided liquidity? Are there 
other data factors that the Commission should consider?
    62. Does the percentage of shares executed of orders providing 
liquidity provide information customers could use to evaluate how a 
broker-dealer is implementing its order execution and routing 
strategies and at what venues? Would this information be useful to 
customers in analyzing and potentially modifying their trading 
instructions or choosing a broker-dealer for order routing and 
execution services?
    63. Do commenters believe that the average time between order entry 
and execution or cancellation (measured in milliseconds) for orders 
providing liquidity will be an appropriate measure of whether the 
broker-dealer is implementing a customer's order instructions? If not, 
why not? Do commenters believe that the ``average'' is the appropriate 
measure to gauge the amount of time an order is resting on the book? 
What are alternative data points or measurements that would achieve the 
same goal? Separately, is milliseconds an appropriate measure? If not, 
what would be more appropriate? Are there other time measures and/or 
data that would be useful to institutional customers in evaluating

[[Page 49458]]

whether the broker-dealer is implementing their order instructions? If 
so, please explain and provide data to support your argument.
    64. Do commenters believe that disclosing the average net execution 
rebate or fee for shares of orders providing liquidity at each venue 
and by order routing strategy would be useful in assessing potential 
conflicts of interest broker-dealers may face with regard to routing 
venues and the order routing strategies that use those venues?
    65. Do commenters believe that specifying the average net execution 
fee or rebate to four decimal places is appropriate? If not, to what 
level of precision should the fee or rebate be specified? Please 
explain and provide data for your argument.
e. Information on Orders That Removed Liquidity
    Similarly to orders that provided liquidity, the Commission 
proposes to require the disclosure of information on institutional 
orders that removed liquidity within the venue and order routing 
strategy segmentations described above.\176\ Related to this new 
disclosure, the Commission proposes to define the term ``orders 
removing liquidity'' to mean ``orders that executed against resting 
trading interest at a trading center.'' \177\ Generally, orders that 
remove liquidity are marketable orders that are immediately executable 
when routed to a venue and execute against and remove orders that are 
resting on a trading center's order book. The Commission preliminarily 
believes that the defined term should reduce any potential broker-
dealer confusion when distinguishing orders for reporting purposes and 
would allow all broker-dealers to more consistently designate certain 
orders as orders removing liquidity.
---------------------------------------------------------------------------

    \176\ See proposed Rule 606(b)(3)(iv).
    \177\ See proposed Rule 600(b)(56).
---------------------------------------------------------------------------

    The Commission preliminarily believes that disclosure of 
information on institutional orders that removed liquidity will be 
useful for customers to understand which venues their broker-dealers 
route liquidity removing orders to and the fees paid or rebates 
received at each venue for such orders. The Commission proposes to 
require disclosure of: (1) Total number of shares executed of orders 
removing liquidity; (2) percentage of shares executed of orders 
removing liquidity; and (3) average net execution fee or rebate for 
shares of orders removing liquidity (cents per 100 shares, specified to 
four decimal places).\178\
---------------------------------------------------------------------------

    \178\ See proposed Rule 606(b)(3)(iv)(A)-(C).
---------------------------------------------------------------------------

    As proposed, the report would require data on the total number of 
shares executed and the percentage of shares executed of orders 
removing liquidity.\179\ The Commission preliminarily believes the 
number of shares and the percentage of shares executed that removed 
liquidity at each venue would allow the customer to understand how much 
of its total institutional orders removed liquidity at a particular 
venue, as well as by order routing strategy. Coupled with the 
information on fill rates, customers could assess the risk of 
information leakage and the potential effect of the broker-dealer's 
routing practices on execution quality. For example, many market 
participants monitor their and other bids and offers for executions. 
When an execution occurs on one venue, market participants may adjust 
their bids or offers on other venues to take into account that there 
may be more trading interest to follow, which could result in prices 
moving away from the institutional order and ultimately resulting in 
the institutional order receiving a worse overall price for the full 
size of the institutional order. Indeed, the risk of information 
leakage and its potential negative impact on execution quality may be 
significant, if a broker-dealer routinely routes orders removing 
liquidity to a venue with insufficient liquidity to fill the orders. 
Using the proposed disclosures, customers could assess whether their 
broker-dealers routed their institutional orders that removed liquidity 
in the most effective manner to reduce the potential that prices move 
against the institutional order.
---------------------------------------------------------------------------

    \179\ See proposed Rule 606(b)(3)(iv)(A)-(B).
---------------------------------------------------------------------------

    The institutional order handling report also would require 
disclosure of the average net execution fee or rebate for shares of 
orders that removed liquidity. Parallel to the information on orders 
providing liquidity, the average net execution fee or rebate for orders 
removing liquidity would be calculated in cents per 100 shares, 
specified to four decimal places, to correspond to current industry 
practice and to ensure consistency in reporting among broker-
dealers.\180\ Additionally, similar to the information on orders 
providing liquidity, this information would allow customers to examine 
the venues chosen by their broker-dealers, the order routing strategies 
used, and the economic interests motivating such choices. If a broker-
dealer routinely routes orders that remove liquidity to a venue that 
pays a rebate to the broker-dealer or charges the lowest fee, the 
customer could examine whether there is a conflict of interest that 
affects how the broker-dealer handles its institutional orders, and if 
so, whether that conflict of interest has a negative impact on 
execution quality.
---------------------------------------------------------------------------

    \180\ See proposed Rule 606(b)(3)(iv)(C).
---------------------------------------------------------------------------

    The Commission requests comment on disclosures for institutional 
orders that remove liquidity as proposed in Rule 606(b)(3)(iv). In 
particular, the Commission solicits comment on the following:
    66. The Commission proposes to define ``orders removing 
liquidity.'' Do commenters believe that this term should be defined? Is 
the proposed definition useful to broker-dealers in categorizing an 
order for reporting purposes? Should it be modified in any way, 
including adding additional criteria? Why or why not?
    67. Do commenters believe that the total number of shares executed 
of orders removing liquidity is the appropriate data to inform 
customers how much of its order flow removed liquidity? Are there other 
data factors that the Commission should consider?
    68. Does the percentage of shares executed of orders removing 
liquidity provide information customers could use to evaluate how a 
broker-dealer is implementing its order execution and routing 
strategies and at what venues? Would this information be useful to 
customers in analyzing and potentially modifying their order 
instructions and/or choosing a broker-dealer for order routing and 
execution services?
    69. Do commenters believe that the average net execution fee or 
rebate for shares of orders removing liquidity at each venue and by 
order routing strategy would be useful in assessing potential conflicts 
of interest broker-dealers may face with regard to routing venues and 
the order routing strategies that use those venues?
    70. Do commenters believe that specifying the average net execution 
fee or rebate to four decimal places is appropriate? To what level of 
precision should the fee or rebate be specified? Please explain and 
provide data for your argument.
5. Public Report for Institutional Orders
    The institutional order handling disclosures, described above, 
would provide detailed information to a requesting customer with regard 
to how all of its institutional orders were handled by a broker-dealer, 
broken down by calendar month. The Commission preliminarily believes 
that a publicly disclosed aggregated report (aggregating all customer 
information) could provide additional transparency into the broader 
institutional order

[[Page 49459]]

handling practices of broker-dealers, which could, in turn, allow for 
more efficient and effective comparisons of the quality of services 
offered by broker-dealers. As noted above, in today's complex equity 
markets, it may be difficult for customers to assess the order handling 
services of multiple broker-dealers without standardized order handling 
disclosures, particularly the services of broker-dealers with which 
they do not have a relationship.
    The Commission preliminarily believes that aggregated public 
disclosure of the information contained in the customer-specific 
institutional order handling reports, described above, would be useful 
to institutional customers and other market participants to determine 
whether to engage the services of a broker-dealer as well as the 
ability to gauge the adequacy of the services performed by a broker-
dealer. The public disclosure by broker-dealers of aggregated 
institutional order handling information should promote competition as 
broker-dealers may seek to differentiate their services and expertise 
in an effort to retain current customers and attract the business of 
prospective customers. Indeed, the Commission preliminarily believes 
that public disclosure of institutional order handling information by 
each broker-dealer would provide market participants with useful 
information and could bring competitive forces to bear on broker-dealer 
institutional order handling services. Accordingly, the Commission 
preliminarily believes that aggregated public institutional order 
handling reports would increase the overall transparency of 
institutional order handling practices to the benefit of customers and 
the marketplace as a whole.
    The Commission proposes to require a broker-dealer that receives 
institutional orders to make publicly available \181\ a report that 
aggregates the information required for customer-specific institutional 
order handling reports, described above, for all institutional orders 
it receives.\182\ Broker-dealers would be required to make such report 
publicly available for each calendar quarter, broken down by calendar 
month, within one month after the end of the quarter.\183\ This public 
aggregated institutional order handling report would be mandatory for 
all of the institutional orders that a broker-dealer handles within a 
calendar quarter regardless of whether any of its customers request 
customer-specific institutional order handling reports.
---------------------------------------------------------------------------

    \181\ The Commission notes that ``make publicly available'' is 
defined in Rule 600(b)(36) of Regulation NMS to mean ``posting on an 
Internet Web site 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.'' See 17 CFR 242.600(b)(36).
    \182\ See proposed Rule 606(c).
    \183\ See id.
---------------------------------------------------------------------------

    Similar to the customer-specific institutional order handling 
reports required under proposed Rule 606(b), the public aggregated 
institutional order handling report would be made available using an 
XML schema and associated PDF renderer to be published on the 
Commission's Web site.\184\ The Commission preliminarily believes that 
requiring the public aggregated institutional order handling reports be 
provided in this format would be useful to customers as it would allow 
them to more easily analyze and compare the data provided in both types 
of reports, for the reasons discussed above, and would allow market 
participants generally to analyze and compare broker-dealer 
institutional order handling practices.\185\
---------------------------------------------------------------------------

    \184\ See supra Section II.A.3.
    \185\ See id.
---------------------------------------------------------------------------

    In addition, the Commission proposes to require that broker-dealers 
keep such public aggregated institutional order handling reports posted 
on an Internet Web site that is free and readily accessible to the 
public for a period of three years from the initial date of posting on 
the Internet Web site.\186\ The Commission preliminarily believes that 
making this historical data available to customers and the public 
generally will be useful to those seeking to analyze past order 
handling behavior of a broker-dealer or across multiple broker-dealers. 
To further support customers' usage of the public aggregated 
institutional order handling reports, the Commission notes that it 
would be incumbent upon the broker-dealer to maintain accurate order 
handling data during the three year period.
---------------------------------------------------------------------------

    \186\ The Commission notes that it is proposing similar 
reporting format and accessibility requirements for quarterly 
reports on retail order routing in Rule 606(a)(1), which is 
discussed in more detail in Section III.B.4. below.
---------------------------------------------------------------------------

    The Commission recognizes that broker-dealers have proprietary 
methods for order handling, and is cognizant of the sensitive nature of 
such business practices and intellectual property. The Commission 
preliminarily believes that the risk of exposing sensitive proprietary 
information on the broker-dealers' order handling techniques would be 
minimal due to the structure of the proposed report and by aggregating 
the information to be publicly disclosed. Like the proposed customer-
specific institutional order handling reports, the proposed public 
aggregated institutional order handling report would aggregate a 
broker-dealer's order handling information for all NMS stocks for the 
reporting period, and, therefore, the Commission preliminarily believes 
other market participants would not be able to ascertain which 
particular securities were routed during the reporting period. 
Additionally, as routing decisions are generally dependent on the 
market for the particular security at the time of routing, the 
Commission preliminarily believes that public aggregated institutional 
order handling reports for the prior calendar quarter would not provide 
other market participants, including a broker-dealer's competitors, 
sensitive information about a broker-dealer's order handling 
techniques.
    Further, while the public aggregated institutional order handling 
report would provide information on the venues to which a broker-dealer 
routed its institutional order flow as well as the three categories of 
order routing strategies used to route those orders, the report would 
not provide any information about the manner or sequence in which those 
orders were routed to the venues. For example, the report would not 
disclose whether the broker-dealer routed orders sequentially or 
simultaneously to multiple trading centers in order to fully execute an 
institutional order, or the sequence in which such orders were routed 
to trading centers. Because such information is essential to 
effectively reverse engineer an order routing algorithm, the Commission 
preliminarily believes that the proposed public aggregated 
institutional order handling information would not provide other market 
participants with the information to reverse engineer a broker-dealer's 
proprietary order handling techniques, regardless of the number of 
orders a broker-dealer routes or the number of institutional customers 
for which a broker-dealer routes orders during the reporting period. 
Accordingly, the Commission preliminarily believes that information 
contained in the proposed public aggregated institutional order 
handling report should provide appropriate safeguards for broker-
dealers' current business practices, while, at the same time, providing 
meaningful information for customers and others to compare broker-
dealers' order routing services.
    The Commission also preliminarily believes that the risk of 
exposing sensitive customer-specific information would be minimal due 
to the structure of the proposed report and by aggregating the 
information to be

[[Page 49460]]

publicly disclosed. As noted above, the proposed public aggregated 
institutional order handling report would aggregate order handling 
information for all NMS stocks for the reporting period and would not 
disclose the customers of the broker-dealer. To the extent a broker-
dealer only had one or a few institutional customers to which it 
provided routing services, market participants could presume a 
customer's orders were included in the public aggregated institutional 
order handling report, but only to the extent the market participants 
knew of the routing relationship. However, even if a market participant 
is aware of such routing relationship, because the proposed public 
aggregated institutional order handling report would not disclose the 
specific securities routed and the historical data would reflect only 
previous calendar quarters, the Commission preliminarily believes that 
public disclosure would not expose sensitive information of the 
institutional customers.
    The Commission understands that many customers currently request 
information about a broker-dealer's order handling practices before 
engaging its services.\187\ Generally, these requests are 
questionnaires regarding order routing strategies used by the broker-
dealer and the venues to which the broker-dealer routes orders.\188\ 
The Commission understands that the information requested in the 
questionnaires and the responses provided are generally not uniform, 
and, therefore, not readily comparable across multiple broker-dealers. 
While customers would continue to be able to use their specific 
questionnaires, the Commission preliminarily believes that a 
standardized report reflecting the order handling information for all 
of a broker-dealer's institutional orders for the past calendar quarter 
would greatly enhance their ability to understand how the broker-dealer 
routes and executes institutional orders and would also allow them to 
compare the execution quality of their orders against the execution 
quality of all of a broker-dealer's institutional orders. In addition, 
the standardized structure of the public aggregated institutional order 
handling report would provide all customers, regardless of size or 
sophistication, with the means to compare and contrast how broker-
dealers implement passive, neutral, and aggressive order routing 
strategies, and the quality of executions received with respect to such 
strategies.
---------------------------------------------------------------------------

    \187\ See TM Memo re Morgan Stanley I, supra note 43.
    \188\ See id.
---------------------------------------------------------------------------

    Moreover, the public disclosure of aggregated institutional order 
handling information would provide academics and others, including 
third-party vendors offering analytical services, access to order 
routing and execution information that would not otherwise be 
available.
    Finally, the Commission notes that the proposed public aggregated 
institutional order handling reports differ from the current reports on 
retail order routing required pursuant to Rule 606(a).\189\ The 
Commission preliminarily believes that such distinction is appropriate 
because institutional orders are generally large and may be complex, in 
contrast to retail orders that are of smaller size, utilize different 
routing strategies, and which typically have less impact on the market. 
Specifically, due to the large size of institutional orders, it may be 
difficult to fully fill the orders by executing against displayed bids 
or offers resting on a trading center. Instead, institutional orders 
are often broken up into child orders, routed to multiple trading 
centers, and filled at multiple price levels which may result in 
potential information leakage \190\ and unfavorable price movement to 
the institutional order.\191\ As such, broker-dealers often employ more 
complex order routing strategies when handling institutional orders to 
reduce the potential information leakage and unfavorable price 
movement.\192\ Conversely, marketable retail orders are generally 
internalized by broker-dealers at prices at or slightly better than the 
NBBO, with very little risk of information leakage and impact on the 
market. If not internalized, retail orders, due to their smaller size 
are typically routed to a single trading center and fully executed. 
While the potential for information leakage of a retail order is low, 
even if order information is exposed, there is little influence on the 
retail order as it would likely already be fully executed. Due to these 
differences, the Commission preliminarily believes that because retail 
orders are not subjected to similar risks of potential information 
leakage and disadvantageous price impact as with institutional orders, 
the use of the proposed aggregated reporting of information for 
institutional orders--including order routing and execution and orders 
providing and removing liquidity--to among other things, monitor 
broker-dealers' management of these risks would not be pertinent for 
retail orders.
---------------------------------------------------------------------------

    \189\ Rule 606(a) currently requires the reporting of the 
percentage of total orders that were non-directed orders, and the 
percentages of total non-directed orders that were market orders, 
limit orders, and other orders, the percentages of such orders 
routed to the Specified Venue, and a discussion of the material 
aspects of the broker-dealer's relationship with each Specified 
Venue (including a description of any arrangement for payment for 
order flow and any profit-sharing relationship). See 17 CFR 
242.606(a)(1).
    \190\ See Bunge Article, supra note 69.
    \191\ See Bartlett and McCrary Paper, supra note 164, at 5 
(discussing order size and its relation to price impact).
    \192\ See Concept Release on Equity Market Structure, supra note 
2, at 3602.
---------------------------------------------------------------------------

    The Commission requests comments on information contained in the 
public aggregated institutional order handling reports by broker-
dealers. In particular, the Commission solicits comment on the 
following:
    71. Do commenters believe that aggregated institutional order 
handling information being publicly disclosed would be useful to 
institutional customers and other market participants? Who would it be 
useful to and in what ways?
    72. Do commenters believe that the aggregated institutional order 
handling information proposed by Rule 606(c) should be disclosed for 
both retail and institutional orders, rather than only for 
institutional orders as proposed? Why or why not? Please provide 
support for your argument.
    73. Should the public aggregated institutional order handling 
report include all the data points enumerated in proposed Rule 
606(b)(3)(i)-(iv)? Why or why not? If not, which data points should be 
excluded or modified? Are there other data points the Commission should 
consider that would be useful to customers and the public? Please 
explain and provide data, if possible.
    74. Do commenters believe that broker-dealers should be required to 
provide the public aggregated institutional order handling report in 
the proposed format? Why or why not? Do commenters believe that 
providing the report in a structured XML format will facilitate 
comparison of the data across broker-dealers? If not, why not? Do 
commenters believe that a structured XML format would be useful to 
customers and other market participants, and if so how? What 
incremental costs or savings would broker-dealers incur in providing 
the report in a structured XML format? Should the Commission consider 
alternative formats? If so, please explain the alternative formats and 
associated benefits and costs. Do commenters believe that it would be 
useful for broker-dealers to also provide the report in an instantly 
readable PDF format? If not, why not? Are there other formats

[[Page 49461]]

that would be more appropriate? If so, please explain the alternative 
formats and benefits and costs.
    75. Do commenters believe that the rule should include a de minimis 
exemption for broker-dealers that receive, in the aggregate, less than 
a certain threshold number or dollar value of institutional orders? Why 
or why not? If so, what would be the appropriate threshold number or 
dollar value of institutional orders a broker-dealer should need to 
receive from all customers in the aggregate before it would be required 
to provide the public order handling reports? Please explain. 
Separately, are there alternative approaches to reduce the compliance 
costs on broker-dealers with few institutional customers? Please 
provide data to support your arguments.
    76. Regarding broker-dealers with a small number of institutional 
customers, do commenters believe there is a potential risk of exposing 
the customer's sensitive, proprietary information in an aggregated 
report? Should the Commission make any modifications to the proposed 
disclosures or eliminate any or all of the proposed requirements under 
certain circumstances? If so, what is the appropriate measure? Please 
provide support for your argument.
    77. Do commenters believe that a broker-dealer that routes less 
than a certain number of orders should be exempt from the public 
disclosure requirement? Why or why not? What is an appropriate 
threshold for this potential exemption? Separately, are there 
alternative approaches to reduce the compliance costs on broker-dealers 
who route and execute few institutional orders? Please provide data to 
support your arguments. What information, if any, should the broker-
dealer be required to provide to customers and/or the public if it 
relies on the potential exemption?
    78. Do commenters believe that the public reports would be useful 
to customers and the public in comparing the quality of services 
offered by broker-dealers? Do commenters believe that public disclosure 
of aggregated institutional order handling information will enhance 
competition among broker-dealers?
    79. Do commenters believe that publicly releasing aggregated 
institutional order handling reports on a quarterly basis is 
appropriate? Should the report be publicly disclosed at a different 
interval, such as monthly? Please explain.
    80. Do commenters believe that the requirement that the reports be 
broken down by calendar month is useful? Should the report be broken 
down with a different interval(s)? Please explain.
    81. Do commenters believe that the aggregated institutional order 
handling information will be stale if published one month after the end 
of the quarter? Should the disclosures be available earlier or later? 
Please explain.
    82. Will aggregating the information being publicly disclosed 
mitigate the risk that the disclosure will reveal sensitive, 
proprietary information about the broker-dealer's order handling 
practices? Will it mitigate the risk that the disclosure will reveal 
sensitive proprietary information about customers' trading strategies? 
Why or why not? Are there alternative approaches to protecting such 
information while still requiring the public disclosure of meaningful 
order handling information? Are there other benefits or risks 
associated with publicly disclosing aggregated institutional order 
handling information?
    83. Should the Commission require that each quarterly report be 
publicly available for a designated amount of time? If so, is three 
years a reasonable amount of time that the reports should be available? 
Would a shorter or longer period be more appropriate? How, if at all, 
would a shorter or longer disclosure period impact investors placing 
orders or broker-dealers? Please explain.
    84. Should the Commission require all broker-dealers to make their 
aggregated institutional order handling reports available on one 
centralized Web site? For example, should all broker-dealer reports be 
available on the SEC's Web site? Alternatively, should the SEC's Web 
site have hyperlinks to the Web sites of broker-dealers where they 
display their aggregated reports? Why or why not?
    85. As proposed, broker-dealers would be required to ``make 
publicly available,'' as defined in Rule 600(b)(36) of Regulation NMS, 
their aggregated public institutional order handling reports, which 
means, among other things, that such reports must be posted on an 
Internet Web site that is free and readily accessible to the public. Do 
commenters believe that broker-dealers might place restrictions on or 
impediments to obtaining the reports from their own Web sites, such as 
requiring agreement with certain terms, conditions, or provisions prior 
to being provided access to the reports? If so, what would be the costs 
and benefits of those restrictions or impediments? Please explain.
    86. Should the Commission require that the aggregated institutional 
order handling reports be filed with or furnished to the SEC? Should 
the Commission require that the individual order handling reports 
provided to customers with institutional orders be filed with or 
furnished to the SEC? Why or why not?

B. Disclosures for Retail Orders

    As noted above, changes to market structure and order routing 
practices have led the Commission to analyze the current requirements 
for retail orders under Rule 606. Currently, Rule 606 reports allow 
customers to assess order routing and execution services of broker-
dealers with respect to retail orders. Additionally, the Rule 606 
reports are used by broker-dealers as a means to compare their order 
routing and execution services to that of other firms.\193\ Some market 
participants have stated that public disclosure of meaningful data in 
Rule 606 reports can assist broker-dealers in evaluating their own 
trade execution performance relative to other firms.\194\ The 
Commission preliminarily believes that Rule 606 reports spur 
competition among broker-dealers to provide enhanced order routing 
services and better execution quality, which in turn motivates trading 
centers to deliver more efficient and innovative execution services as 
they compete for order flow. The Commission preliminarily believes that 
investors ultimately benefit from such enhanced competition, as broker-
dealers continually seek to enhance their order routing and execution 
services to achieve better execution quality for their customers and to 
attract business from prospective customers.
---------------------------------------------------------------------------

    \193\ See, e.g., NASDAQ Letter, supra note 19, at 20-21 (stating 
that, despite the fact that retail investors do not review 606 
reports, the disclosure rules have positively impacted retail 
customers since the reports facilitate brokers' rigorous review of 
execution quality).
    \194\ See, e.g., TD Ameritrade Letter, supra note 19, at 3-4 
(stating that Rule 606 reports have performed a vital role in adding 
transparency to market center execution practices and that retail 
investors reap the ultimate benefit of the statistics); and 
Scottrade, Quarterly Order Routing Disclosure, available at https://www.scottrade.com/online-brokerage/trade-quality-execution.html 
(stating that ``enhanced, meaningful transparency can serve as a 
catalyst for driving competition amongst industry participants to 
the ultimate benefit of the investing public'').
---------------------------------------------------------------------------

    To preserve the benefits of Rule 606 reports and keep pace with 
market developments, the Commission preliminarily believes that it is 
appropriate to update Rule 606 to provide customers with enhanced 
disclosure regarding a broker-dealer's retail order handling practices. 
As discussed above in detail, currently, Rule 606 requires, among other 
things, broker-dealers that route ``retail'' orders to publicly 
disclose, on a quarterly and

[[Page 49462]]

aggregated basis, certain information regarding non-directed orders in 
NMS securities by listing market and material aspects of relationships 
with Specified Venues.\195\
---------------------------------------------------------------------------

    \195\ See supra Section II.A.
---------------------------------------------------------------------------

1. Marketable Limit Orders and Non-Marketable Limit Orders
    Currently, with respect to what would be defined as ``retail'' 
orders by this proposal, Rule 606 distinguishes broadly between 
``market orders'' and ``limit orders.'' Limit orders, however, fall 
into two categories: (1) Marketable limit orders, which are priced at 
or above the lowest offer in the market for a buy order or at or below 
the highest bid in the market for a sell order; and (2) non-marketable 
limit orders, which are priced to not execute immediately and seek to 
provide liquidity.\196\ The distinction between a marketable and non-
marketable limit order often is a significant factor in a broker-
dealer's order routing practices. Broker-dealers have several options 
when deciding to route their customers' limit orders--they may (1) 
internalize and trade against customer order flow; (2) post the order; 
or (3) route the order to a third-party trading center.
---------------------------------------------------------------------------

    \196\ See Dolgopolov, supra note 55, at 234-235.
---------------------------------------------------------------------------

    The Commission preliminarily believes that, under the current rule, 
customers and other market participants cannot fully evaluate a broker-
dealer's limit order routing practice if both marketable and non-
marketable limit orders are combined into a single order category. The 
Commission preliminarily believes that classifying limit orders into 
marketable and non-marketable limit orders would allow customers and 
other market participants to more fully assess a broker-dealer's 
routing decisions for both types of orders and the potential impact on 
execution quality. The Commission also preliminarily believes that 
greater transparency between the routing practices of marketable and 
non-marketable limit orders would allow customers and other market 
participants to better assess whether broker-dealers are effectively 
managing their potential conflicts of interest. For example, the 
Commission understands that broker-dealers may be incentivized to route 
marketable and non-marketable limit orders to certain venues based on 
their fee or rebate schedule to the benefit of the broker-dealer. 
Providing greater public transparency between the routing practices of 
marketable and non-marketable limit orders could increase competition 
among broker-dealers and minimize the potential conflicts of interest 
between maximizing revenue and the duty of best execution.\197\
---------------------------------------------------------------------------

    \197\ See Battalio, Corwin, and Jennings Paper, supra note 57, 
at 3 (finding that fill rates for displayed limit orders are lower 
on exchanges with higher take fees).
---------------------------------------------------------------------------

    Currently, Rule 606(a)(1)(i) requires every broker-dealer's 
quarterly retail order routing report to include the percentage of 
total orders that were non-directed orders and the percentages of total 
non-directed orders that were market orders, limit orders, and other 
orders. In addition, Rule 606(a)(1)(ii) requires every broker-dealer's 
quarterly report on retail order routing to include the identity of the 
ten venues to which the largest number of non-directed orders were 
routed for execution, as well as any venue to which five percent or 
more of non-directed orders were routed (i.e., collectively, Specified 
Venues). The Commission proposes to amend Rule 606(a)(1)(i) and (ii) to 
split limit orders and separately disclose them as marketable and non-
marketable.\198\ In connection with this proposed new requirement, the 
Commission is proposing to amend Rule 600 of Regulation NMS to include 
the definition of the term ``non-marketable limit order,'' which is 
used in the proposed amendments to Rule 606(a). Specifically, the 
Commission proposes to define ``non-marketable limit order'' to mean 
``any limit order other than a marketable limit order.'' \199\
---------------------------------------------------------------------------

    \198\ See proposed Rule 606(a)(1)(i)-(ii).
    \199\ See proposed Rule 600(b)(51).
---------------------------------------------------------------------------

    The Commission requests comment on the proposed amendments to Rules 
600 and 606(a)(1)(i) and (ii). In particular, the Commission solicits 
comment on the following:
    87. Do commenters believe that broker-dealers use Rule 606 reports 
as a means to assess how their order routing and execution services 
compare to other firms? Do commenters believe that the reports 
encourage competition among broker-dealers? Why or why not? If so, do 
investors in turn benefit from such increased competition? Please 
provide data to support your arguments.
    88. Do commenters believe that Rule 606 quarterly reports continue 
to provide useful information for customers placing retail orders in 
assessing the quality of order execution and the routing practices of 
their broker-dealers? Why or why not? If not, how could the reports be 
improved to provide more useful information to retail customers? Please 
explain.
    89. Do commenters believe that the proposed definition of non-
marketable limit order is appropriate to distinguish the types of limit 
orders? Why or why not? Should the proposed definition be modified in 
any way? If so, please explain how.
    90. Do commenters believe that separately reporting limit orders by 
marketable and non-marketable will enable customers placing retail 
orders to better understand broker-dealers' routing decisions and 
impact on best execution? Are there other ways in which that 
information might be useful to customers? Do commenters believe that 
the separate disclosure of marketable and non-marketable limit orders 
will be useful to broker-dealers, and if so, how? Do commenters believe 
it will promote competition among broker-dealers? Please provide data 
to support your arguments.
    91. Do commenters believe that market orders and marketable limit 
orders should be combined in the quarterly retail order routing report? 
Would such combination be useful to customers? If so, how? Please 
explain and provide support, if possible.
    92. Should the Commission require the same disclosures for retail 
orders that it is proposing to require for institutional orders? Why or 
why not? Would any or all of the disclosures proposed above for 
institutional orders be appropriate or useful for evaluating order 
routing of retail orders? If so, would the proposed disclosures need to 
be modified in any way to be applied to retail orders? Please explain.
    93. Are the venues that are required to be included on retail order 
routing reports appropriate? Should the requirement cover more or fewer 
venues than are currently included (i.e., the ten to which the largest 
number of non-directed orders were routed for execution and any to 
which five percent or more of non-directed orders were routed)?
2. Net Payment for Order Flow and Transaction Fees and Rebates by 
Specified Venue
    Currently, Rule 606 requires that a broker-dealer's quarterly 
retail order routing report describe the material aspects of the 
broker-dealer's relationship with each Specified Venue, including a 
description of any arrangement for payment for order flow or profit-
sharing relationship.\200\ The current disclosure requirement is 
intended to signal to investors the potential conflicts of interest 
that may influence a broker-dealer's order routing decisions.\201\ 
Generally, the description

[[Page 49463]]

of any payment for order flow arrangement includes the material terms 
of the relationship, a description of the amounts per share or per 
order that the broker-dealer receives, and any transaction 
rebates.\202\ Similarly, a broker-dealer that has entered into a 
profit-sharing relationship arrangement with a Specified Venue must 
disclose the extent to which it would share in profits derived from the 
execution of non-directed orders.\203\
---------------------------------------------------------------------------

    \200\ See supra notes 26 and 27 and accompanying text.
    \201\ See Rule 606 Predecessor Adopting Release, supra note 15, 
at 75427 (stating that ``[t]he purpose of requiring disclosure 
concerning the relationships between a broker-dealer and the venues 
to which it routes orders is to alert customers to potential 
conflicts of interest that may influence the broker-dealer's order 
routing practices'').
    \202\ See id.
    \203\ Id.
---------------------------------------------------------------------------

    As noted above, financial inducements to attract order flow have 
become more varied and may be a substantial source of revenue.\204\ A 
significant percentage of retail orders are routed to OTC market makers 
and most broker-dealers that handle retail orders either receive 
payment for order flow in connection with the routing of orders or are 
affiliated with an OTC market maker that executes the orders.\205\ The 
Commission understands that financial inducements to attract order flow 
may create conflicts of interest between maximizing revenue and broker-
dealers' duty of best execution to their customers.
---------------------------------------------------------------------------

    \204\ See supra notes 71-74 and accompanying text. See also 
Battalio, Corwin, and Jennings Paper, supra note 57, at 15-16 
(``Nine of the brokers route at least a portion of their orders to 
market makers that offer payment for marketable orders . . . Charles 
Schwab, Morgan Stanley, Edward Jones, Just2Trade, and LowTrade route 
all non-directed market and limit orders to market makers that 
purchase order flow (although LowTrade and Just2Trade indicate that 
they do not accept payment for order flow, Edward Jones reports `no 
material economic relationship' with the market makers, and Morgan 
Stanley reveals no payment for order flow)'').
    \205\ See id. In a typical payment for order flow arrangement, a 
broker-dealer is paid for sending retail orders to another broker-
dealer, which will in turn trade with the retail orders out of its 
own inventory or route the order to another venue for execution. The 
internalizing broker-dealer is able to capture small profits on 
these trades, and is thus able to pay for the order flow which 
generates this profit. Moreover, retail order flow is considered to 
be less informed about near-term price movements and therefore 
particularly attractive to internalizing broker-dealers. See Concept 
Release on Equity Market Structure, supra note 2, at 3612.
---------------------------------------------------------------------------

    While Rule 606 currently requires public reports on order routing 
percentages to Specified Venues and a discussion of the broker-dealer's 
relationship with each Specified Venue, it does not require detailed 
disclosure of payment for order flow received, payment from any profit-
sharing relationship received, or access fees or transaction rebates. 
As a result, the Commission preliminarily believes that customers have 
not received as complete a picture of a broker-dealer's activities to 
fully evaluate its broker-dealer's management of any potential 
conflicts of interest and the quality of their broker-dealers' retail 
order routing practices. The Commission further preliminarily believes 
that providing such data for specific order types would further enhance 
a customer's ability to assess their broker-dealers' retail order 
routing practices.
    As such, the Commission proposes to amend Rule 606(a)(1) to include 
new subparagraph (iii) to require that, for each Specified Venue, the 
broker-dealer must report 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 on a per share basis, for each of the 
following non-directed order types: (1) Market orders; (2) marketable 
limit orders; (3) non-marketable limit orders; and (4) other 
orders.\206\
---------------------------------------------------------------------------

    \206\ See proposed Rule 606(a)(1)(iii).
---------------------------------------------------------------------------

    The Commission preliminarily believes identifying specific payment 
information received for each category of order type by Specified Venue 
would provide customers with useful information to more completely 
evaluate their broker-dealers' services. Specifically, the Commission 
preliminarily believes that providing the aggregate amount of payments 
and fees received is important to give investors and others a 
comprehensive overview of their broker-dealer. Additionally, the 
Commission preliminarily believes that payments and fees received in 
total dollar amounts per share for each order type would allow 
customers to have a stronger grasp on a broker-dealer's motivation to 
route to a particular Specified Venue, the management of any potential 
conflicts of interest, and provide more insight into their retail order 
routing practices. The Commission preliminarily believes that the 
greater transparency achieved by such detailed information would be 
useful to retail customers when selecting or re-evaluating a broker-
dealer.
    The Commission requests comment on the proposed detailed disclosure 
of payments received and fees paid for market, marketable limit, non-
marketable limit, and other order types at each Specified Venue. In 
particular, the Commission solicits comment on the following:
    94. Do commenters believe that requiring broker-dealers to 
disclose, for each Specified Venue, payment for order flow received, 
payment from any profit-sharing relationship received, transaction fees 
paid, and transaction rebates received would enable customers placing 
retail orders to better assess their broker-dealers' management of 
potential conflicts of interest and quality of routing and execution 
services? Should the Commission require such information to be 
disclosed? Is there additional information that a customer could use to 
better assess their broker-dealer's conflicts of interest and quality 
of routing and execution services? Would requiring such disclosure 
affect broker-dealers' routing decisions? Please explain and provide 
support for your argument.
    95. Do commenters believe that the proposal will permit customers 
placing retail orders to be able to better assess whether financial 
inducements impact their broker-dealer's order routing decisions for 
different types of orders and the execution quality of those orders? 
Why or why not?
    96. Do commenters believe there are other specific categories of 
orders in addition to market orders, marketable limit orders, and non-
marketable limit orders that should be included in the disclosure that 
would aid investors placing retail orders in assessing the quality of 
their order routing? Please provide support for your arguments.
    97. Do commenters believe that broker-dealers should disclose the 
information required by proposed Rule 606(a)(1)(iii) for all orders, 
not just retail orders?
3. Discussion of Arrangement Terms With a Specified Venue
    As noted above, Rule 606(a)(1)(iv) currently requires that a 
broker-dealer, in its quarterly Rule 606 report, provide a discussion 
of the material aspects of its relationship with a Specified Venue, 
including a description of any arrangement for payment for order flow 
and any profit-sharing relationship. In adopting the rule, the 
Commission stated that the description of a payment for order flow 
arrangement must include disclosure of the material aspects of the 
arrangement.\207\ The Commission noted that material aspects of the 
arrangement should include a description of the terms of the 
arrangement, such as any amounts per share or per order that the 
broker-dealer receives.\208\ While the Commission understands that 
certain terms, such as amounts per share or per order received, are 
important to a reasonable investor in evaluating a broker-dealer's 
routing practices, based

[[Page 49464]]

on market structure changes since the Rule 606 Predecessor Adopting 
Release, among other things, the Commission preliminarily believes that 
disclosure of any terms, written or oral, that may influence a broker-
dealer's order routing decision would be useful for customers to assess 
the potential conflicts of interest facing broker-dealers when 
implementing their retail order routing decisions. Accordingly, the 
Commission preliminarily believes it should require broker-dealers to 
describe any terms, written or oral, of payment for order flow 
arrangements or profit-sharing relationships that may influence a 
broker-dealer's order routing decision in the discussion of a broker-
dealer's relationship with a Specified Venue.
---------------------------------------------------------------------------

    \207\ See Rule 606 Predecessor Adopting Release, supra note 15, 
at 75427.
    \208\ See id.
---------------------------------------------------------------------------

    The Commission acknowledges that payment for order flow 
arrangements are intensively fact-based in nature and may vary across 
broker-dealers, nevertheless, the Commission preliminarily believes 
that disclosing the terms of such arrangements will provide more 
complete information for customers to better understand and evaluate a 
broker-dealer's retail order routing decision. In this regard, the 
Commission preliminarily believes that requiring broker-dealers to 
describe the terms of such arrangements with a Specified Venue that may 
influence their decision of where to route a retail order should serve 
to provide additional clarity to customers in evaluating a broker-
dealer's retail order routing practices. The Commission preliminarily 
believes that the following are a non-exclusive list of terms of a 
payment for order flow arrangement or profit-sharing relationships that 
may influence a broker-dealer's order routing decision and would be 
required to be disclosed under the proposal: (1) Incentives for 
equaling or exceeding an agreed upon order flow volume threshold, such 
as additional payments or a higher rate of payment; (2) disincentives 
for failing to meet an agreed upon minimum order flow threshold, such 
as lower payments or the requirement to pay a fee; (3) volume-based 
tiered payment schedules; and (4) agreements regarding the minimum 
amount of order flow that the broker-dealer would send to a venue.\209\ 
The Commission preliminarily believes that these four types of terms 
reflect existing types of arrangements.
---------------------------------------------------------------------------

    \209\ See proposed Rule 606(a)(1)(iv).
---------------------------------------------------------------------------

    The Commission is proposing to require broker-dealers to disclose 
when a Specified Venue provides incentives for equaling or exceeding a 
volume threshold by offering additional payments or a higher rate of 
payment, or conversely, disincentives for failing to meet an agreed 
upon minimum retail order flow threshold, such as a lower payment or 
charging a fee. The Commission understands that such arrangements may 
vary among venues, as well as for each broker-dealer sending orders to 
those venues, and some venues provide higher rebates for meeting or 
exceeding order flow quotas or charge financial penalties for failing 
to meet order flow quotas. The Commission preliminarily believes that 
such incentives and disincentives influence a broker-dealer's decision 
to either meet or route additional retail order flow to exceed the 
threshold, and should be disclosed to inform customers of their broker-
dealer's conflicts of interest.
    Further, the Commission is proposing to require broker-dealers to 
disclose any volume-based tiered payment schedules with a Specified 
Venue. Venues that offer these payment schedules typically offer 
incrementally higher rebates or lower fees to broker-dealers for 
additional retail order flow volume. The Commission preliminarily 
believes that these payment schedules can encourage a broker-dealer to 
route additional retail order flow to such venue in an effort to reap a 
financial benefit and should be disclosed. Additionally, the Commission 
is proposing to require broker-dealers to disclose agreements regarding 
the minimum amount of retail order flow that a broker-dealer would be 
required to send to a Specified Venue. These types of agreements 
typically specify that a broker-dealer must send a minimum number of 
orders or shares to a venue during a particular time period. The 
Commission preliminarily believes that such commitments for retail 
order flow may present conflicts of interest and should be disclosed. 
Finally, the Commission acknowledges that as market structure evolves, 
new types of arrangements not specifically listed may come about. The 
four arrangements referenced in Rule 606(a)(1)(iv) are not an 
exhaustive list of terms of payment for order flow arrangements or 
profit-sharing relationships that may influence a broker-dealer's 
retail order routing decision that would be required to be disclosed 
under the proposed rule. The proposed rule would require disclosure of 
any term of such arrangements that may influence a broker-dealer's 
retail order routing decision.
    As described above, because certain terms of payment for order flow 
arrangements or profit-sharing relationships may encourage broker-
dealers to direct their orders to a specific venue in order to achieve 
an economic benefit or avoid an economic loss, potential conflicts of 
interest may arise. The Commission preliminarily believes that 
disclosure of such information would be useful for customers to assess 
the extent to which a broker-dealer's payment for order flow 
arrangements and profit-sharing relationships may potentially affect or 
distort the way in which retail orders are routed. The Commission 
further preliminarily believes that providing customers a comprehensive 
description of such quantifiable terms of a broker-dealer's 
relationship with a Specified Venue would allow them to fully 
appreciate the nature and extent of potential conflicts of interest 
facing their broker-dealers and assist them in evaluating the broker-
dealers' management of such potential conflicts of interest.
    The Commission requests comment on requiring broker-dealers to 
describe any terms of payment for order flow arrangements and profit-
sharing relationships with a Specified Venue that may influence their 
retail order routing decisions. In particular, the Commission solicits 
comment on the following:
    98. Do commenters believe that disclosure of any terms of payment 
for order flow arrangements and profit-sharing relationships that may 
influence order routing decisions is relevant for retail customers to 
understand and evaluate a broker-dealer's routing practices and 
handling of potential conflicts of interest? If so, do commenters 
believe that the Commission should require a description of these terms 
to be disclosed in the retail order routing reports? Why or why not? 
Please explain. Would requiring such disclosure affect broker-dealers' 
routing decisions?
    99. Do commenters believe that broker-dealers should disclose the 
information required by proposed Rule 606(a)(1)(iv) for all orders, not 
just retail orders?
    100. Do commenters believe that the four enumerated examples in 
proposed Rule 606(a)(1)(iv) reflect the types of payment for order flow 
arrangements and other profit-sharing relationships currently in 
practice? If not, how should their descriptions be modified and what 
other types of arrangements, if any, should be specified in the rule 
text?
    101. Do commenters believe that there are other identifiable 
factors, beyond the four included in the proposed rule, that may 
influence a broker-dealer's order routing decisions for retail orders? 
If yes, what are the factors and should the rule specify those factors?

[[Page 49465]]

    102. Do commenters believe that incentives for equaling or 
exceeding an agreed upon order flow volume threshold influence a 
broker-dealer's order routing decision for retail orders? Why or why 
not? Please explain.
    103. Do commenters believe that disincentives for failing to meet 
an agreed upon minimum order flow threshold influence a broker-dealer's 
order routing decision for retail orders? Why or why not? Please 
explain.
    104. Do commenters believe that volume-based tiered payment 
schedules influence a broker-dealer's order routing decision for retail 
orders? Why or why not? Please explain.
    105. Do commenters believe that agreements regarding the minimum 
amount of order flow that a broker-dealer would send to a venue 
influence a broker-dealer's order routing decision for retail orders? 
Why or why not? Please explain.
    106. Do comments believe that both written and oral terms that may 
influence a broker-dealer's order routing decision should be required 
to be disclosed? Why or why not? Please explain.
4. Additional Amendments to Retail Disclosures
    The Commission is further proposing amendments to remove the 
requirement that Rule 606(a)(1) report be divided into three separate 
sections for securities listed on the NYSE, securities that are 
qualified for inclusion in NASDAQ, and securities listed on the 
American Stock Exchange.\210\ First, the Commission notes that the 
language is stale, as NASDAQ is currently a national securities 
exchange and the American Stock Exchange is now known as NYSE MKT 
LLC.\211\ Second, the Commission preliminarily believes that segmenting 
retail order routing reports by primary listing market is no longer 
necessary or particularly useful to customers placing retail orders 
because the handling of NMS stocks no longer varies materially based on 
the primary listing market and the primary listing market often is not 
the dominant market for the trading of its listed securities.\212\ As 
noted earlier, in 2000, when Rule 606 was adopted, the primary listing 
markets looked and operated very differently than they do today. For 
example, NYSE and the American Stock Exchange were primarily manual 
markets with limited electronic trading, while NASDAQ, not yet a 
national securities exchange, was a quote-driven dealer market. Today, 
with the adoption of Regulation NMS and the advances in technology, the 
primary listing markets are all dominated by electronic trading and the 
trading characteristics of securities listed on those markets may no 
longer warrant separating the routing report by primary listing 
market.\213\ Accordingly, the Commission preliminarily believes that 
the division of reports by listing market is not particularly useful to 
retail customers interested in analyzing their broker-dealers' routing 
practices. While the Commission recognizes that eliminating the 
division of reports by the three distinct listing markets may 
potentially cause some reduction in informational content (as further 
discussed below), the Commission preliminarily believes that any 
diminution in granular listing market data is appropriate in light of 
the proposed new requirement to provide customers with pertinent retail 
order routing data that reflects today's multiple trading centers and 
practices.
---------------------------------------------------------------------------

    \210\ See proposed Rule 606(a)(1).
    \211\ See supra note 76.
    \212\ For example, from February 2005 to February 2014, NYSE's 
market share in its listed securities declined from 78.9% to 20.1%. 
See Memorandum from the SEC Division of Trading and Markets to the 
SEC Market Structure Advisory Committee (April 30, 2015) (``Rule 611 
Memo''), available at http://www.sec.gov/spotlight/emsac/memo-rule-611-regulation-nms.pdf.
    \213\ See FIF Letter, supra note 77, at 3 (stating that order 
routing practices are no longer based on listing market).
---------------------------------------------------------------------------

    The Commission is proposing that the public retail order routing 
reports required by Rule 606(a)(1) be broken down by calendar 
month.\214\ Currently, Rule 606(a)(1) requires broker-dealers to make 
retail order routing reports publicly available for each calendar 
quarter, and such reports contain aggregate quarterly information on 
the routing of retail orders. As noted above, the Commission 
understands that trading centers frequently change their fee 
structures, including the amount of fees and rebates, in order to 
attract order flow, and such changes typically occur at the beginning 
of a calendar month. The changes in fee structures at trading centers 
may affect a broker-dealer's routing decisions. Disclosing retail order 
routing information on an aggregated quarterly basis can mask changes 
in routing behavior in response to changes in a trading center's fee 
structure. The Commission preliminarily believes that disclosing the 
information contained in the public retail order routing reports by 
calendar month would allow customers to better assess whether their 
broker-dealers' routing decisions are affected by changes in fee 
structures and the extent such changes affect execution quality. 
Accordingly, similar to the proposed rule to require institutional 
order handling reports to be broken down by calendar month,\215\ the 
Commission is proposing to amend Rule 606(a)(1) to require that public 
retail order routing reports also be broken down by calendar 
month.\216\
---------------------------------------------------------------------------

    \214\ See proposed Rule 606(a)(1).
    \215\ See supra Sections III.A.3. and III.A.4.
    \216\ See id.
---------------------------------------------------------------------------

    In addition, the Commission is proposing that the public retail 
order routing reports required by Rule 606(a)(1) and customer-specific 
retail order routing report required by Rule 606(b)(1) be made 
available using an XML schema and associated PDF renderer to be 
published on the Commission's Web site.\217\ The Commission 
preliminarily believes that retail customers would have a similar 
interest as institutional customers in receiving the reports in a 
format that would allow them to use software applications to 
automatically recognize and process the information rather than having 
to manually enter the data to perform a comparison across broker-
dealers. The Commission preliminarily believes that requiring both the 
public and customer-specific retail order routing reports to be 
provided in the proposed format should be useful to customers as it 
would allow them to more easily analyze and compare the data provided 
in both types of reports across broker-dealers, for the reasons 
discussed above.\218\
---------------------------------------------------------------------------

    \217\ See proposed Rule 606(a)(1).
    \218\ See supra Section III.A.3.
---------------------------------------------------------------------------

    The Commission is also proposing to amend Rule 606(a)(1) to require 
every broker- dealer to keep the reports required pursuant to Rule 
606(a)(1) posted on an Internet Web site that is free of charge and 
readily accessible to the public for a period of three years from the 
initial date of posting on the Internet Web site. Similar to the 
identical requirement proposed for the public aggregated institutional 
order handling report under proposed Rule 606(c), the Commission 
preliminarily believes that making this historical data available to 
customers and the public generally will be useful to those seeking to 
analyze past routing behavior of broker-dealers. Should the proposal be 
adopted, the requirement to post and maintain reports on an Internet 
Web site that is free and readily accessible to the public would begin 
at that time and apply going forward. Affected entities would not be 
required to post past reports created prior to the proposed Rule's 
effectiveness, but such entities would be neither prevented nor 
discouraged from posting such reports.

[[Page 49466]]

    Finally, the Commission proposes to insert the term ``retail'' in 
the heading of Rule 606(a),\219\ to state ``Quarterly report on retail 
order routing.'' The Commission preliminarily believes that such 
distinction between retail order routing information referred to in 
Rule 606(a) and institutional order handling information proposed in 
Rule 606(b) will help clarify the requirements of broker-dealers' 
reporting obligations under the Rules.
---------------------------------------------------------------------------

    \219\ See proposed Rule 606(a).
---------------------------------------------------------------------------

    The Commission seeks comment on the proposed amendments to retail 
order routing disclosures. In particular, the Commission solicits 
comment on the following:
    107. Do commenters believe that it continues to be useful for 
options to be included in disclosures for retail orders pursuant to 
Rule 606, in light of the fact that the proposal with respect to 
institutional orders would exclude options?
    108. Should the Commission require retail order routing reports, 
both customer-specific and public, to be made available using an XML 
schema and associated PDF renderer? Why or why not?
    109. Do commenters believe that broker-dealers should be required 
to provide the customer-specific and aggregated reports on retail order 
routing in the proposed format? Why or why not? Do commenters believe 
that it is useful to customers for broker-dealers to provide the 
reports in a structured XML format that would facilitate comparison of 
the data across broker-dealers? If not, why not? Should only the 
customer-specific report be provided in a structured XML format? Should 
only the aggregated report be provided in a structured XML format? Do 
commenters believe that it is useful to customers for broker-dealers to 
also provide the reports in an instantly readable PDF format? If not, 
why not? Are there other formats that would be more appropriate?
    110. Do commenters believe that it is appropriate to remove the 
requirement to report retail order routing information by listing 
market (NYSE, NASDAQ, and the American Stock Exchange (n/k/a NYSE MKT 
LLC))? Why or why not?
    111. Do commenters believe that the retail order routing report 
divided by the three listing markets continues to be relevant and 
useful to customers placing retail orders and/or analyzing their 
broker-dealer's routing practices? Why or why not?
    112. Do commenters believe that alternative or additional criterion 
should be required in reports regarding retail order routing such as 
market capitalization or security type (e.g., exchange-traded products 
or NMS stocks)? If so, please explain why should such criterion be used 
to report retail order routing information? Please provide data to 
support your arguments.
    113. Do commenters believe that retail order routing information 
organized by stocks included in the S&P 500 Index and stocks not 
included in the S&P 500 Index versus by listing market or by NMS stocks 
would be useful to customers? Why or why not? Please explain.
    114. Do commenters believe that it is reasonable and appropriate to 
require that the retail order routing reports be broken down by 
calendar month? Should the Commission require the retail order routing 
reports be produced on a different frequency than quarterly (e.g., 
monthly)? Why or why not? What are the incremental burdens or benefits 
of providing reports at a different frequency? Please explain.
    115. Do commenters believe that the Commission should require each 
retail order routing report be publicly available for a designated 
amount of time, as proposed? If so, is three years a reasonable amount 
of time that the reports should be available? Would a shorter or longer 
disclosure period be useful to investors and/or onerous to broker-
dealers? Please explain.
    116. Broker-dealers currently are required to make publicly 
available for each calendar quarter their quarterly reports on retail 
order routing and retain such reports for a period of not less than 
three years. Generally, broker-dealers will remove the previous 
quarterly report from their Web site and replace it with their most 
recent quarterly report. Since past quarterly reports are already 
required to be retained by broker-dealers, should the Commission 
require broker-dealers to make publicly available the prior three 
years' worth of quarterly reports from the effective date of the rule? 
Why or why not?
    117. Should the Commission require all broker-dealers to make their 
public retail order routing reports available on one centralized Web 
site? For example, should all broker-dealer reports be available on the 
SEC's or an SRO's Web site? Why or why not?
5. Amendment to Rule 600(b)(18) To Rename ``Customer Order'' to 
``Retail Order''
    Finally, the Commission proposes to amend Rule 600(b)(18) to rename 
the defined term ``customer order'' to ``retail order,'' and to amend 
Rules 600(b)(19), 600(b)(23), 600(b)(48), 605, 606, and 607 to reflect 
such change. ``Customer order'' is currently defined in Rule 600(b)(18) 
to include smaller-sized orders in NMS securities.\220\ As discussed 
above, the Commission is proposing to define institutional order to 
include larger-sized orders in NMS stocks.\221\ Since ``retail'' 
generally connotes orders of a smaller size and ``institutional'' 
generally connotes orders of a larger size, the Commission 
preliminarily believes it is appropriate to rename ``customer order'' 
to ``retail order'' in connection with this proposed rulemaking. The 
Commission preliminarily believes that such change would clarify to 
market participants that the defined terms are based on the size of the 
order.
---------------------------------------------------------------------------

    \220\ See 17 CFR 242.600(b)(18) and supra note 7 and 
accompanying text.
    \221\ See proposed Rule 600(b)(31) and supra Section III.A.1.
---------------------------------------------------------------------------

    The Commission requests comment on the proposal to rename the 
defined term ``customer order'' to ``retail order.'' In particular, the 
Commission solicits comment on the following:
    118. Do commenters believe that the proposed change is appropriate? 
Do commenters believe that such change would provide clarity to market 
participants? Are there alternative ways to distinguish small and 
large-sized orders? Please provide support for your arguments.

C. Amendment to Disclosure of Order Execution Information

    The Commission is proposing to amend Rule 605(a)(2) to require 
market centers to keep reports required pursuant to Rule 605(a)(1) 
posted on an Internet Web site that is free of charge and readily 
accessible to the public for a period of three years from the initial 
date of posting on the Internet Web site. Similar to the analogous 
requirements proposed in Rules 606(a) and 606(c) described above, the 
Commission preliminarily believes that making past order execution 
information available to customers and the public generally for a 
specified period of time will be beneficial to those seeking to analyze 
historical order execution information at various market centers. 
Should the proposal be adopted, the requirement to post and maintain 
reports on an Internet Web site that is free of charge and readily 
accessible to the public would begin at that time and apply going 
forward. Affected entities would not be required to post reports 
covering periods prior to the proposed Rule's effectiveness.
    The Commission requests comment on the proposed amendments to the 
disclosure of order execution

[[Page 49467]]

information. In particular, the Commission solicits comment on the 
following:
    119. Do commenters believe that the monthly electronic reports 
required by Rule 605(a) should be publicly available for a designated 
amount of time? If so, is three years a reasonable amount of time that 
the reports should be available? Would a shorter or longer disclosure 
period be useful to investors placing institutional orders and/or 
onerous to broker-dealers? Please explain.

IV. Paperwork Reduction Act

    Certain provisions of these proposed amendments contain 
``collection of information requirements'' within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\222\ The Commission is 
submitting these collections of information to the Office of Management 
and Budget (``OMB'') for review in accordance with 44 U.S.C. 3507(d) 
and 5 CFR 1320.11. The current collection of information for Rule 606 
entitled ``Disclosure of order routing information'' is being modified 
in a way that creates new collection of information burden estimates 
and modifies existing collection of information burden estimates. The 
existing collection of information for Rule 605 entitled ``Disclosure 
of order execution information'' is being modified in manner that does 
not alter the collection of information burden estimate. 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.
---------------------------------------------------------------------------

    \222\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

A. Summary of Collection of Information

    The proposed amendments to Rule 606 would include a collection of 
information within the meaning of the PRA for broker-dealers who 
receive and route retail and institutional orders.
1. Customer Requests for Information on Institutional Orders
    As detailed above, proposed Rule 606(b)(3) of Regulation NMS would 
require a broker-dealer, on request of a customer that places, directly 
or indirectly, an institutional order with the broker-dealer, to 
electronically disclose to such customer within seven business days of 
receiving the request, a report on the broker-dealer's handling of 
institutional orders for that customer for the prior six months, broken 
down by calendar month. Specifically, the report would contain certain 
information on the customer's order flow with the reporting broker-
dealer as well as certain columns of information on institutional 
orders handled by the broker-dealer, as described below, categorized by 
venue and by order routing strategy category--passive, neutral, and 
aggressive--for each venue. The required columns of information include 
four groups of information: (1) Information on institutional order 
routing; (2) information on institutional order execution; (3) 
information on institutional orders that provided liquidity; and (4) 
information on institutional orders that removed liquidity.\223\
---------------------------------------------------------------------------

    \223\ See supra Section III.A.4.
---------------------------------------------------------------------------

    With regard to information about the customer's order flow with the 
reporting broker-dealer, the Commission is proposing to require 
disclosure of: (1) Total number of shares of institutional orders sent 
to the broker-dealer by the customer during the reporting period; (2) 
total number of shares executed by the broker-dealer as principal for 
its own account; (3) total number of institutional orders exposed by 
the broker-dealer through an actionable indication of interest; and (4) 
venue or venues to which institutional orders were exposed by the 
broker- dealer through an actionable indication of interest.\224\
---------------------------------------------------------------------------

    \224\ See proposed Rule 606(b)(3).
---------------------------------------------------------------------------

    With regard to information on institutional order routing, the 
Commission is proposing to require disclosure of: (1) Total shares 
routed; (2) total shares routed marked immediate or cancel; (3) total 
shares routed that were further routable; (4) average order size 
routed.\225\
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    \225\ See proposed Rule 606(b)(3)(i)(A)-(D).
---------------------------------------------------------------------------

    With regard to information on institutional order execution, the 
Commission is proposing to require disclosure of: (1) Total shares 
executed; (2) fill rate; \226\ (3) average fill size; \227\ (4) average 
net execution fee or rebate; \228\ (5) total number of shares executed 
at the midpoint; (6) percentage of shares executed at the midpoint; (7) 
total number of shares executed that were priced on the side of the 
spread more favorable to the institutional order; (8) percentage of 
total shares executed that were priced on the side of the spread more 
favorable to the institutional order; (9) total number of shares 
executed that were priced on the side of the spread less favorable to 
the institutional order; and (10) percentage of total shares executed 
that were priced on the side of the spread less favorable to the 
institutional order.\229\
---------------------------------------------------------------------------

    \226\ Fill rate would be calculated by the shares executed 
divided by the shares routed.
    \227\ Average fill size would be the average size, by number of 
shares, of each order executed on the venue.
    \228\ The fee and rebate would be measured in cents per 100 
shares.
    \229\ See proposed Rule 606(b)(3)(ii)(A)-(J).
---------------------------------------------------------------------------

    With regard to information on institutional orders that provided 
liquidity, the Commission is proposing to require disclosure of: (1) 
Total number of shares executed of orders providing liquidity; (2) 
percentage of shares executed of orders providing liquidity; (3) 
average time between order entry and execution or cancellation for 
orders providing liquidity (in milliseconds); and (4) average net 
execution rebate or fee for shares of orders providing liquidity (cents 
per 100 shares, specified to four decimal places).\230\
---------------------------------------------------------------------------

    \230\ See proposed Rule 606(b)(3)(iii)(A)-(D).
---------------------------------------------------------------------------

    Finally, with regard to information on institutional orders that 
removed liquidity, the Commission is proposing to require disclosure 
of: (1) Total number of shares executed of orders removing liquidity; 
(2) percentage of shares executed of orders removing liquidity; and (3) 
average net execution fee or rebate for shares of orders removing 
liquidity (cents per 100 shares, specified to four decimal 
places).\231\
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    \231\ See proposed Rule 606(b)(3)(i)(A)-(C).
---------------------------------------------------------------------------

2. Public Aggregated Report on Institutional Orders
    Proposed Rule 606(c) of Regulation NMS would require a broker-
dealer that receives institutional orders to make publicly available a 
report that aggregates the information required for customer-specific 
reports pursuant to proposed Rule 606(b)(3) for all institutional 
orders the broker-dealer receives, regardless of whether the 
information was requested by a customer and that such report would be 
broken down by calendar month. A broker-dealer would be required to 
make such report publicly available for each calendar quarter within 
one month after the end of the quarter. Broker-dealers would also be 
required to keep such reports posted on an Internet Web site that is 
free and readily accessible to the public for a period of three years 
from the initial date of posting on the Internet Web site.
3. Requirement To Document Methodologies for Categorizing Institutional 
Order Routing Strategies
    Proposed Rule 606(b)(3)(v) would require broker-dealers to provide 
the required information for each venue broken down and classified by 
the

[[Page 49468]]

following order routing strategy category: (1) ``Passive order routing 
strategy,'' which emphasize the minimization of price impact over the 
speed of execution of the entire institutional order; (2) ``neutral 
order routing strategy,'' which are relatively neutral between the 
minimization of price impact and the speed of execution of the entire 
institutional order; and (3) ``aggressive order routing strategy,'' 
which emphasize the speed of execution of the entire institutional 
order over the minimization of price impact. The proposed rule would 
require the broker-dealer to assign each order routing strategy that it 
uses for institutional orders to one of these three categories in a 
consistent manner for each report it prepares, promptly update the 
assignments any time an existing strategy is amended or a new strategy 
is created that would change such assignments, and to document the 
specific methodologies it relies upon for making such assignments. The 
Commission is proposing to require every broker-dealer to preserve a 
copy of the methodologies used to assign its order routing strategies 
and maintain such copy as part of its books and records in a manner 
consistent with Rule 17a-4(b) under the Exchange Act.
4. Amendment to Current Disclosures With Respect to Retail Orders
    The proposed amendments to Rule 606(a) of Regulation NMS would: (1) 
Break down the existing limit order disclosure into separate categories 
of marketable limit orders and non-marketable limit orders; (2) require 
that for each Specified Venue, the broker-dealer must report 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 on a 
per share basis, for each of the following order types: (i) Market 
orders; (ii) marketable limit orders; (iii) non-marketable limit 
orders; and (iv) other orders; (3) require broker-dealers to describe 
specific aspects of any terms of payment for order flow arrangements 
and profit-sharing relationships, whether written or oral, with a 
Specified Venue that may influence their order routing decisions, 
including: (i) Incentives for equaling or exceeding an agreed upon 
order flow volume threshold, such as additional payments or a higher 
rate of payment; (ii) disincentives for failing to meet an agreed upon 
minimum order flow threshold, such as lower payments or the requirement 
to pay a fee; (iii) volume-based tiered payment schedules; and (iv) 
agreements regarding the minimum amount of order flow that the broker-
dealer would send to a venue; (4) require that such reports be broken 
down by calendar month; (5) require that such reports be kept posted on 
an Internet Web site that is free and readily accessible to the public 
for a period of three years from the initial date of posting on the 
Internet Web site; and (6) remove the requirement that the Rule 
606(a)(1) report be divided into three separate categories by listing 
market. Instead, the information required under Rule 606(a)(1) would be 
aggregated for all NMS stocks. The proposed amendments would require 
reports produced pursuant to Rules 606(a) and 606(b)(1) to be formatted 
in the most recent versions of the XML schema and the associated PDF 
renderer as published on the Commission's Web site.
5. Amendment to Current Disclosures Under Rule 605
    The Commission is proposing to amend Rule 605(a)(2) to require 
market centers to keep reports required pursuant to the Rule 605(a)(1) 
posted on an Internet Web site that is free of charge and readily 
accessible to the public for a period of three years from the initial 
date of posting on the Internet Web site.

B. Proposed Use of Information

    Generally, the order routing disclosures required under the 
proposed amendments to Rule 606 would provide detailed information to 
both institutional and retail customers that would enable them to 
evaluate how their orders were routed by their broker-dealers, assess 
conflicts of interest facing their broker-dealers in providing order 
routing services, and have the ability to engage in informed 
discussions with their broker-dealers about the broker-dealer's order 
routing practices. The proposed order routing disclosures could inform 
future decisions on whether to retain a broker-dealer's order routing 
services or engage the order routing services of a new broker-dealer. 
In addition, broker-dealers may use the public disclosures to compete 
on the basis of order routing services, and academics and others may 
use the public disclosures pursuant to Rules 605 and 606 to review and 
analyze broker-dealer routing practices and trading center order 
executions.
1. Customer Requests for Information on Institutional Orders
    The order handling disclosures proposed under Rule 606(b)(3) would 
provide detailed order routing and execution information to a customer 
regarding its specific institutional orders during the reporting 
period. Generally, the five groups of information contained in the 
institutional order handling report would enable customers to 
understand where and how their institutional orders were routed or 
exposed as well as where their orders were executed during the 
reporting period. Customers could use the information contained in an 
institutional order handling report to assess any considerations a 
broker-dealer may have faced when routing its orders to various venues, 
whether those considerations may have affected how a broker-dealer 
routed its orders, and whether those considerations may have affected 
its execution equality.
    Specifically, customers would be able to review each venue to which 
their institutional orders were routed and identify potential conflicts 
of interest, affiliations, or business arrangements between their 
broker-dealer and the venue and assess whether large volumes of orders 
or certain order types were directed to venues from which the broker-
dealer may receive significant economic benefit. The information 
provided in the institutional order handling report could further be 
used by customers to assess whether a broker-dealer's order routing 
practices may have led to risks of information leakage. In addition, 
the information contained in the institutional order handling report 
would enable investors to assess, monitor, and generally determine the 
overall execution quality received from a broker-dealer. As noted 
above, customers could use the proposed order handling disclosures to 
inform future decisions on whether to retain a broker-dealer's order 
routing services or engage the order routing services of a new broker-
dealer.
2. Public Aggregated Report on Institutional Orders
    Proposed Rule 606(c) would require a broker-dealer that receives 
institutional orders to make publicly available a report that 
aggregates the information enumerated in proposed Rule 606(b)(3), even 
if not requested by a customer. The proposed public aggregated 
institutional order handling reports would enable customers to use a 
standardized set of information to compare how broker-dealers handle 
institutional orders and use such information in determining whether to 
retain the services of a broker-dealer or engage the services of a new 
broker-dealer. Broker-dealers could use the aggregated information to 
compare its order handling services against other broker-dealers, which

[[Page 49469]]

could improve competition among broker-dealers on the basis of order 
routing and execution quality. In addition, academic researchers and 
others could use the public aggregated institutional order handling 
information for research and analysis. Further, third-party vendors 
offering analytical services may use the information in the public 
reports in an attempt to sell customized reporting tools and services.
3. Requirement to Document Methodologies for Categorizing Institutional 
Order Routing Strategies
    Broker-dealers would assign order routing strategies into passive, 
neutral, and aggressive categories, applying consistent classification 
of their order routing strategies for purposes of producing customer-
specific and public aggregated institutional order handling reports, 
and promptly update the assignments any time an existing strategy is 
amended or a new strategy is created that would change such 
assignments. Regulators, including the Commission, could use the 
documented methodologies as a reference in determining whether a 
broker-dealer is consistently classifying and applying its order 
routing strategies for reporting purposes.
4. Amendment to Current Disclosures With Respect to Retail Orders
    The proposed amendment to Rule 606(a) to break down the existing 
limit order disclosure in the retail order routing reports into 
separate categories of marketable limit orders and non-marketable limit 
orders could be used by customers to assess the differences in the ways 
broker-dealers route these specific order types. Customers could use 
the information contained in the retail order routing reports to assess 
potential conflicts of interest its broker-dealers face with respect to 
routing these distinct order types, particularly with respect to the 
economic incentives received from trading centers. Customers could use 
this information to determine whether to retain a broker-dealer's 
services or engage the services of a new broker-dealer, which could 
foster competition among broker-dealers on the basis of quality of 
order routing and execution. In addition, academic researchers and 
others could use this information for research and analysis.
    The proposed requirement that a broker-dealer disclose 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 an on a per 
share basis, for specified non-directed order types for each Specified 
Venue could allow customers to determine how broker-dealers route 
different types of orders relative to any economic benefit or 
consequence to the broker-dealer. Customers could use this information 
to further assess whether their broker-dealers' routing decisions may 
be influenced by conflicts of interest. The requirement in proposed 
Rule 606(a)(1) that the quarterly reports be broken down by calendar 
month could allow customers to determine whether and how their broker-
dealer's routing decisions changed in response to changing fee and 
rebate structures in the marketplace, which often change at the 
beginning of a calendar month. The proposed requirement that such 
reports be kept posted on an Internet Web site for three years could 
allow customers and others, such as researchers, to analyze historical 
routing behavior of particular broker-dealers. In addition, the 
proposed requirement for broker-dealers to describe any terms of 
payment for order flow arrangements and profit-sharing relationships 
with a Specified Venue that may influence their order routing 
decisions, including information relating to specific incentives or 
volume minimums, could allow customers to understand how their broker-
dealers route retail orders and whether and how such routing is 
influenced by payment for order flow and/or a profit-sharing 
relationship.
5. Amendment to Current Disclosures Under Rule 605
    The requirement that reports required under Rule 605 be kept posted 
on an Internet Web site that is free of charge and readily accessible 
to the public for a period of three years from the initial date of 
posting on the Internet Web site could allow customers and others, such 
as researchers, to analyze historical order execution quality at 
various market centers. The three years of data could be useful to 
those seeking to analyze how execution quality has changed over time, 
in addition to changes in response to regulatory or other developments.

C. Respondents

    The respondents to these proposed amendments would be broker-
dealers that route retail or institutional orders and market centers 
that create reports pursuant to Rule 605. As of December 2015, the 
Commission estimates that there were approximately 4,156 total 
registered broker-dealers.\232\ Of these, the Commission estimates 266 
are broker-dealers that route retail orders.\233\ The Commission 
estimates that 200 broker-dealers are involved in the practice of 
routing institutional orders, all of whom also route retail 
orders.\234\ The Commission estimates that there are 380 market centers 
to which Rule 605 applies.\235\ The Commission requests comment on the 
accuracy of these estimated figures.
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    \232\ The Commission is basing its estimate off data compiled 
from responses to Form BD.
    \233\ See id. The Commission estimates that both clearing 
brokers and introducing brokers route retail orders. The Commission 
notes that the term ``retail order'' refers to ``customer order'' 
defined in Rule 600 (b)(18) of Regulation NMS. See supra note 7 and 
accompanying text.
    \234\ See id. Using Form BD data, the Commission estimates that 
clearing brokers and some introducing brokers route institutional 
orders.
    \235\ The Commission derived this estimate based on the 
following: 236 OTC market makers (not including market makers 
claiming an exemption from the reporting requirements of the Rule), 
plus 12 exchanges, 1 securities association, 86 exchange market 
makers, and 45 ATSs.
---------------------------------------------------------------------------

D. Total Initial and Annual Reporting and Recordkeeping Burdens

1. Customer Requests for Information on Institutional Orders
a. Initial Reporting and Recordkeeping Burden
    The Commission preliminarily believes that many broker-dealers that 
route institutional orders already create and retain the order handling 
information required by the proposed changes to Rule 606(b)(3). In such 
cases, the initial burden to comply with the requirement would be 
significantly lower than for a broker-dealer whose systems do not 
already create and retain the required information. In addition, the 
Commission preliminarily believes that many broker-dealers who do not 
have proprietary systems which create and retain order handling 
information use third-party service providers to allow them to create 
and retain the information required by the proposed changes to Rule 
606(b)(3). For this reason, the Commission is providing two estimates 
below, one for broker-dealers that route institutional orders whose 
systems do not currently support creating and retaining the information 
required by Rule 606(b)(3) who will upgrade their systems either in-
house or via a third-party service provider, and another for broker-
dealers that route institutional orders whose systems currently do 
create and retain such information, including those that use a third-
party service provider whose systems currently obtain such information.
    The Commission preliminarily believes that most broker-dealers 
either have systems that currently obtain the

[[Page 49470]]

information required by the proposed rule, or use third-party service 
providers who have systems that obtain such information. The Commission 
further preliminarily believes that all broker-dealers have systems in 
place that at least capture some of the information required by the 
proposed rule. Of the 200 broker-dealers involved in routing 
institutional orders, the Commission estimates that 25 broker-dealers 
that route institutional orders do not currently have systems that 
obtain all of the information required by the proposed amendments.\236\ 
The Commission estimates that these 25 broker-dealers would be able to 
perform the required enhancements in-house, but could also use a third-
party service provider. As discussed further below, the Commission 
further estimates that, after required systems enhancements were 
performed, all broker-dealers would capture the necessary information 
in-house, but some broker-dealers would create the required reports in-
house, while other broker-dealers would engage third parties to create 
the reports.
---------------------------------------------------------------------------

    \236\ This estimate was based on discussions with various 
industry participants.
---------------------------------------------------------------------------

    Based on discussions with industry sources, the Commission 
estimates that the average one-time, initial burden for broker-dealers 
that route institutional orders that do not currently create and retain 
the proposed order handling information to program systems in-house to 
implement the requirements of the proposed amendments to Rule 606(b)(3) 
in-house would be 200 hours \237\ per broker-dealer. The Commission 
estimates the average one-time, initial burden for broker-dealers that 
route institutional orders that do not currently create and retain the 
proposed order handling information to engage a third-party to program 
the broker-dealers' systems to implement the requirements of the 
proposed amendments to Rule 606(b)(3) to be 50 hours \238\ and 
$35,000.\239\ The Commission estimates that of the 25 broker-dealers 
that route institutional orders who do not currently have systems in 
place to capture the information required by the rule, 10 such broker-
dealers will perform the necessary programming upgrades in-house, and 
15 will engage a third-party to perform the programming upgrades. 
Additionally, of the 25 broker-dealers that route institutional orders 
who do not currently have systems in place to capture the information 
required by the proposed rule, the Commission estimates that 10 such 
broker-dealers will need to purchase hardware and software upgrades to 
fulfill the requirements of the proposed rule at an average cost of 
$15,000 per broker-dealer, and that the remaining 15 broker-dealers 
have adequate hardware and software to capture the information proposed 
by the rule. Therefore, the total initial burden for broker-dealers 
that route institutional orders who do not currently capture order 
handling information required by the proposed rule to program their 
systems to produce a report to comply with the proposed rule change is 
2,750 hours \240\ and $675,000.\241\
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    \237\ The Commission estimates the monetized burden for this 
requirement to be $60,420. The Commission derived this estimate 
based on per hour figures from SIFMA's Management & Professional 
Earnings in the Securities Industry 2013: (Sr. Programmer at $303 
per hour for 100 hours) + (Sr. Database Administrator at $312 per 
hour for 40 hours) + (Sr. Business Analyst at $251 per hour for 40 
hours) + (Attorney at $380 per hour for 20 hours) = 200 hours and 
$60,420. This burden hour estimate was based on discussions with 
various industry participants.
    \238\ The Commission estimates the monetized burden for this 
requirement to be $15,125. The Commission derived this estimate 
based on per hour figures from SIFMA's Management & Professional 
Earnings in the Securities Industry 2013: (Compliance Manager at 
$283 per hour for 20 hours) + (Sr. Business Analyst at $251 per hour 
for 15 hours) + (Attorney at $380 per hour for 15 hours) = 200 hours 
and $15,125. This burden hour estimate was based on discussions with 
various industry participants.
    \239\ The Commission estimates that, on average, a third-party 
service provider would charge $35,000 to perform the necessary work.
    \240\ 200 hours per broker-dealer who routes institutional 
orders who does not currently obtain data required by the proposed 
rule who will upgrade its own systems x 10 such broker-dealers + 50 
hours per broker-dealer who will engage a third-party to perform the 
necessary systems upgrades x 15 such broker-dealers = 2,750 hours. 
The Commission estimates the total monetized burden for this 
requirement to be $831,075 (10 routing broker-dealers who will 
perform upgrades in-house x $60,420 = $604,200) + (15 broker-dealers 
who will engage a third-party x $15,125 = $226,875) = $831,075). See 
supra notes 237 and 238.
    \241\ ($35,000 per broker-dealer who will engage a third-party x 
15 such broker-dealers) + ($15,000 per broker-dealer who will need 
to purchase hardware and software upgrades x 10 such broker-dealers) 
= $675.000. See supra note 239.
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    A broker-dealer that routes institutional orders whose systems 
already capture the data required by the proposed rule would need to 
format its systems to produce a report that complies with the proposed 
rule. The Commission estimates the average burden for a broker-dealer 
who already captures information required by the proposed rule to 
format its systems to produce a report to comply with the proposed rule 
would be 40 hours.\242\ The Commission estimates that 125 broker-
dealers would format systems to produce the reports in-house. A broker-
dealer that routes institutional orders who uses a third-party service 
provider to produce reports using such order handling information would 
need to need to work with the vendor to ensure the proper data is 
captured in the reports. The Commission estimates 50 broker-dealers 
that route institutional orders would use a third-party vendor to 
ensure data required by the rule is captured in the reports. The 
Commission estimates the average burden for a broker-dealer who uses a 
third-party service provider to work with such service provider to 
ensure proper reports are produced would be 20 hours \243\ and 
$5,000.\244\ The Commission preliminarily believes that broker-dealers 
whose systems currently capture and retain information required by the 
rule would not need to purchase hardware or software upgrades. Thus, 
the total burden for broker-dealers who currently obtain the required 
data but need to format their systems, or work with their data 
provider, to prepare a report to comply with the proposed rule is 6,000 
hours \245\ and $250,000.\246\

[[Page 49471]]

Therefore, the estimated total initial burden to comply with proposed 
Rule 606(b)(3) is 8,750 hours \247\ and $925,000.\248\
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    \242\ The Commission estimates the monetized burden for this 
requirement to be $12,084. The Commission derived this estimate 
based on per hour figures from SIFMA's Management & Professional 
Earnings in the Securities Industry 2013: (Sr. Programmer at $303 
per hour for 20 hours) + (Sr. Database Administrator at $312 per 
hour for 8 hours) + (Sr. Business Analyst at $251 per hour for 8 
hours) + (Attorney at $380 per hour for 4 hours) = 40 hours and 
$12,084.
    \243\ The Commission estimates the monetized burden for this 
requirement to be $5,726. The Commission derived this estimate based 
on per hour figures from SIFMA's Management & Professional Earnings 
in the Securities Industry 2013: (Compliance Manager at $283 per 
hour for 14 hours) + (Sr. Business Analyst at $251 per hour for 4 
hours) + (Attorney at $380 per hour for 2 hours) = 20 hours and 
$5,726.
    \244\ The Commission estimates a third-party service provider 
working with a broker-dealer whose systems currently capture and 
retain information required by the rule would, on average, charge 
$5,000 to program the systems to create a report that complies with 
the rule.
    \245\ 40 hours per broker-dealer who needs to format its systems 
to prepare a report x 125 broker-dealers who need to format their 
systems to prepare a report + 20 hours per broker-dealer who needs 
to work with a third-party vendor to ensure a proper report is 
produced x 50 broker-dealers who need to work with third-party 
vendors = 6,000 hours. The Commission estimates the monetized burden 
for this requirement to be $1,796,800 ($12,084 per broker-dealer who 
needs to format its systems to prepare a report x 125 such broker-
dealers + $5,726 per broker-dealer who needs to work with a third-
party vendor to ensure a proper report is produced x 50 such broker-
dealers = $1,796,800). See supra notes 242 and 243.
    \246\ $5,000 per broker-dealer who works with a third-party 
vendor to ensure proper reports are produced x 50 such broker-
dealers = $250,000. See supra note 244.
    \247\ 2,750 hours for broker-dealers who need to format their 
systems to obtain the information required by the proposed rule and 
prepare reports + 6,000 hours for broker-dealers who currently 
obtain such information and need to format their systems or work 
with their third-party vendor to prepare a report to comply with the 
rule = 8,750 hours. The Commission estimates the total monetized 
burden for this requirement to be $2,627,875 ($831,075 for broker-
dealers who need to format their systems either on their own or by 
using a third-party to obtain the information required by the 
proposed rule + $1,796,800 for broker-dealers who currently obtain 
such information and need to format their systems or work with their 
third-party vendor to prepare a report to comply with the rule = 
$2,627,875). See supra notes 240 and 245.
    \248\ ($35,000 per broker-dealer who will engage a third-party x 
15 such broker-dealers) + ($15,000 per broker-dealer who will need 
to purchase hardware and software upgrades x 10 such broker-dealers) 
+ ($5,000 per broker-dealer who works with a third-party vendor to 
work with such vendor to ensure proper reports are produced x 50 
such broker-dealers) = $975,000. See supra notes 241 and 246.
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    The Commission requests comment regarding the accuracy of its 
estimate as to how many broker-dealers that route institutional orders 
are currently able to obtain the information required by the proposed 
rules and the estimated burden hours necessary to comply with the 
proposal.
b. Annual Reporting and Recordkeeping Burden
    Proposed Rule 606(b)(3) requires broker-dealers to respond to 
individual customer requests for information on institutional orders. 
The Commission estimates that 135 of the 200 broker-dealers that route 
institutional orders would respond to proposed Rule 606(b)(3) requests 
in-house.\249\ The Commission estimates that an average response to a 
Rule 606(b)(3) request for a broker-dealer who responds to such 
requests in-house will take approximately 2 hours per response.\250\ 
The Commission estimates that an average broker-dealer will receive 
approximately 200 requests annually.\251\ Therefore, on average, a 
broker-dealer who responds to 606(b)(3) requests in-house will incur an 
estimated annual burden of 400 hours to prepare, disseminate, and 
retain responses to customers required by Rule 606(b)(3).\252\ With an 
estimated 135 broker-dealers who route institutional orders who will 
respond to 606(b)(3) requests in-house, the estimated total annual 
burden for such 135 broker-dealers to comply with the customer response 
requirement in proposed Rule 606(b)(3) is 54,000 hours.\253\
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    \249\ The Commission estimates that the 125 broker-dealers 
estimated already to capture the information that would be required 
plus the 10 broker-dealers that would do systems work in-house who 
do not currently capture the information that would be required 
would respond to Rule 606(b)(3) requests in-house.
    \250\ Based on discussions with industry participants, the 
Commission estimates that each response will require a Jr. Business 
Analyst for 1 hour and a Programmer Analyst for 1 hour. Thus, the 
burden estimate is calculated as follows: Jr. Business Analyst at 
$160 per hour for 1 hour, and a Programmer Analyst at $220 per hour 
for 1 hour, for a total burden of 2 hours and $380 per report. The 
Commission derived this estimate based on per hour figures from 
SIFMA's Management & Professional Earnings in the Securities 
Industry 2013.
    \251\ This estimate was based on discussions with various 
industry participants.
    \252\ 2 hours per request x 200 annual requests = 400 hours. The 
Commission estimates the total monetized burden for this requirement 
to be $76,000 annually (200 annual requests x $380 per request = 
$76,000). See supra note 250.
    \253\ 400 hours annually per broker-dealer that routes 
institutional orders who will respond to requests in-house x 135 
such broker-dealers = 54,000 hours. The Commission estimates the 
total monetized burden for this requirement to be $10,260,000 
($76,000 per broker-dealer that routes institutional orders that 
will respond to requests in-house x 135 such broker-dealers = 
$10,260,000). See id.
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    For the 65 broker-dealers that route institutional orders who are 
anticipated to use a third-party service provider to respond to 
requests pursuant to Rule 606(b)(3), the Commission estimates the 
burden to be 1 hour \254\ and $100 per response.\255\ With an estimated 
200 requests pursuant to Rule 606(b)(3) per year, the Commission 
estimates that on average, the annual burden for a broker-dealer who 
uses a third-party service provider to respond to requests pursuant to 
Rule 606(b)(3) will be 200 hours \256\ and $20,000. With an estimated 
65 broker-dealers that route institutional orders who will respond to 
Rule 606(b)(3) requests using a third-party-service provider, the 
Commission estimates the total annual burden for such 65 broker-dealers 
will be 13,000 hours \257\ and $1,300,000.\258\
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    \254\ The Commission estimates the monetized burden for this 
requirement to be $283. The Commission derived this estimate based 
on per hour figures from SIFMA's Management & Professional Earnings 
in the Securities Industry 2013: Compliance Manager at $283 per hour 
for 1 hour = $283.
    \255\ The Commission estimates a third-party service provider 
would charge on average $100 to respond to requests pursuant to the 
rule.
    \256\ 1 hour per broker-dealer who will use a third-party 
service provider per request x 200 requests annually = 200 hours. 
The Commission estimates the monetized burden for this requirement 
to be $56,600 (200 annual requests x $283 per request = $56,600). 
See supra note 254.
    \257\ 200 hours annual per broker-dealer who will use a third-
party service provider x 65 such broker-dealers = 13,000 hours. The 
Commission estimates the monetized burden for this requirement to be 
$3,679,000 ($56,600 annually per broker-dealer who will use a third-
party service provider x 65 such broker-dealers = $3,679,000). See 
id.
    \258\ $100 per request x 200 requests annually x 65 broker-
dealers who will use a third-party service provider = $1,300,000. 
See supra note 255.
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    Therefore, the total annual burden for all 200 broker-dealers that 
route institutional orders to comply with the customer response 
requirement in proposed Rule 606(b)(3) is estimated to be 67,000 hours 
\259\ and $1,300,000.\260\
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    \259\ 400 hours annually per broker-dealer that routes 
institutional orders who will respond to requests in-house x 135 
such broker-dealers + 200 hours annually per broker-dealer who 
routes institutional orders who will use a third-party to respond to 
requests x 65 such broker-dealers = 67,000 hours. The Commission 
estimates the total monetized burden for this requirement to be 
$13,939,000 ($10,260,000 for broker-dealers that route institutional 
orders who will respond to requests in-house + $3,679,000 for 
broker-dealers that route institutional orders who will use a third-
party service provider to respond to requests = $13,939,000). See 
supra notes 253 and 257.
    \260\ See supra note 258.
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2. Public Aggregated Report on Institutional Orders
c. Initial Reporting and Recordkeeping Burden
    Once a broker-dealer that routes institutional orders has systems 
in place to record and report the information required by proposed Rule 
606(b)(3) to individual customers, the broker-dealer creating the 
quarterly public aggregated institutional order handling reports in-
house will need to configure its systems to aggregate the information 
required by proposed Rule 606(c) or use a third-party service provider 
to create such reports. Once the systems to obtain such information are 
in place, the Commission estimates that broker-dealers or their third-
party service providers would incur a modest additional burden or cost 
to format such data into an aggregated report. The Commission estimates 
that some broker-dealers will format these reports themselves in-house 
while others will use a third-party service provider to format the 
reports. The Commission estimates that a broker-dealer who routes 
institutional orders which formats and creates the required reports 
itself would incur an initial burden of 20 hours to comply with the 
quarterly reporting requirement of proposed Rule 606(c).\261\ The 
Commission estimates

[[Page 49472]]

that a broker-dealer who uses a third-party service provide to create 
the necessary reports would incur an initial burden of 5 hours \262\ 
and $2,500.\263\ The Commission estimates that consistent with the 
estimates above about reports pursuant to proposed Rule 606(b)(3), 135 
broker-dealers who route institutional orders will create the required 
reports themselves while 65 broker-dealers will use a third-party 
service provider to create the required reports. Therefore, the 
estimated total initial burden for broker-dealers that route 
institutional orders to produce the quarterly report is 3,025 hours 
\264\ and $162,500.\265\
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    \261\ The Commission estimates the monetized burden for this 
requirement to be $4,990. The Commission derived this estimate based 
on per hour figures from SIFMA's Management & Professional Earnings 
in the Securities Industry 2013: Programmer at $248 per hour for 10 
hours + Sr. Business Analyst at $251 per hour for 10 hours = 20 
hours and $4,990.
    \262\ The Commission estimates the monetized burden for this 
requirement to be $1,415. The Commission derived this estimate based 
on per hour figures from SIFMA's Management & Professional Earnings 
in the Securities Industry 2013: Compliance Manager at $283 per hour 
for 5 hours = $1,415.
    \263\ The Commission estimates a third-party service provider 
would charge on average $2,500 to format a broker-dealer's data to 
produce a report to comply with the rule.
    \264\ 20 hours per broker-dealer that routes institutional 
orders who will create the required reports itself x 135 such 
broker-dealers + 5 hours per broker-dealer that routes institutional 
orders who uses a third-party service provider to create the 
required reports itself x 65 such broker-dealers = 3,025 hours. The 
Commission estimates the total monetized burden for this requirement 
to be $765,625 ($4,990 per broker-dealer that routes institutional 
orders x 135 such broker-dealers + $1,415 per broker-dealer who uses 
a third-party service provider to create the required reports x 65 
such broker-dealers = $765,625). See supra notes 261 and 262.
    \265\ $2,500 per broker-dealer who uses a third-party service 
provider to create the required reports x 65 such broker-dealers = 
$162,500. See supra note 263.
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d. Annual Reporting and Recordkeeping Burden
    The Commission estimates that each broker-dealer that routes 
institutional orders who prepares its reports in-house will incur an 
average burden of 10 hours \266\ to prepare and make publicly available 
a quarterly report in the format required by proposed Rule 606(c), or a 
burden of 40 hours per year.\267\ Once a report is posted on an 
internet Web site, the Commission does not estimate that there would be 
an additional burden to allow the report to remain posted for the 
period of time specified in the rule. With an estimated 135 broker-
dealers that route institutional orders that will prepare their own 
reports, the total burden per year to comply with the quarterly 
reporting requirement in proposed Rule 606(c) is estimated to be 5,400 
hours.\268\
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    \266\ The monetized cost for this burden requirement was derived 
as follows: (Jr. Business Analyst at $160 per hour for 10 hours = 
$1,600). The Commission derived this estimate based on per hour 
figures from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013.
    \267\ 10 hours per broker-dealer that routes institutional 
orders per quarter x 4 quarters = 40 hours per broker-dealer that 
routes institutional orders. The Commission estimates the total 
monetized burden for this requirement to be $6,400 ($1,600 per 
broker-dealer that routes institutional orders per quarter x 4 
quarters = $6,400). See id.
    \268\ 40 hours annually per broker-dealer that routes 
institutional orders x 135 broker-dealers that route institutional 
orders = 5,400 hours. The Commission estimates the total monetized 
burden for this requirement to be $864,000 ($6,400 annually per 
broker-dealer that routes institutional orders x 135 such broker-
dealers = $864,000). See id.
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    The Commission estimates that each broker-dealer that routes 
institutional orders that uses a third-party service provider to 
prepare the report will incur an average burden of 2 hours \269\ and 
$500 \270\ to prepare and make publicly available a quarterly report in 
the format required by proposed Rule 606(c), or a burden of 8 hours 
\271\ and $2,000 per year.\272\ Once a report is posted on an internet 
Web site, the Commission does not estimate that there would be an 
additional burden to allow the report to remain posted for the period 
of time specified in the rule. With an estimated 65 broker-dealers that 
route institutional orders that will use a third-party service provider 
to prepare their reports, the total burden per year to comply with the 
quarterly reporting requirement in proposed Rule 606(c) is estimated to 
be 520 hours \273\ and $130,000.\274\
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    \269\ The Commission estimates the monetized burden for this 
requirement to be $443. The monetized cost for this burden 
requirement was derived as follows: (Jr. Business Analyst at $160 
per hour for 1 hour + Compliance Manager at $283 per hour for 1 hour 
= $443). The Commission derived this estimate based on per hour 
figures from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013.
    \270\ The Commission estimates a third-party service provider 
would charge on average $500 to prepare a report required by the 
rule.
    \271\ 2 hours per broker-dealer that routes institutional orders 
per quarter who uses a third-party servicer provider x 4 quarters = 
8 hours per such broker-dealer. The Commission estimates the total 
monetized burden for this requirement to be $1,772 ($443 per broker-
dealer that routes institutional orders who uses a third-party 
servicer provider per quarter x 4 quarters = $1,772). See supra note 
269.
    \272\ $500 per report x 4 reports per year = $2,000. See supra 
note 270.
    \273\ 8 hours annually per broker-dealer that routes 
institutional orders who will use a third-party servicer provider to 
prepare its reports x 65 such broker-dealers = 520 hours. The 
Commission estimates the total monetized burden for this requirement 
to be $115,180 ($1,772 annually per broker-dealer that routes 
institutional orders x 65 such broker-dealers = $115,180).
    \274\ $2000 per broker-dealer who will use a third-party service 
provider to prepare its reports x 65 such broker-dealers = $130,000.
---------------------------------------------------------------------------

    Therefore, the total annual burden for all 200 broker-dealers who 
route institutional orders to comply with the quarterly reporting 
requirement in proposed Rule 606(c) is estimated to be 5,920 hours 
\275\ and $130,000.\276\
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    \275\ 40 hours per broker-dealer that routes institutional 
orders who will create the required reports x 135 such broker-
dealers + 8 hours per broker-dealer that routes institutional orders 
who will use a third-party service provider to create the required 
reports itself x 65 such broker-dealers = 5,920 hours. The 
Commission estimates the total monetized burden for this requirement 
to be $979,180 ($6,400 per broker-dealer that will create the 
reports itself x 135 such broker-dealers + $1,772 per broker-dealer 
who uses a third-party service provider to create the required 
reports x 65 such broker-dealers = $979,180). See supra notes 267 
and 271.
    \276\ See supra notes 274.
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3. Requirement To Document Methodologies for Categorizing Institutional 
Order Routing Strategies
a. Initial Reporting and Recordkeeping Burden
    The Commission estimates that broker-dealers that route 
institutional orders already have descriptions for their order routing 
strategies (or employ third-party vendors who have descriptions for 
such strategies) and will need to assign each order routing strategy 
for institutional orders to comply with the passive, neutral, and 
aggressive categories. Thus, the Commission estimates that the one-
time, initial burden for a broker-dealer that routes institutional 
orders to assign its own current strategies and establish and document 
its specific methodologies for assigning order routing strategies as 
required by Rule 606(b)(3)(v) to be 40 hours.\277\ The Commission 
estimates that, consistent with its estimates above, 135 broker-dealers 
that route institutional orders would do this in-house. With an 
estimated 135 broker-dealers who will assign their strategies and 
establish and document its specific methodologies for assigning 
institutional order routing strategies as passive, neutral, and 
aggressive in-house, the total initial burden for such broker-dealers 
is estimated to be 5,400 hours.\278\
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    \277\ The Commission estimates the monetized burden for this 
requirement to be $12,620. The Commission derived this estimate 
based on per hour figures from SIFMA's Management & Professional 
Earnings in the Securities Industry 2013: Sr. Business Analyst at 
$251 per hour for 20 hours + Attorney at $380 per hour for 20 hours 
= 40 hours and $12,620. This burden hour estimate was based on 
discussions with various industry participants.
    \278\ 40 hours per broker-dealer that routes institutional 
orders x 135 such broker-dealers = 5,400 hours. The Commission 
estimates the total monetized burden for this requirement to be 
$1,703,700 ($12,620 per broker-dealer that routes institutional 
orders x 135 such broker-dealers = $1,703,700). See id.

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[[Page 49473]]

    The Commission estimates that the one-time, initial burden for the 
65 broker-dealers that route institutional orders who will work with a 
third-party service provider to assign each order routing strategy for 
institutional orders into passive, neutral, and aggressive categories 
and establish and document its specific methodologies for assigning 
order routing strategies as required by Rule 606(b)(3)(v) to be 10 
hours \279\ and $5,000.\280\ With an estimated 65 broker-dealers that 
route institutional orders who will work with a third-party service 
provider, the total initial burden for such broker-dealers to assign 
their current routing strategies for institutional orders into passive, 
neutral, and aggressive strategies is estimated to be 650 hours \281\ 
and $325,000.\282\
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    \279\ The Commission estimates the monetized burden for this 
requirement to be $2,896. The Commission derived this estimate based 
on per hour figures from SIFMA's Management & Professional Earnings 
in the Securities Industry 2013: Compliance Manager at $283 per hour 
for 4 hours + Sr. Business Analyst at $251 per hour for 4 hours + 
Attorney at $380 per hour for 2 hours = 10 hours and $2,896. This 
burden hour estimate was based on discussions with various industry 
participants.
    \280\ The Commission estimates a third-party service provider 
would charge on average $5,000 to assign into one of the three 
categories the current strategies a broker-dealer uses and establish 
and document the specific methodologies for assigning order routing 
strategies as required by Rule 606(b)(3)(v).
    \281\ 10 hours per broker-dealer that routes institutional 
orders who will engage a third-party service provider to assign into 
one of the three categories its routing strategies and document such 
categorizations x 65 such broker-dealers = 650 hours. The Commission 
estimates the total monetized burden for this requirement to be 
$188,2400 ($2,896 per broker-dealer that routes institutional orders 
x 65 such broker-dealers = $188,240). See supra note 279.
    \282\ $5,000 per broker-dealer who will use a third-party 
service provider to assign into one of the three categories its 
routing strategies and document the methodologies for making such 
assignments x 65 such broker-dealers = $325,000. See supra note 280.
---------------------------------------------------------------------------

    Therefore, the total initial burden for all 200 broker-dealers who 
route institutional orders to comply with the requirement to document 
the methodologies for categorizing order routing strategies in proposed 
Rule 606(b)(3)(v) is estimated to be 6,050 hours \283\ and 
$325,000.\284\
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    \283\ 5,400 hours for broker-dealers who will assign each order 
routing strategy into one of the three categories and document 
methodologies for assigning such order routing strategies in-house 
plus 650 hours for broker-dealers who will use a third-party service 
provider to assign into one of the three categories its routing 
strategies, document the methodologies for making such assignments, 
and promptly update the assignments any time an existing strategy is 
amended or a new strategy is created that would change such 
assignments = 6,050 hours. The Commission estimates the monetized 
burden for this requirement to be $1,891,940 ($1,703,700 for broker-
dealers who will assign into one of the three categories its routing 
strategies, document the methodologies for making such assignments, 
and promptly update the assignments any time an existing strategy is 
amended or a new strategy is created that would change such 
assignments in-house plus $188,240 for broker-dealers who will use a 
third-party service provider to assign into one of the three 
categories its routing strategies, document the methodologies for 
making such assignments, and promptly update the assignments any 
time an existing strategy is amended or a new strategy is created 
that would change such assignments = $1,891,940). See supra notes 
278 and 281.
    \284\ See supra note 282.
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b. Annual Reporting and Recordkeeping Burden
    Once established, broker-dealers that route institutional orders 
would be required to maintain the documentation of their order routing 
strategies. After a broker-dealer's strategies are initially assigned 
to one of the three categories in a consistent manner, the broker-
dealer would be required to promptly update such assignments any time 
an existing strategy is amended or a new strategy is created that would 
change such assignment. The Commission estimates that the annual burden 
for a broker-dealer who will perform the work in-house to assign the 
descriptions of order routing strategies and promptly update the 
assignments any time an existing strategy is amended or a new strategy 
is created that would change such assignments to comply with Rule 
606(b)(3)(v) will be 15 hours.\285\ With an estimated 135 broker-
dealers who route institutional orders who will maintain and assign 
their own descriptions, the total annual burden for such broker-dealers 
to assign the routing strategies for their institutional orders into 
passive, neutral, and aggressive strategies is estimated to be 2,025 
hours.\286\
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    \285\ The Commission estimates the monetized burden for this 
requirement to be $3,500. The Commission derived this estimate based 
on per hour figures from SIFMA's Management & Professional Earnings 
in the Securities Industry 2013: Jr. Business Analyst at $160 per 
hour for 10 hours + Attorney at $380 per hour for 5 hours = 15 hours 
and $3,500. This burden hour estimate was based on discussions with 
various industry participants.
    \286\ 15 hours per broker-dealer that routes institutional 
orders who will assign and maintain their own descriptions x 135 
such broker-dealers = 2,025 hours. The Commission estimates the 
total monetized burden for this requirement to be $472,500 ($3,500 
per broker-dealer that routes institutional orders x 135 such 
broker-dealers = $472,500). See id.
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    The Commission estimates that the annual burden for a broker-dealer 
who routes institutional orders who engages a third-party service 
provider to comply with Rule 606(b)(3)(v) will be 5 hours \287\ and 
$1,000.\288\ With an estimated 65 broker-dealers who route 
institutional orders who will engage a third-party to assign each order 
routing strategy for institutional orders into one of these three 
categories, document the methodologies for making such assignments, and 
promptly update the assignments any time an existing strategy is 
amended or a new strategy is created that would change such 
assignments, the total annual burden for such broker-dealers to work 
with a third-party service provider to assign the routing strategies 
for their institutional orders into passive, neutral, and aggressive 
strategies is estimated to be 325 hours \289\ and $65,000.\290\
---------------------------------------------------------------------------

    \287\ The Commission estimates the monetized burden for this 
requirement to be $1,609. The Commission derived this estimate based 
on per hour figures from SIFMA's Management & Professional Earnings 
in the Securities Industry 2013: Compliance Manager at $283 per hour 
for 3 hours + Attorney at $380 per hour for 2 hours = 5 hours and 
$1,609. This burden hour estimate was based on discussions with 
various industry participants.
    \288\ The Commission estimates a third-party service provider 
would charge $1,000 annually to maintain and keep current strategy 
categorizations strategies documentation of specific methodologies 
for assigning order routing strategies as required by Rule 
606(b)(3)(v).
    \289\ 5 hours per broker-dealer that routes institutional orders 
who will engage a third-party to assign into one of the three 
categories its routing strategies, document the methodologies for 
making such assignments, and promptly update the assignments any 
time an existing strategy is amended or a new strategy is created 
that would change such assignments x 65 such broker-dealers = 325 
hours. The Commission estimates the total monetized burden for this 
requirement to be $104,585 ($1,609 per broker-dealer that routes 
institutional orders who will engage a third-party to assign into 
one of the three categories its routing strategies, document the 
methodologies for making such assignments, and promptly update the 
assignments any time an existing strategy is amended or a new 
strategy is created that would change such assignments x 65 such 
broker-dealers = $104,585). See supra note 287.
    \290\ $1,000 per broker-dealer who will use a third-party 
service provider to assign into one of the three categories its 
routing strategies, document the methodologies for making such 
assignments, and promptly update the assignments any time an 
existing strategy is amended or a new strategy is created that would 
change such assignments x 65 such broker-dealers = $65,000.
---------------------------------------------------------------------------

    Therefore, the total annual burden for all 200 broker-dealers who 
route institutional orders to comply with the requirement to document 
the

[[Page 49474]]

methodologies for categorizing order routing strategies and maintain 
the documentation of such methodologies in proposed Rule 606(b)(3)(v) 
is estimated to be 2,350 hours \291\ and $65,000.\292\
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    \291\ 2,025 hours for broker-dealers who will assign into one of 
the three categories its routing strategies, document the 
methodologies for making such assignments, and promptly update the 
assignments any time an existing strategy is amended or a new 
strategy is created that would change such assignments in-house plus 
325 hours for broker-dealers who will use a third-party service 
provider to assign into one of the three categories its routing 
strategies, document the methodologies for making such assignments, 
and promptly update the assignments any time an existing strategy is 
amended or a new strategy is created that would change such 
assignments = 2,350 hours. The Commission estimates the monetized 
burden for this requirement to be $577,085 ($472,500 for broker-
dealers who will assign into one of the three categories its routing 
strategies, document the methodologies for making such assignments, 
and promptly update the assignments any time an existing strategy is 
amended or a new strategy is created that would change such 
assignments in-house plus $104,585 for broker-dealers who will use a 
third-party service provider to assign into one of the three 
categories its routing strategies, document the methodologies for 
making such assignments, and promptly update the assignments any 
time an existing strategy is amended or a new strategy is created 
that would change such assignments = $577,085). See supra notes 286 
and 291.
    \292\ See supra note 290.
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4. Amendment to Current Disclosures With Respect to Retail Orders
a. Initial Reporting and Recordkeeping Burden
    Any broker-dealer that routes retail orders is subject to the 
collection of information in Rule 606(a) and the proposed amendments 
thereto. The Commission notes that there are differences among the 
estimated 266 broker-dealers that are subject to retail order routing 
disclosure requirements.\293\ Introducing firms typically rely 
primarily on clearing brokers to handle their customer accounts, and 
the collection of information burden would not apply to introducing 
brokers unless they are directly involved in determining where their 
customer orders are routed.\294\ The Commission estimates that there 
are currently 185 clearing brokers that route retail orders. In 
addition to the 185 clearing brokers, there are approximately 81 
introducing brokers that receive (but do not hold) funds or securities 
from their customers.\295\ Generally, introducing brokers rely on 
clearing brokers to clear and execute trades and handle customer funds 
and securities.\296\ However, the Commission preliminarily believes 
that some introducing brokers which receive funds or securities for 
customers may be involved in initiating orders or initially routing 
orders on behalf of their customers and may therefore have involvement 
in determining where retail orders are routed for execution. Because 
such introducing brokers may have involvement in determining where 
orders are routed, they have been included, along with clearing 
brokers, in estimating the total burden of the proposed amendments for 
institutional routing disclosure. The Commission preliminarily believes 
that the estimates should be the same for a clearing broker or an 
introducing broker that routes retail orders. Therefore, the Commission 
estimates that there are 266 broker-dealers to which the proposed 
requirements would apply.\297\
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    \293\ The Commission has previously noted the differences 
between these types of broker-dealers. See, e.g., Rule 606 
Predecessor Proposing Release supra note 15, at 48427.
    \294\ See Securities Exchange Act Release No. 40122 (June 24, 
1998), 63 FR 35508 (June 30, 1998).
    \295\ This estimate is based on December 2015 Form Custody data 
received by the Commission.
    \296\ See Rule 606 Predecessor Proposing Release, supra note 15 
at 48427.
    \297\ 185 clearing brokers + 81 introducing brokers that receive 
funds or securities from customers = 266 broker-dealers that route 
retail orders.
---------------------------------------------------------------------------

    Rule 606(a)(1) currently requires that broker-dealers make publicly 
available quarterly reports on retail order routing. While the proposed 
rule does not alter this requirement; it does modify the content of the 
report. As noted above, broker-dealers will be required to account for 
the proportion of non-directed marketable limit and non-marketable 
limit orders as a percentage of total retail orders as well as the 
percentage of such orders broken down by Specified Venue. In addition, 
for each Specified Venue, broker-dealers would be required to provide 
information about net payment for order flow received per share, 
payment from any profit-sharing relationship received, transaction fees 
paid, and transaction rebates received per share and in the aggregate 
broken down by order type. The proposed rule would require that such 
reports be broken down by calendar month. The proposed rule also 
eliminates a requirement that the order routing information contained 
in the customer reports be broken down by listing market, which 
simplifies presentation of information required under the rule.
    To comply with the proposed requirements, broker-dealers who do not 
have systems that currently obtain information required by the rule 
will have to alter their current systems to obtain, record, and retain 
the information required by the proposed changes. The Commission 
preliminarily believes that broker-dealers would not encounter capital 
expenditures to comply with this requirement. The Commission estimates 
that most broker-dealers that route retail orders already obtain the 
information required by the proposed rule and that 50 broker-dealers do 
not currently obtain such information.\298\ The Commission estimates 
that 25 of these 50 broker-dealers would update their systems in-house, 
while 25 would use third-party service providers.
---------------------------------------------------------------------------

    \298\ The Commission estimates that most broker-dealers 
currently obtain such information. At the time of routing, for 
instance, a broker-dealer should know what type an order is, (i.e., 
market or limit), whether the order is directed or not, and, if the 
order is a limit order, whether the limit order is marketable or 
not. Additionally, a broker-dealer should know after execution what 
types of fees or rebates were received, both on a per share basis 
and in the aggregate.
---------------------------------------------------------------------------

    The Commission estimates that the initial burden for a broker-
dealer that routes retail orders whose systems do not currently capture 
all of the information required by the rule to update its systems to 
capture the information required by proposed Rule 606(a) and format 
that information into a report to comply with the rule will be 80 
hours.\299\ Therefore, the Commission estimates the total initial 
burden for the 25 broker-dealers who the Commission estimates do not 
currently capture information required by the proposed rule that 
perform the necessary system updates in-house will be 2,000 hours.\300\
---------------------------------------------------------------------------

    \299\ The Commission estimates the monetized burden for this 
requirement to be $22,648. The Commission derived this cost estimate 
based on per hour figures from SIFMA's Management & Professional 
Earnings in the Securities Industry 2013: Sr. Programmer at $303 per 
hour for 40 hours) + (Sr. Database Administrator at $312 per hour 
for 16 hours) + (Sr. Business Analyst at $251 per hour for 16 hours) 
+ (Attorney at $380 per hour for 4 hours) = 80 hours and $22,648.
    \300\ 80 hours per broker-dealer that routes retail orders who 
will perform necessary system updates in-house x 25 such-broker-
dealers = 2,000 hours. The Commission estimates the total monetized 
burden for this requirement to be $566,200 ($22,648 per broker-
dealer that routes institutional orders x 25 such broker-dealers = 
$566,200). See id.
---------------------------------------------------------------------------

    The Commission estimates that the initial burden for a broker-
dealer that routes retail orders to engage a third-party to program the 
necessary system updates to comply with proposed Rule 606(a) will be 20 
hours \301\ and $10,000.\302\ Therefore, the Commission

[[Page 49475]]

estimates the total initial burden for the 25 broker-dealers who the 
Commission estimates do not currently capture information required by 
the proposed rule who will engage a third-party service provider to 
perform the necessary system updates will be 500 hours \303\ and 
$250,000. The Commission notes that this estimate contemplates the 
impact of making the reports available using the most recent versions 
of the XML schema and the associated PDF renderer, as published on the 
Commission's Web site, as required by both proposed Rule 606(a) and 
606(b)(1). Therefore, the total initial burden estimate for all 50 
broker-dealers who the Commission estimates will need to update their 
systems and create a new report is 2,500 hours \304\ and $250,000.\305\
---------------------------------------------------------------------------

    \301\ The Commission estimates the monetized burden for this 
requirement to be $5,985. The Commission derived this cost estimate 
based on per hour figures from SIFMA's Management & Professional 
Earnings in the Securities Industry 2013: Compliance Manager at $283 
per hour for 10 hours + Sr. Business Analyst at $251 per hour for 5 
hours + Attorney at $380 per hour for 5 hours = 20 hours and $5,985.
    \302\ The Commission estimates that a third-party service 
provider would charge an average of $10,000 to upgrade a broker-
dealer's systems to comply with proposed Rule 606(a).
    \303\ 20 hours per broker-dealer that routes retail orders who 
will engage a third-party service provider to perform necessary 
system updates x 25 such-broker-dealers = 500 hours. The Commission 
estimates the total monetized burden for this requirement to be 
$149,625 ($5,985 per broker-dealer that routes institutional orders 
x 25 such broker-dealers = $149,625). See supra note 301.
    \304\ 2,000 hours for a broker-dealer that routes retail orders 
whose systems do not currently capture the required information who 
will perform upgrades + 500 hours for a broker-dealer who routes 
retail orders whose systems do not currently capture the required 
information who will engage a third-party to perform the necessary 
upgrades = 2,500 hours. The Commission estimates the total monetized 
burden for this requirement to be $715,825 ($566,200 for broker-
dealers that route retail orders whose systems do not currently 
capture the required information who will perform necessary upgrades 
in-house + $149,625 for broker-dealers that route retail orders 
whose systems do not currently capture the required information who 
will engage a third-party service provider to perform the system 
updates x 25 such broker-dealers) = $715,825. See supra notes 300 
and 303.
    \305\ $10,000 per broker-dealer who will engage a third-party to 
perform necessary updates x 25 such broker-dealers = $250,000.
---------------------------------------------------------------------------

    For the remaining 216 broker-dealers whom the Commission estimates 
currently capture the data required by the proposed modifications to 
Rule 606(a), such broker-dealers would need to only format their 
reports to incorporate such data. The Commission estimates that 108 of 
such broker-dealers currently engage a third-party service provider to 
provide reports pursuant to existing Rule 606(a) and such broker-
dealers would continue to use third-party service providers to format 
reports to comply with proposed Rule 606(a), as described further 
below. The Commission estimates that the remaining 108 broker-dealers 
who already capture information required by the proposed rule would 
prepare and format a report to comply with the proposed rule in-house. 
The Commission estimates for a broker-dealer who already captures such 
data, the burden to format that data into its existing reports on its 
own would be 20 hours.\306\ Therefore, the total initial burden for 
broker-dealers to format already captured data into a report in-house 
to comply with proposed Rule 606(a) is estimated to be 2,160 
hours.\307\
---------------------------------------------------------------------------

    \306\ The Commission estimates the monetized burden for this 
requirement to be $4,975. The Commission derived this estimate based 
on per hour figures from SIFMA's Management & Professional Earnings 
in the Securities Industry 2013: Programmer at $248 per hour for 15 
hours + Sr. Business Analyst at $251 per hour for 5 hours = 20 hours 
and $4,975.
    \307\ 20 hours per broker-dealer who will format reports in-
house x 108 such broker-dealers = 2,160 hours. The Commission 
estimates the monetized burden for this requirement to be $537,300 
($4,975 per broker-dealer who will format reports in-house x 108 
such broker-dealers). See id.
---------------------------------------------------------------------------

    The Commission estimates the initial burden for the 108 broker-
dealers who engage a third-party service provider to format reports to 
comply with proposed Rule 606(a) would be 8 hours \308\ and 
$2,000.\309\ Therefore, for the 108 broker-dealers the Commission 
estimates route retail orders who will engage a third-party to format 
and prepare a report that would comply with the proposed rule, the 
estimated total initial burden to comply with proposed Rule 606(a) is 
864 hours \310\ and $216,000.\311\ Thus, the total estimate for the 216 
broker-dealers for whom the Commission estimates currently capture the 
data required by proposed Rule 606(a) to format their reports to 
incorporate such data is 3,024 hours \312\ and $216,000.\313\ The 
Commission notes that these estimate include the impact of making the 
reports available using the most recent versions of the XML schema and 
the associated PDF renderer as published on the Commission's Web site, 
as required by both proposed Rule 606(a) and 606(b)(1).
---------------------------------------------------------------------------

    \308\ The Commission estimates the monetized burden for this 
requirement to be $2,555. The Commission derived this estimate based 
on per hour figures from SIFMA's Management & Professional Earnings 
in the Securities Industry 2013: Compliance Manager at $283 per hour 
for 5 hours + Attorney at $380 per hour for 3 hours = 8 hours and 
$2,555. This burden hour estimate was based on discussions with 
various industry participants.
    \309\ The Commission estimates a third-party service provider 
would charge on average $2,000 to format already captured data into 
a report that would comply with proposed Rule 606(a).
    \310\ 8 hours per broker-dealer who will perform the necessary 
system updates in-house x 108 such broker-dealers = 864 hours. The 
Commission estimates the monetized burden for this requirement to be 
$275,940 ($2,555 per broker-dealer who will perform the system 
updates in-house 108 such broker-dealers). See supra note 308.
    \311\ $2,000 per broker-dealer who will use a third-party 
service provider to format data and prepare a report x 108 such 
broker-dealers = $216,000. See supra note 309.
    \312\ 2,160 hours for broker-dealers who currently capture the 
information required by proposed Rule 606(a) and will format their 
systems to create reports to comply with the proposed rule in-house 
+ 864 hours for broker-dealers who currently capture such 
information who will hire a third-party service provider to format 
their systems to comply with the proposed rule = 3,024 hours. The 
Commission estimates the total monetized burden for this requirement 
to be $813,240 ($537,500 for broker-dealers who currently capture 
the information required by proposed Rule 606(a) and will format 
their systems to create reports to comply with the proposed rule in-
house + $275,940 for broker-dealers who currently capture such 
information who will hire a third-party service provider to format 
their systems to comply with the proposed rule = $813,240). See 
supra notes 307 and 310.
    \313\ See supra note 311.
---------------------------------------------------------------------------

    Therefore, the Commission estimates that the total initial burden 
to comply with the proposed modifications to Rule 606(a) for all 266 
broker-dealers which the Commission estimates route retail orders is 
5,524 hours \314\ and $466,000.\315\
---------------------------------------------------------------------------

    \314\ 2,500 hours for broker-dealers who need to update their 
systems and prepare a report + 3,124 hours for broker-dealers who 
currently capture the information required by proposed Rule 606(a) 
and need to format their systems to create reports to comply with 
the proposed rule = 5,524 hours. The Commission estimates the total 
monetized burden for this requirement to be $1,529,065 ($715,850 for 
broker-dealers who need to update their systems and prepare a report 
+ $813,240 for broker-dealers who currently capture the information 
required by proposed Rule 606(a) and need to format their systems to 
create reports to comply with the proposed rule = $1,529,065). See 
supra notes 304 and 312.
    \315\ $250,000 for broker-dealers who will engage a third-party 
to perform necessary upgrades + $216,000 for broker-dealers who will 
engage a third-party to format reports to comply with the proposed 
rule = $466,000. See supra notes 305 and 311.
---------------------------------------------------------------------------

    Finally, the Commission proposes to amend Rule 606(a)(1)(iv) \316\ 
to require broker-dealers to describe specific aspects of any terms of 
payment for order flow arrangements and profit-sharing relationships, 
whether written or oral, with a Specified Venue that may influence 
their order routing decisions, including information relating to 
specific incentives or volume minimums.\317\ The Commission estimates 
that the initial burden for a broker-dealer that routes retail orders 
to review, assess, and disclose its payment for order flow arrangements 
and profit-sharing relationships would be 10

[[Page 49476]]

hours \318\ and that all 266 broker-dealers who route retail orders 
would describe such agreements and arrangements themselves. Therefore, 
the total initial burden for all broker-dealers who route retail orders 
to review, assess, and disclose its payment for order flow arrangements 
and profit-sharing relationships is estimated to be 2,660 hours.\319\
---------------------------------------------------------------------------

    \316\ Renumbered from Rule 606(a)(1)(iii).
    \317\ See proposed Rule 606(a)(1)(iv).
    \318\ The Commission estimates the monetized burden for this 
requirement to be $3,155. The Commission derived this estimate based 
on per hour figures from SIFMA's Management & Professional Earnings 
in the Securities Industry 2013: (Sr. Business Analyst at $251 per 
hour for 5 hours) + (Attorney at $380 per hour for 5 hours) = 10 
hours and $3,155.
    \319\ 10 hours per broker-dealer that routes retail orders x 266 
such broker-dealers = 2,660 hours. The Commission estimates the 
total monetized burden for this requirement to be $839,230 ($3,155 
per broker-dealer that routes retail orders x 266 such broker-
dealers = $839,230). See id.
---------------------------------------------------------------------------

b. Annual Reporting and Recordkeeping Burden
    Rule 606(a) currently requires brokers-dealers that route retail 
orders to make available reports on the routing of all non-directed 
orders. The proposed changes to Rule 606(a)(1) will: (1) Eliminate the 
requirement that such reports be divided based on primary listing 
market and instead aggregate all NMS stocks into a single section; (2) 
add requirements that the reports contain information relating to the 
routing of marketable and non-marketable orders, as well as average 
payment for order flow for different types of orders; (3) require 
broker-dealers to describe any terms of payment for order flow 
arrangements and profit-sharing relationships with a Specified Venue 
that may influence their order routing decisions; and (4) require that 
such reports be made available using the most recent versions of the 
XML schema and the associated PDF renderer as published on the 
Commission's Web site.\320\ The proposed amendments do alter the 
information currently collected under an existing collection of 
information requirement. The Commission preliminarily believes that 
once the initial burdens, described above, have been incurred to allow 
the broker-dealer to obtain the required information, the ongoing 
burden to produce a quarterly report would remain the same. However, 
broker-dealers would need to monitor payment for order flow and profit-
sharing relationships and potential SRO rule changes that could impact 
their order routing decisions and incorporate any new information into 
their reports. Thus, the Commission estimates the average annual burden 
for a broker-dealer to comply with the proposed amendments to Rule 
606(a)(1)(i)-(iii) would be 10 hours.\321\ Thus, the total annual 
burden for all broker-dealers to comply with the proposed amendments is 
estimated to be 2,660 hours.\322\
---------------------------------------------------------------------------

    \320\ See supra Section III.B.
    \321\ The Commission estimates the monetized burden for this 
requirement to be $3,155. The Commission derived this estimate based 
on per hour figures from SIFMA's Management & Professional Earnings 
in the Securities Industry 2013: (Sr. Business Analyst at $251 per 
hour for 5 hours) + (Attorney at $380 per hour for 5 hours) = 10 
hours and $3,155.
    \322\ 10 hours per broker-dealer that routes retail orders x 266 
such broker-dealers = 2,660 hours. The Commission estimates the 
total monetized burden for this requirement to be $839,230 ($3,155 
per broker-dealer that routes retail orders x 266 such broker-
dealers = $839,230). See id.
---------------------------------------------------------------------------

    Proposed Rule 606(a)(1)(iv) would require broker-dealers to 
describe any terms of payment for order flow arrangements and profit-
sharing relationships with a Specified Venue that may influence their 
order routing decisions. Current Rule 606(a)(1)(iii), being renumbered 
as proposed Rule 606(a)(iv), requires broker-dealers to provide a 
discussion of the material aspects of the broker-dealer's relationship 
with each Specified Venue, including a description of any arrangement 
for payment for order flow and any profit-sharing relationship. 
Therefore, the proposed changes would require broker-dealers to 
describe any terms of payment for order flow arrangements and profit-
sharing relationships with a Specified Venue that may influence their 
order routing decisions, in addition to the material aspects of the 
broker-dealer's relationship with each Specified Venue. Additionally, 
the costs noted in this section include the impact of posting the 
required reports in the specified format to an internet Web site. Once 
a report is posted on an internet Web site, the Commission estimates 
that there would not be an additional burden to allow the report to 
remain posted for the period of time specified in the rule. The 
Commission estimates that the average annual burden for a broker-dealer 
that handles retail orders to describe and update any terms of payment 
for order flow arrangements and profit-sharing relationships with a 
Specified Venue that may influence their order routing decisions to be 
15 hours.\323\ With 266 broker-dealers involved in retail order routing 
practices that would be required to comply with the rule, the 
Commission estimates the total annual burden for complying with 
proposed Rule 606(a)(1)(iv) to be 3,990 hours.\324\
---------------------------------------------------------------------------

    \323\ The Commission estimates the monetized burden for this 
requirement to be $3,500. The Commission derived this estimate based 
on per hour figures from SIFMA's Management & Professional Earnings 
in the Securities Industry 2013: (Jr. Business Analyst at $160 per 
hour for 10 hours) + (Attorney at $380 per hour for 5 hours) = 15 
hours and $3,500.
    \324\ 15 hours annually per broker-dealer that routes retail 
orders x 266 such broker-dealers = 3,990 hours. The Commission 
estimates the total monetized burden for this requirement to be 
$931,000 ($3,500 annually per broker-dealer that routes retail 
orders x 266 such broker-dealers = $931,000). See id.
---------------------------------------------------------------------------

5. Amendment to Current Disclosures Under Rule 605
    Currently, Rule 605 requires market centers make available 
standardized, monthly reports of statistical information concerning 
their order executions. Further, the Rule requires that such reports be 
in electronic form and be made available for downloading from an 
Internet Web site that is free and readily accessible to the public. 
The proposed amendment to Rule 605 would require that such reports be 
kept posted on an Internet Web site that is free of charge and readily 
accessible to the public for a period of three years from the initial 
date of posting on the Internet Web site. Because reports are already 
posted to an internet Web site pursuant to current Rule 605, the 
Commission estimates the proposed amendment to Rule 605 would not 
impose an additional burden. The proposed amendment prescribes a 
minimum period of time for which such reports that are already required 
to be posted on an Internet Web site shall remain posted.

E. Collection of Information Is Mandatory

    All of the collection of information would be mandatory.

F. Confidentiality of Responses to Collection of Information

    To the extent that the Commission receives confidential information 
pursuant to the collection of information, such information will be 
kept confidential, subject to the provisions of applicable law.\325\ 
Any information required to be disclosed publicly by the proposed Rules 
would not be confidential.
---------------------------------------------------------------------------

    \325\ See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x (governing 
the public availability of information obtained by the Commission).
---------------------------------------------------------------------------

    The quarterly order routing reports prepared and disseminated by 
broker-dealers pursuant to Rules 606(a) and 606(c), as proposed, would 
be available to the public. The individual responses by broker-dealers 
to customer requests for order routing information required by Rules 
606(b)(1) and (b)(3), as proposed, would be made available the 
customer. The Commission, SROs, and

[[Page 49477]]

other regulatory authorities could obtain copies of these reports as 
appropriate.

G. Retention Period for Recordkeeping Requirements

    Pursuant to proposed Rule 606(a), broker-dealers shall be required 
to keep quarterly retail order routing reports posted on an Internet 
Web site that is free and readily accessible to the public for a period 
of three years from the initial date of posting on the Internet Web 
site.
    For Rule 606(b), broker-dealers shall be required to preserve all 
communications required under these proposed amendments pursuant to 
Rule 17a-4, as applicable.\326\ For the categorization of order routing 
strategies pursuant to proposed Rule 606(b)(3)(v), broker-dealers shall 
be required to preserve such records in a manner consistent with Rule 
17a-4(b), specifically for a period of not less than three years, the 
first two years in an easily accessible place.
---------------------------------------------------------------------------

    \326\ 17 CFR 240.17a-4. Registered brokers and dealers are 
already subject to existing recordkeeping and retention requirements 
under Rule 17a-4.
---------------------------------------------------------------------------

    Pursuant to proposed Rule 606(c), broker-dealers shall be required 
to keep public aggregated institutional order handling reports posted 
on an Internet Web site that is free and readily accessible to the 
public for a period of three years from the initial date of posting on 
the Internet Web site.
    Pursuant to the proposed amendments to Rule 605, market centers 
shall be required to keep order execution reports posted on an Internet 
Web site that is free and readily accessible to the public for a period 
of three years from the initial date of posting on the Internet Web 
site.

H. Request for Comments

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to:
    120. Evaluate whether the proposed collections of information are 
necessary for the proper performance of the functions of the agency, 
including whether the information shall have practical utility;
    121. Evaluate the accuracy of our estimates of the burden of the 
proposed collection of information;
    122. Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected; and
    123. Evaluate whether there are ways to minimize the burden of 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology.
    Persons submitting comments on the collection of information 
requirements should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090, with reference to File Number S7-14-16. 
Requests for materials submitted to OMB by the Commission with regard 
to this collection of information should be in writing, with reference 
to File Number S7-14-16 and be submitted to the Securities and Exchange 
Commission, Office of FOIA/PA Services, 100 F Street NE., Washington, 
DC 20549-2736. As OMB is required to make a decision concerning the 
collection of information between 30 and 60 days after publication, a 
comment to OMB is best assured of having its full effect if OMB 
receives it within 30 days of publication.

V. Economic Analysis

    The Commission is sensitive to the economic consequences and 
effects, including costs and benefits, of its rules. The following 
economic analysis identifies and considers the costs and benefits--
including the effects on efficiency, competition, and capital 
formation--that may result from the proposed amendments to Rules 600, 
605, and 606.\327\ These costs and benefits are discussed below and 
have informed the policy choices described throughout this release.
---------------------------------------------------------------------------

    \327\ The Commission also considered the proposed amendments to 
Rule 607 and preliminarily believes that there are no costs and 
benefits associated with those proposed amendments. The proposed 
amendments to Rule 607 replace ``customer order'' with ``retail 
order'' to be consistent with the proposed amendments to Rule 
600(b)(19). However, since the definition in proposed Rule 
600(b)(19) remains unchanged, there are no cost and benefits to the 
proposed amendments to Rule 607. The Commission is also proposing to 
amend Rule 3a51-1(a) under the Exchange Act; Rule 13h-1(a)(5) of 
Regulation 13D-G; Rule 105(b)(1) of Regulation M; Rules 201(a) and 
204(g) of Regulation SHO; Rules 600(b), 602(a)(5), 607(a)(1), and 
611(c) of Regulation NMS; and Rule 1000 of Regulation SCI, to update 
cross-references as a result of today's proposal, which would not 
result in costs or benefits.
---------------------------------------------------------------------------

A. Introduction

    Among the primary economic considerations for the proposed 
amendments to Rule 600, Rule 605, and Rule 606 are transparency for 
customers placing institutional orders, enhanced transparency for 
customers placing retail orders, and enhanced access to order handling 
reports.
    The Commission proposes to amend Rule 600 to include a definition 
of ``institutional order'' and to amend Rule 606 to require broker-
dealers to (1) disclose standardized customer-specific institutional 
order handling information to their customers, including the use of 
actionable IOIs in executing institutional orders and (2) make publicly 
available for each calendar quarter a report that aggregates the 
information required for customer-specific institutional order handling 
reports for all institutional orders they receive.
    In short, and as discussed earlier, the Commission preliminarily 
believes that standardizing customer-specific institutional order 
handling disclosures, as would be required by proposed Rule 606(b)(3), 
would provide information to customers to enable them to: (1) Assess 
the potential for information leakage with the routing of their orders; 
(2) assess the conflicts of interest that may influence the broker-
dealer's order handling practices; and (3) compare institutional order 
handling practices across multiple broker-dealers. The Commission also 
preliminarily believes that requiring broker-dealers to disclose their 
use of actionable IOIs in executing institutional orders will be useful 
to customers assessing broker-dealers' order handling decisions, 
particularly in regards to analyzing information leakage.
    In addition, the Commission preliminarily believes that public 
disclosure by each broker-dealer of aggregated information about its 
institutional order handling, as would be required by proposed Rule 
606(c), would, among other things, (1) assist market participants, 
including customers, in comparing the order handling services of all 
broker-dealers; (2) facilitate customers' ability to make informed 
decisions when engaging a broker-dealer's services; (3) provide 
academics and other members of the public with access to additional 
data for conducting research on institutional order routing and market 
execution quality; (4) allow broker-dealers to better compare their own 
services against other broker-dealers; and (5) permit trading centers 
to better compare their execution statistics against other trading 
centers.
    The Commission preliminarily believes that the customer-specific as 
well as the public aggregated institutional order handling reports may 
further incentivize broker-dealers to provide customers with higher-
quality routing services when executing their institutional orders, 
thereby mitigating the potential for information leakage,

[[Page 49478]]

and better manage any potential conflicts of interest the broker-
dealers may face. The Commission also preliminarily believes that the 
reports will promote competition among broker-dealers to capture 
customers' order flow, and among trading centers for order execution.
    With respect to retail orders, the Commission proposes to amend 
Rule 606(a)(1) to include new subparagraph (iii) to require that, for 
each Specified Venue, the broker-dealer must report 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 on a per share 
basis, for each of the following non-directed order types: (1) Market 
orders; (2) marketable limit orders; (3) non-marketable limit orders; 
and (4) other orders.\328\ In addition, proposed amendments to Rule 
606(a)(1)(iv) would require disclosure of a description of any terms of 
payment for order flow arrangements and profit-sharing relationships, 
whether written or oral, with a Specified Venue that may influence a 
broker-dealer's order routing decisions, including, but not limited to: 
(1) Incentives for equaling or exceeding an agreed upon order flow 
volume threshold, such as additional payments or a higher rate of 
payment; (2) disincentives for failing to meet an agreed upon minimum 
order flow threshold, such as lower payments or the requirement to pay 
a fee; (3) volume-based tiered payment schedules; and (4) agreements 
regarding the minimum amount of order flow that the broker-dealer would 
send to a venue. The Commission preliminarily believes that these 
amendments will enhance transparency on the routing of retail orders 
and enhance competition among broker-dealers that route retail orders, 
to the benefit of investors.
---------------------------------------------------------------------------

    \328\ See proposed Rule 606(a)(1)(iii).
---------------------------------------------------------------------------

    In addition, the Commission preliminarily believes that the 
proposed amendments would allow customers to better assess the retail 
order routing and execution quality offered by their broker-dealers. As 
a result, the Commission preliminarily believes that these additional 
disclosures may provide broker-dealers further incentives to improve 
execution quality for their customers and better manage any potential 
for conflicts of interest the broker-dealers may face. In addition, the 
ability of customers to better assess routing and execution quality 
could also lead to increased competition among broker-dealers with 
respect to execution quality, which could, in turn, result in broker-
dealers providing even higher-quality retail order routing and 
execution services.
    The Commission is further proposing to require that all reports on 
institutional order handling and retail order routing be provided in a 
consistent, structured format. The Commission preliminarily believes 
that requiring the reports be provided in this format would be useful 
to customers as it would allow them to more easily analyze and compare 
data across broker-dealers.
    Finally, the Commission is proposing to amend Rules 605 and 606 of 
Regulation NMS to require that the public order execution and order 
routing reports be kept publicly available for a period of three years. 
The Commission preliminarily believes that this would allow the public 
to more efficiently evaluate the services of broker-dealers because it 
would be easier for the public to access historic reports and analyze 
the data over an extended time period. For example, at a minimum, the 
public would have access to three years of historic data and may choose 
to download the reports periodically to analyze data over a time period 
of more than three years.
    The discussion below presents an overview of the current practices 
with regards to the reporting and disclosure of order routing and 
execution quality for institutional as well as retail orders, a 
consideration of the costs and benefits of the proposed new reporting 
requirements for institutional orders and of the proposed amendments to 
the reporting requirements for retail orders, and a discussion of the 
potential effects of the proposed amendments to Rule 606 on efficiency, 
competition, and capital formation. This discussion will also describe 
the Commission's proposal to amend Rule 605 by requiring market centers 
to keep public execution reports posted on an Internet Web site that is 
accessible to the public for a period of three years.

B. Baseline

    The baseline for considering the economic impact of amending Rule 
606 to require reporting for institutional orders consists of: (1) 
Information that customers currently receive from their broker-dealers 
regarding how their institutional orders are handled; (2) the format in 
which such information is currently provided to customers; (3) 
conflicts of interest broker-dealers currently face; (4) the current 
use of actionable IOIs; and (5) the ability to assess order routing and 
execution quality currently provided by different broker-dealers and 
execution quality currently provided by different trading centers.
    The baseline for considering the economic impact of amending Rule 
606 for retail orders and of amending Rule 605 consists of: (1) 
Information that customers currently receive under current Rules 605 
and 606 or information that customers currently receive from their 
broker-dealers that is not required by current Rules 605 and 606; (2) 
the format in which information required by current Rule 606 for retail 
orders is provided to customers; (3) conflicts of interest broker-
dealers currently face; (4) how long reports required by current Rules 
605 and 606 are available to the public; and (5) the ability to assess 
order routing and execution quality currently provided by different 
broker-dealers and execution quality currently provided by different 
trading centers.
    Further, the baseline for considering the economic impact of 
amending Rule 606 for institutional and retail orders and Rule 605 
comprises the current competitive landscape in the markets for 
brokerage services and for execution services and any current 
limitations on efficiency or capital formation relevant to the proposed 
amendments. These various baseline factors are discussed in further 
detail below.
1. Ad Hoc Reports for Institutional Orders
    Currently, broker-dealers may voluntarily provide some information 
on routing and execution quality of institutional orders to individual 
customers in response to requests by these customers. Customers may 
also use third-party vendors for TCA (e.g., to analyze the execution 
prices of orders compared to various benchmarks). However, the 
Commission understands that TCA provided by third-party vendors 
generally does not encompass an analysis of routing decisions because 
the third-party vendors, similar to customers, do not have access to 
the order handling information necessary to do so. Therefore, the 
completeness of any analysis of institutional orders, including TCA, is 
affected by a lack of specific order handling information with regard 
to the various venues to which institutional orders are routed. In 
addition, while TCA provided by third-party vendors may focus on 
measuring and comparing execution quality of orders, TCA does so 
typically at the parent order or broker-dealer level, and generally not 
at the trading center level, because the third-party vendors, again, do 
not have access to the information about institutional order handling 
that would be necessary to do so.

[[Page 49479]]

    The Commission further understands that reports that institutional 
customers currently receive upon request from their broker-dealers may 
not provide the consistent and standardized information needed to fully 
assess the performance of their broker-dealers. In particular, the 
Commission understands that these reports are not prepared or presented 
in a uniform manner that allows for easy comparison of institutional 
order handling across different broker-dealers, and there is no 
uniformity in the current disclosure of execution fees charged or 
rebates paid by the trading centers to the broker-dealers. The reports 
contain what the broker-dealers provide upon the requests of customers 
or what the customers specifically request from the broker-dealers. As 
a result, a broker-dealer will often supply reports containing 
different information to different customers, and more importantly, a 
customer may receive reports containing different information from 
different broker-dealers. Further, even if the reports contain the same 
data elements, those data elements may not be computed in the same way 
or use the same terminology across different broker-dealers or over 
time for the same broker-dealer. These differences make it more 
difficult for institutional customers to compare broker-dealers or to 
examine one broker-dealer's performance over time. In addition, as 
these reports are not standardized and vary by broker-dealer or by 
customer, the Commission understands that some of these reports group 
order routing strategies by their aggressiveness,\329\ while other 
reports do not.
---------------------------------------------------------------------------

    \329\ This grouping could be similar to the grouping into 
aggressive, neutral, and passive as proposed in Rule 606(b)(3).
---------------------------------------------------------------------------

    Even if a broker-dealer voluntarily provides information about 
institutional orders upon request, it may not do so with respect to all 
customers. Whether a given customer receives a report and how 
responsive the report is to the request likely depends on the 
customer's current or potential business relationship with the broker-
dealer. A broker-dealer may be more accommodating towards customers 
that send, or may send in the near future, substantial order flow. To 
the extent that some customers receive reports from broker-dealers 
while other customers do not or that some customers receive higher-
quality reports than other customers, the playing field may not be 
level with respect to institutional order handling information.
    Moreover, the public currently does not have access to information 
on the performance of broker-dealers relating to institutional orders. 
Under current Rule 606, a broker-dealer is not required to provide 
public reports for orders having a market value of $200,000 or more. 
While an institutional customer can request ad-hoc reports from broker-
dealers about the handling of its orders, the lack of public reports 
relating to institutional orders makes it infeasible for an 
institutional customer to compare handling of institutional orders by 
broker-dealers that the customer does not have a business relationship 
with. For the broker-dealers that the customer does send orders to, the 
customer is not able to compare these broker-dealers more generally 
based on all orders those broker-dealers handle rather than only the 
orders the customer sends to the broker-dealers.\330\ Institutional 
customers and the public may use public reports for retail orders 
required under current Rule 606 to evaluate broker-dealers, with the 
effectiveness of that approach being dependent upon how good a proxy 
the order routing for retail orders is for the order routing for 
institutional orders. The Commission understands that some customers 
use the reports for retail orders required by current Rule 606 to 
predict, among other things, the execution quality of institutional 
orders.
---------------------------------------------------------------------------

    \330\ Currently, a customer placing institutional orders can 
only compare broker-dealers based on the orders it had sent to the 
broker-dealers because only those are contained in the ad-hoc 
reports the broker-dealers provide upon request, but cannot compare 
how the broker-dealers handle the orders it had sent compared to all 
of the institutional orders the broker-dealers had received. In 
addition, the ad-hoc reports provided by the broker-dealers upon 
request by a customer placing institutional orders may be provided 
in different formats and contain different and potentially 
inconsistent information, which makes the comparison of the order 
routing decisions and execution quality of broker-dealers more 
difficult and less useful.
---------------------------------------------------------------------------

2. Publication Period for Reports on Retail Orders Required by Current 
Rules 605 and 606
    Currently, Rule 605 does not specify the minimum length of time 
that market centers need to post publicly the order execution reports 
and Rule 606 does not specify a minimum length of time that broker-
dealers need to post publicly the order routing reports. The Commission 
understands that generally, when reports are posted, market centers and 
broker-dealers will remove the previous report from their Web site and 
replace it with their most recent report,\331\ though some may make 
reports available for a longer period of time that varies.\332\ The 
Commission understands that this may make it difficult for the public 
to analyze historical data. For example, the public must download the 
data regularly to have access to historical data. Alternatively, the 
public may rely on third-party vendors who retrieve and aggregate Rule 
605 and 606 reports from market centers and broker-dealers, 
respectively, to get access to historical data.
---------------------------------------------------------------------------

    \331\ See, e.g., Morgan Stanley Rules 605 and 606 Disclosures, 
available at http://www.morganstanley.com/institutional-sales/sec_rules_605_606; Wells Fargo Legal Disclosures, available at 
https://www.wellsfargoadvisors.com/disclosures/legal-disclosures.htm; Charles Schwab Order Routing, available at http://www.schwab.com/public/schwab/nn/legal_compliance/important_notices/order_routing.html; TD Ameritrade Disclosures, available at https://www.tdameritrade.com/disclosure.page; Fidelity Quarterly Reports, 
available at https://capitalmarkets.fidelity.com/app/item/RD_13569_21696.html.
    \332\ See, e.g., UBS Order Routing Disclosure, available at 
https://www.ubs.com/us/en/wealth/misc/orderroutingdisclosure.html.
---------------------------------------------------------------------------

3. Available Information on Conflicts of Interest
    Current Rule 606 requires for retail orders, among other things, a 
description of any arrangement for payment for order flow \333\ and any 
profit-sharing relationships. The current required disclosure is 
designed to set forth arrangements, including financial relationships, 
that could lead to conflicts of interest for a broker-dealer when 
routing retail orders.\334\ 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. Broker-dealers face conflicts of interest when routing orders, 
such as affiliations with trading centers, receipt of payment for order 
flow or receipt of payment from any profit-sharing relationship, and 
liquidity rebates. For example, recent research analyzed the relation 
between maker-taker fee schedules and order routing. According to this 
study, four out of ten national brokerage firms appear to consistently 
route limit orders to the

[[Page 49480]]

exchange(s) paying the highest rebate for those limit orders. In this 
research, an analysis of proprietary limit order data and trades from 
NYSE's trade and quote (``TAQ'') data showed strong empirical evidence 
of a negative relation between take fees and limit order execution 
quality.\335\ The Commission preliminarily believes that such financial 
incentives have the potential to affect how broker-dealers route retail 
orders; however, these conflicts of interest might not only affect 
retail orders.
---------------------------------------------------------------------------

    \333\ In addition, Rule 10b-10 under the Exchange Act requires 
broker-dealers, when acting as agent for the customer, to disclose 
on the confirmation of a transaction whether payment for order flow 
was received and, upon written request of the customer, to furnish 
the source and nature of the compensation received. See 17 CFR 
240.10b-10(a)(2)(i)(C). Accordingly, Rule 10b-10 provides disclosure 
to a specific customer of whether payment for order flow was 
received on a particular transaction while Rule 606 provides public 
disclosure of any arrangement for payment for order flow and any 
profit-sharing relationship by requiring a description of such 
arrangements.
    \334\ 17 CFR 242.606(a)(1)(iii). See Rule 606 Predecessor 
Adopting Release, supra note 15, at 48417 (stating that ``[t]he 
purpose of requiring disclosure of any relationships between a 
broker-dealer and the venues to which it routes orders is to alert 
customers to potential conflicts of interest that may influence the 
broker-dealer's order-routing practices.'').
    \335\ See Battalio, Corwin, and Jennings Paper, supra note 57. 
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.'' 
See id.
---------------------------------------------------------------------------

    Under the quarterly disclosure obligations in current Rule 606(a), 
a broker-dealer is required to discuss the material aspects of the 
broker-dealer's relationship with each Specified Venue (which is 
determined based on retail order routing), including a description of 
any arrangement for payment for order flow, but broker-dealers are not 
required to provide information on the net amount of payment for order 
flow per share or by order type nor payment received for any profit-
sharing relationship. Further, current Rule 606(a) does not require 
broker-dealers to disclose rebates received and access fees paid per 
share or by order type nor does it require a description of the terms 
of a payment for order flow arrangement or profit-sharing relationship 
that may influence a broker-dealer's order routing decision. The 
current information required by Rule 606(a) can be used by customers to 
assess order routing and execution services of broker-dealers as well 
as the potential conflicts of interest faced by broker-dealers in 
providing such services and determine whether to retain the services of 
broker-dealers or to discontinue the use of such services. In addition, 
broker-dealers could use the current information required by Rule 
606(a) as a means to evaluate and enhance their order routing and 
execution services, compare their order routing and execution services 
to that of other firms, and use such comparisons in selling their 
services to customers.
    Moreover, current Rule 606(a) does not specify a minimum length of 
time that reports must be made available from broker-dealers. As a 
result, customers placing retail orders may not be able to compare the 
order routing decisions of a broker-dealer through time, if past 
quarterly reports are not available. Instead, customers may need to 
rely on third-party vendors to provide and/or analyze past quarterly 
reports.
    As noted above, conflicts of interest may affect institutional 
orders in ways similar to effects on retail orders. The ad hoc nature 
of the current order handling disclosures of institutional orders is 
not conducive to providing institutions with information they can use 
efficiently to assess conflicts of interest. In particular, a broker-
dealer for which conflicts of interest influence routing decisions may 
have the incentive to obscure the conflicts of interest in the ad hoc 
reports.
4. Available Information on Execution Quality for Institutional and 
Retail Orders
    The Commission preliminarily believes that broker-dealers are 
incentivized to provide their customers with information about the 
quality of services they offer as they may lose business if their 
competitors provide reports and they do not. However, as described 
above, under current rules, broker-dealers are not required to provide 
customers standardized reports about the handling of their 
institutional orders and instead customers may receive ad-hoc reports 
from broker-dealers upon request. Additionally, a broker-dealer may 
have an incentive to structure its reports and provide data in a way 
that is advantageous to the broker-dealer. Specifically, broker-dealers 
may want to design the ad hoc reports to highlight areas where the 
broker-dealer believes it compares well to others and obscure areas 
where the broker-dealer may not compare well or where customers are 
likely to have concerns. Separately, there are no public reports about 
the handling of institutional orders for independent research and 
analysis, by academic researchers, the public at large, or third-party 
vendors. Due to the limitations noted above, the Commission 
preliminarily believes that customers may not be able to compare the 
institutional order handling performance of broker-dealers reliably and 
as a result, broker-dealers may have less incentive to compete on the 
quality of their institutional order handling, which may result in 
broker-dealer routing practices that are suboptimal for customers, 
e.g., practices that do not avoid excessive information leakage or that 
may not provide the execution quality desired by the customer.
    For customers placing retail orders, current Rule 606 requires 
quarterly public reports on retail order routing and disclosure of 
retail order routing information upon request, but the reports do not 
require information on payment for order flow received, payment from 
any profit-sharing relationship received, or transaction rebates and 
access fees, and they are not required to separate limit orders into 
marketable and non-marketable limit orders. As a result, it may be 
difficult for customers to use the information provided in the reports 
to evaluate the quality of their broker-dealers' retail order routing. 
Customers may therefore not be well informed as to how their broker-
dealers manage any potential conflicts of interest they may face. The 
Commission preliminarily believes providing payment for order flow data 
in the quarterly public reports, broken down by calendar month, 
separately for marketable and non-marketable limit orders would create 
an opportunity for more detailed analysis.\336\
---------------------------------------------------------------------------

    \336\ See Battalio, Corwin, and Jennings Paper, supra note 57.
---------------------------------------------------------------------------

    As noted above, the current information on retail order routing 
required by Rule 606(a) may spur competition between broker-dealers on 
the basis of order routing services and execution quality.\337\ 
Customers may use the information required by Rule 606(a) to evaluate 
and retain the services of a broker-dealer or to discontinue the use of 
such services. In addition, broker-dealers may use the current 
information required by Rule 606(a) as a means to: (1) Evaluate and 
enhance their order routing and execution services; (2) compare their 
order routing and execution services to that of other firms; and (3) 
use such comparison in selling their services to customers.
---------------------------------------------------------------------------

    \337\ See supra Section III.B.
---------------------------------------------------------------------------

5. Format of Current Reports for Institutional and Retail Orders
    As discussed above, broker-dealers currently may provide some 
information on routing and execution quality of institutional orders to 
individual customers in response to requests by these customers. The 
Commission understands that broker-dealers provide these reports in a 
variety of formats and a given broker-dealer may use different formats 
for different customers and/or may modify their formats over time. The 
formats of these reports vary from unstructured to structured formats, 
such as unstructured text and PDF files to structured XML files. The 
Commission is soliciting comment on whether broker-dealers currently 
provide their reports in a structured or unstructured format, and which 
format the broker-dealers use for these reports. For those broker-
dealers that provide their reports

[[Page 49481]]

in a structured format, the Commission is further soliciting comment on 
how prevalent or useful the selected structured format is.
    Under current Rule 606(a), broker-dealers are required to provide 
public quarterly reports on retail order routing. The current Rule 
606(a) does not specify a format for these reports. The Commission 
understands that broker-dealers currently provide these reports on a 
Web site or downloadable as a PDF file. The reports typically are 
presented as tables with one line for each listing exchange for NMS 
stocks and exchange-listed options, where each row represents metrics 
for a particular routing venue, but they are not in a structured 
format.
6. Quality of Broker-Dealer Routing Practices for Institutional Orders
    The Commission does not have data to gauge the current level of 
quality of broker-dealer routing practices for institutional orders, as 
current Rule 606 only covers retail orders and not institutional 
orders.\338\ As noted, customers of broker-dealers can and do request 
ad-hoc reports about the handling of their orders and broker-dealers 
may voluntarily provide such reports. Customers can use those reports 
to evaluate their broker-dealers' routing practices. This, in turn, may 
give broker-dealers additional incentives to provide high execution 
quality to their customers. However, as discussed, there are 
limitations to the current situation, namely, the ad-hoc reports are 
not standardized across broker-dealers and there are no public reports 
that would allow customers to evaluate all broker-dealers, independent 
of whether they place orders with them or not.
---------------------------------------------------------------------------

    \338\ As noted above, including in Section V.B.3., current Rule 
606 provides information on the quality of broker-dealer routing 
practices for retail orders.
---------------------------------------------------------------------------

7. Use of Actionable IOIs in Institutional Orders
    Some broker-dealers use actionable IOIs to communicate to external 
liquidity providers to send an order to the broker-dealer in response 
to liquidity at the broker-dealer, generally a customer's institutional 
order. As noted above, because actionable IOIs convey similar 
information as an order, a response to an actionable IOI may result in 
an execution at the venue of the IOI sender. Accordingly, a broker-
dealer's use of actionable IOIs creates potential information leakage 
similar to the routing of orders. The Commission does not have data to 
gauge the current level of use of actionable IOIs by broker-dealers to 
attract orders to execute against institutional orders represented by 
such actionable IOIs. In addition, current Rule 606 for retail orders 
does not require the inclusion of actionable IOIs in the reports.
8. Competition, Efficiency, and Capital Formation
    The proposed amendments are likely to affect competition among 
broker-dealers that route institutional and retail orders. These 
broker-dealers compete in a segment of the market for broker-dealer 
services. The market for broker-dealer services is highly competitive, 
with most business concentrated among a small set of large broker-
dealers and thousands of small broker-dealers competing for niche or 
regional segments of the market.\339\ To limit costs and make business 
more viable, small broker-dealers often contract with larger broker-
dealers or service bureaus to handle certain functions, such as 
clearing and execution, or to update their technology.\340\ Larger 
broker-dealers typically enjoy economies of scale over small broker-
dealers and compete with each other to service the smaller broker-
dealers, who are both their competitors and their customers.\341\ Among 
other services, broker-dealers provide execution and strategy services, 
distribute shares from initial public offerings, and provide analyst 
research on securities. Brokerage commissions typically are charged for 
a broker-dealer's premium services, and represent an average, not 
marginal, cost of trading.\342\
---------------------------------------------------------------------------

    \339\ See Securities Exchange Act Release No. 63241 (November 3, 
2010), 75 FR 69791, 69822 (November 15, 2010) (Risk Management 
Controls for Brokers or Dealers with Market Access).
    \340\ Id.
    \341\ Id.
    \342\ Brokerage commissions are fixed according to a client 
agreement and pay for expected services, such as research, advice, 
and execution. However, while the commissions may pay for a variety 
of services, broker-dealers charge them only on a per-share basis at 
the time of an order's execution. Therefore, the commissions reflect 
broker-dealers' expectations of customers' average use of services 
and not the cost of servicing each order execution on a per-share 
basis. See Michael Goldstein, Paul Irvine, Eugene Kandel, and Zwi 
Wiener, Brokerage Commissions and Institutional Trading Patterns, 22 
Review of Financial Studies 5175 (December 2009).
---------------------------------------------------------------------------

    As discussed in Section IV.C., as of December 2015, there were 
approximately 4,156 registered broker-dealers.\343\ Of these, the 
Commission preliminarily estimates that 266 route retail orders.\344\ 
The Commission preliminarily estimates that 200 broker-dealers route 
institutional orders, all of whom also route retail orders, and that 
each broker-dealer who routes institutional orders will receive an 
average of 200 requests for reports pursuant to proposed Rule 606(b)(3) 
annually.\345\ All of these broker-dealers compete for business from 
retail and institutional customers. The Commission also preliminarily 
estimates that there are approximately 5,594 customers that may place 
institutional orders.\346\
---------------------------------------------------------------------------

    \343\ See supra note 232.
    \344\ See supra note 233.
    \345\ See supra notes 234 and 251.
    \346\ The Commission preliminarily estimates the number of 
customers that may place institutional orders as the number of 13F 
institutions as of December 31, 2015. The Commission recognizes that 
not all of these institutions necessarily trade NMS Stocks and not 
all necessarily submit orders that would qualify for the definition 
of institutional order. Further, some customers that submit 
institutional orders may not be 13F institutions. While this 
preliminary estimate may not be precise, the Commission 
preliminarily believes that it approximates the number of customers 
that may be affected by the proposed amendments.
---------------------------------------------------------------------------

    Among other factors, broker-dealers may compete for retail and 
institutional customers by trying to offer them better terms for 
trading, such as better execution quality. The emergence of discount 
brokerages has encouraged full-service brokers to compete on price and 
led to the unbundling of research from execution services.\347\ In 
addition, the fragmentation of NMS stock trading into 12 registered 
exchanges, more than 40 ATSs, and over 200 OTC market makers \348\ has 
contributed to the need for broker-dealers to focus on venue selection 
in executing orders. Broker-dealers may also innovate to attract new 
customers by, for example, offering access to algorithms designed to 
match trading or investment objectives. However, as noted above, the 
information on which broker-dealers offer better terms of trade may be 
non-standardized, presented inconsistently over time, or may employ 
complex calculations using undisclosed methods.\349\ Further, the 
format of the reports may limit the comparison of reports across 
broker-dealers.\350\ As a result, customers may not be able to 
efficiently identify which broker-dealers provide better execution 
quality. This may reduce the incentives for broker-dealers to compete 
by offering better execution quality or to innovate on execution 
quality. Without the incentive

[[Page 49482]]

to compete by offering better execution quality, broker-dealers may 
route customer orders in ways that do not necessarily promote better 
execution quality.\351\ Such inefficient routing could have effects on 
the market for trading services.
---------------------------------------------------------------------------

    \347\ See supra note 342.
    \348\ See supra Section II.B.
    \349\ See generally supra Sections V.B.1., V.B.4., and V.B.5.
    \350\ See supra Section V.B.5. for a discussion of current 
formats. Broker-dealers provide reports in a variety of formats and 
a given broker-dealer may use different structures and formats for 
different customers. This makes it difficult to electronically read 
reports into a system to compare multiple broker-dealers and conduct 
statistical analysis across broker-dealers. Differing formats also 
make it difficult to electronically search across broker-dealers for 
various data points in the reports.
    \351\ See supra Section V.B.3. regarding the conflicts of 
interest broker-dealers have when routing customer orders.
---------------------------------------------------------------------------

    The market for trading services, which is served by trading 
centers, relies on competition among these market centers to supply 
investors with execution services at efficient prices. These market 
centers, which compete to, among other things, match traders with 
counterparties, provide a framework for price negotiation, and provide 
liquidity to those seeking to trade. As discussed in Section IV.C., the 
Commission preliminarily estimates that there are 380 market centers to 
which Rule 605 applies.\352\
---------------------------------------------------------------------------

    \352\ The Commission derived this estimate for purposes of the 
PRA based on the following: 236 OTC market makers (not including 
market makers claiming an exemption from the reporting requirements 
of the Rule), plus 12 exchanges, 1 securities association, 86 
exchange market makers, and 45 ATSs.
---------------------------------------------------------------------------

    These market centers compete with each other for order flow on a 
number of dimensions, including execution quality. Their primary 
clients are the broker-dealers who route their own or their customers' 
orders for execution at the trading center. One way to attract order 
flow is to offer payment for order flow. The Commission understands 
that a large portion of retail order flow is sent to internalizers who 
pay for retail order flow. Trading centers also may innovate to 
differentiate themselves from other trading centers to attract more 
order flow. For example, several exchanges recently started pilots 
intended to provide better execution quality for retail orders to 
attract more retail order flow.\353\ Trading centers also may adjust 
fees and rebates to incent broker-dealers to route more order flow to 
them. To the extent that broker-dealers route orders for reasons other 
than execution quality, trading centers may have less of an incentive 
to compete and innovate on execution quality. This may limit overall 
execution quality and result in higher transaction costs for customers 
than would exist with greater competition on execution quality.
---------------------------------------------------------------------------

    \353\ See, e.g., Securities Exchange Act Release No. 67347 (July 
3, 2012), 77 FR 40673 (July 10, 2012) for the NYSE and NYSE MKT 
pilot; Securities Exchange Act Release No. 68303 (November 27, 
2012), 77 FR 71652 (December 3, 2012) for the Bats BZX pilot; 
Securities Exchange Act Release No. 71176 (December 23, 2013), 78 FR 
79524 (July 30, 2013) for the NYSE Arca pilot; and Securities 
Exchange Act Release No. 73702 (November 28, 2014), 79 FR 72049 
(December 4, 2014) for the Nasdaq BX pilot.
---------------------------------------------------------------------------

    Transaction costs reflect the level of efficiency in the trading 
process, with higher transaction costs reflecting less efficiency.\354\ 
Inefficiency in the trading process creates friction, which limits the 
ability for prices to fully reflect a stock's underlying value.\355\ 
Stoll (2000) defines friction as follows: ``Friction in financial 
markets measures the difficulty with which an asset is traded.'' \356\ 
Stoll follows Demsetz (1968) \357\ to ``view friction as the price paid 
for immediacy.'' Thus, higher transaction costs imply higher friction 
in the market. Friction makes it more costly to trade and makes 
investing less efficient. Further, friction limits the ability for 
arbitrageurs or informed customers to push prices to their underlying 
values, and thus friction makes prices less efficient.
---------------------------------------------------------------------------

    \354\ See Hans R. Stoll, Friction, 55 Journal of Finance 1479 
(August 2000).
    \355\ See id.
    \356\ See id.
    \357\ See Harold Demsetz, The Cost of Transacting, 82 Quarterly 
Journal of Economics 33 (February 1968).
---------------------------------------------------------------------------

    As a result of the inefficiencies discussed above, a potential 
increase in transaction costs in particular, may cause customers not to 
rebalance their portfolios as often as might otherwise be optimal and 
security prices may less fully reflect true underlying values. This, in 
turn, may limit efficient allocation and capital formation, as those 
issuers that have the best ideas may not get the capital needed to fund 
them. In particular, the less perfectly efficient prices are, the less 
able customers are to identify the issuers with the most profitable 
projects and thus the demand for the stock of those issuers may not 
fully reflect these opportunities. Less demand could result in a lower 
stock price, which would make it harder for these issuers to raise 
capital and result in less favorable conditions for the capital they 
raise.\358\
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    \358\ The Commission also notes that less efficiently allocated 
capital could result in too much relative funding available for 
unprofitable projects, which erode capital. In other words, 
allocative inefficiency could mean that some issuers with 
unprofitable projects could raise capital too easily.
---------------------------------------------------------------------------

9. Request for Comment
    The Commission requests comments on its baseline analysis. In 
particular, the Commission solicits comment on the following:
    124. Do customers currently request institutional order handling 
reports from their broker-dealers? Are those reports generally provided 
and if so, what information do they generally contain? Are there 
differences in the responsiveness of broker-dealers to requests from 
different customers and/or over time? Are there differences in the 
quality or detail of the reports by different broker-dealers? If so, 
what impact do the differences have on the costs and benefits of the 
reports? If possible, please provide specific estimates and data.
    125. Do broker-dealers already have systems in place to produce 
order handling reports?
    126. Do customers currently receive institutional order handling 
reports that are comparable to the public reports as proposed by Rule 
606(c)? If so, what information is contained in such reports and how, 
if at all, do those reports differ from the proposed public reports? 
How do the costs and benefits of those reports compare to the reports 
as proposed by Rule 606(c)? Please be specific and, if possible, 
provide specific estimates or data.
    127. Do commenters believe that the Commission's assessment of the 
baseline for the economic analysis is correct? Why or why not? Please 
be specific.
    128. Do commenters believe that the baseline discussion provides a 
fair representation of current practices under Rules 600, 605, and 606?
    129. Do commenters believe that the Commission's description of the 
competitive landscape for broker-dealers is accurate?
    130. Do commenters believe that the market participants identified 
by the Commission as being affected by the proposed amendments to Rules 
600, 605, and 606 is correct?
    131. Do commenters believe that the Commission's description of 
what information market participants currently receive is accurate?
    132. Do commenters believe that the Commission's description of the 
potential conflicts of interest broker-dealers face when routing 
institutional or retail orders is accurate? Why or why not? Please be 
specific in your response.
    133. Do commenters believe that the Commission's description of the 
current quality of broker-dealer order routing practices for 
institutional orders is accurate? Why or why not? Please be specific in 
your response.
    134. Do commenters believe that the Commission's description of the 
current use of actionable IOIs is accurate? Why or why not? Please be 
specific in your response.
    135. Do commenters believe that the Commission's description of the 
current level of competition, efficiency, and innovation is accurate? 
Why or why not? Please be specific in your response.

[[Page 49483]]

C. Costs and Benefits

    The Commission preliminarily identified costs and benefits 
associated with the proposed amendments to Rules 600, 605, and 606, 
which are discussed in this section. Many of these costs and benefits 
are difficult to quantify, especially as the practices of market 
participants are expected to evolve and may change due to the 
information on order routing and execution quality that is required to 
be reported under the proposed amendments to Rules 600, 605, and 606. 
Therefore, much of the discussion is qualitative in nature but, where 
possible, the Commission quantifies the costs.
    Many, but not all, of the costs of the proposed amendments to Rules 
600, 605, and 606 involve a collection of information, and these costs 
and burdens are discussed in the Paperwork Reduction Act Section above, 
with those preliminary estimates being used in the economic analysis 
below.\359\
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    \359\ See supra Section IV.
---------------------------------------------------------------------------

1. Disclosures for Institutional Orders
a. Definition of Institutional Order in Rule 600(b)(31)
i. Benefits
    Proposed Rule 600(b)(31) defines an institutional order as an order 
to buy or sell an NMS stock that is not for the account of a broker-
dealer and is an order for a quantity of an NMS stock having a market 
value of at least $200,000. The $200,000 threshold determines the 
number of institutional orders included in the proposed reporting 
requirements of Rule 606, as orders less than $200,000 in market value 
are excluded from Rules 606(b)(3) and (c) for reporting purposes. The 
Commission preliminarily estimates that at least 5% of the total 
executed volume in NMS securities would meet this threshold.\360\ The 
Commission preliminarily believes that the proposed definition is 
simple and straightforward, as the same threshold would be applied to 
all NMS stocks independent of the liquidity and other characteristics 
of the specific stock. In addition, the definition of an institutional 
order in proposed Rule 600(b)(31) is the complement to the current 
definition of a ``customer order,'' which would be renamed ``retail 
order'' under the proposed amendment to Rule 600(b)(18) (renumbered as 
600(b)(19)). Specifically, proposed Rule 600(b)(19), as amended, 
defines a ``retail order'' for NMS stocks as an order to buy or sell an 
NMS stock that is not for the account of a broker-dealer and is an 
order for a quantity of an NMS stock having a market value of less than 
$200,000. The definition of institutional order would dovetail with the 
definition of retail order such that all customers' orders would be 
covered by order routing disclosure rules. Moreover, because there 
would be no overlap in the definitions of retail and institutional 
orders--that is, an order would be classified as either retail or 
institutional--there should be no double reporting for any order.\361\
---------------------------------------------------------------------------

    \360\ Commission staff calculated this estimate using a sample 
of institutional orders purchased from Abel Noser Solutions, Ltd., a 
provider of TCA. The Commission recognizes that this data may not 
include all institutional orders, but cannot predict how incomplete 
the data are. The more incomplete this data set is, the more this 
statistic underestimates the prevalence of institutional orders.
    \361\ Current Rule 600(b)(18) defines a customer order and the 
definition is identical to the definition of a retail order in 
proposed Rule 600(b)(19). Throughout this proposal, we use the term 
``retail order'' rather than ``customer order,'' even if we describe 
current rules and practices, because ``retail order'' is the amended 
terminology proposed and the definitions are identical.
---------------------------------------------------------------------------

ii. Costs
    As noted above, the same threshold would be applied to all NMS 
stocks independent of a stock's liquidity. This uniform standard may, 
however, result in orders submitted by institutions that are quite 
large when considering a stock's activity level not meeting the 
definition of institutional order. For example, an order for $200,000 
in a small-cap stock that is illiquid is very different from an order 
for $200,000 in a large-cap stock that is very liquid.\362\ The 
Commission recognizes that orders meeting the $200,000 threshold may 
not be as common for illiquid stocks, and institutional customers may 
use orders smaller than $200,000, as supported by staff analysis 
described below. As a result, the proposed definition may result in 
institutional customers who submit such smaller orders in illiquid 
stock not obtaining the benefits from the disclosures required in the 
proposed amendments to Rule 606, although the existing requirements of 
Rule 606 for retail orders would still apply.
---------------------------------------------------------------------------

    \362\ For example, a $200,000 order in a liquid stock could be 
very small relative to the total activity level of that stock 
whereas a $150,000 order in an illiquid stock could be half the 
typical trading volume of that stock. The execution quality of the 
order in the illiquid stock could be much more dependent on the 
routing practices of the broker-dealer than the execution quality of 
the order in the liquid stock.
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    To determine the extent of institutional orders that would not meet 
this threshold, the Commission staff examined a set of orders from 
institutions and found that 83.2% of the total number of orders are 
smaller than $200,000.\363\ However, 92% of total dollar volume from 
orders of institutions in the data meets the proposed definition of an 
institutional order, i.e., an order to buy or sell a quantity of an NMS 
stock having a market value of at least $200,000. The percentage of 
orders from institutions that would meet the definition varies by 
activity level of the stock, with a higher proportion meeting the 
definition in more active stocks. While approximately 20% of orders 
from institutions in the group of most active stocks would meet the 
proposed definition, less than 3% of orders from institutions in the 
group of least active stocks would meet the proposed definition.\364\ 
Therefore, the proposed definition of institutional order covers a 
lower proportion of orders submitted by institutions in less active 
stocks than it does in more active stocks.
---------------------------------------------------------------------------

    \363\ Information on institutional equity trading for the sample 
period of 2013-2014 is obtained from Abel Noser Solutions, Ltd. 
According to an academic study by Puckett and Yan (2011), the 
dataset contains detailed equity trading information for each Abel 
Noser client and includes a representative set of institutional 
investors including pension plan sponsors (e.g., CalPERS, the 
Commonwealth of Virginia, and YMCA retirement fund) and money 
managers (e.g., Massachusetts Financial Services (MFS), Putnam 
Investments, and Lazard Asset Management). These clients accounted 
for at least 10% of the total trading volume from 1999-2005, 
according to Puckett and Yan (2011). The Commission assumes for 
purposes of this analysis that clients have continued to account for 
at least this volume during its sample period. See, e.g., Andy 
Puckett and Xuemin (Sterling) Yan, The Interim Trading Skills of 
Institutional Investors, 66 Journal of Finance 601 (April 2011).
    \364\ A stock is sorted into a decile according to average 
monthly dollar volume. The most active stocks are defined as being 
those in the 10th decile of the distribution of stocks as measured 
by the average monthly dollar volume, and the least active stocks 
are defined as being those in the 1st decile of the distribution of 
stocks as measured by the average monthly dollar volume.
---------------------------------------------------------------------------

    The Commission notes that using any fixed threshold may have 
another drawback. For example, market participants may change their 
behavior or stock prices may change over time. Fixed thresholds 
generally provide an incentive for those affected by the threshold to 
alter their actions to control whether the action is above or below the 
threshold. With respect to the threshold in the definition of 
institutional order, customers may have an incentive to increase their 
order sizes to exceed the threshold if they can get better information 
about routing and execution quality for orders exceeding the 
threshold.\365\ If such changes result in

[[Page 49484]]

an increase in the size of orders submitted by institutional customers, 
such that more orders from institutional customers are meeting the 
$200,000 threshold to qualify as an ``institutional order,'' the 
proposed amendments to Rule 606 would apply to a bigger proportion of 
all orders submitted by institutional customers. This would increase 
the benefits of the proposed amendments to Rule 606 because 
institutional customers and the public would receive order handling 
information for a larger proportion of all orders submitted by 
institutional customers. However, it would also increase the costs of 
the proposed amendments to Rule 606 because the information required by 
proposed Rules 606(b)(3) and (c) would have to be disclosed for a 
larger proportion of all orders submitted by institutional customers. 
The Commission preliminarily believes that the increase in costs would 
be negligible because the broker-dealers' systems to generate the 
reports would already be in place and the marginal costs of adding one 
order in a report is likely to be low as it would use only little 
additional computing time. Nonetheless, the Commission preliminarily 
believes that these incentives may not significantly alter customer 
order sizes. In particular, if a customer is able to obtain the same 
level of detail on the routing of all of their orders from broker-
dealers, regardless of whether the orders exceed the threshold to be 
institutional orders, that customer may have little benefit in 
submitting their orders in larger pieces. Further, an institution that 
splits its orders to avoid the risk of leaking information to its 
broker-dealer, would incur information leakage costs with larger order 
sizes.
---------------------------------------------------------------------------

    \365\ The Commission understands that customers currently split 
large orders across multiple broker-dealers for reasons such as 
limiting the information that broker-dealers have about the full 
order. On the margin, the proposed threshold could provide the 
incentive to avoid splitting orders to pieces of less than $200,000.
---------------------------------------------------------------------------

    Conversely, if changes in market participants' behavior or stock 
prices resulted in a decrease in the size of orders submitted by 
institutional customers, such that fewer orders meet the $200,000 
threshold for ``institutional orders,'' then the proposed disclosure 
amendments to Rule 606 pertaining to institutional order handling would 
apply to a smaller proportion of all orders by institutional customers. 
This would lead to the public receiving order handling information for 
a smaller proportion of all orders submitted by institutional customers 
and therefore would reduce the benefits of the proposed amendments to 
Rule 606. Still, a decrease in the size of orders submitted by 
institutional customers could also decrease the costs associated with 
the institutional order handling disclosure required by the proposed 
amendments to Rule 606 (since fewer orders would qualify as 
``institutional orders''). The Commission preliminarily believes, 
however, that this potential decrease in costs would be negligible 
since the marginal cost of providing additional information on 
institutional orders once systems were in place to produce such reports 
would be negligible. Moreover, under this scenario, the Commission 
notes that while there may be a decrease in costs associated with 
institutional order handling disclosures, broker-dealers may experience 
an increase in the number of orders covered in retail order routing 
disclosure reports (because the orders that do not qualify as 
``institutional orders'' would nonetheless qualify as ``retail orders'' 
based on size). However, the Commission preliminarily believes that any 
increase in the number of orders in retail order routing reports would 
result in minimal costs as retail reports do not require extensive 
order routing information, the system to generate the reports would 
already be in place, and the marginal costs of adding additional orders 
would require little computing time.
iii. Request for Comment
    The Commission seeks comment on the definition of institutional 
order as proposed in Rule 600(b)(31) and its analysis of the costs and 
benefits. In particular, the Commission solicits comment on the 
following:
    136. Do commenters believe that the Commission's proposed 
definition of institutional order is appropriate from a costs and 
benefits perspective? If not, please provide alternative definitions 
with a detailed discussion of what the advantages and costs of those 
alternatives would be. For example, should the threshold be different 
for different stocks? If yes, how? Should the threshold be a fixed 
dollar amount or should it be variable over time or defined 
differently, e.g., relative to the average daily volume of a stock? 
Please provide data and analysis to support your view.
b. Customer Requests for Information on Institutional Order Handling 
Under Proposed Rule 606(b)(3)
i. Benefits
    The proposed amendments to Rule 606 would provide transparency 
about order routing and execution quality for institutional orders. 
Proposed Rule 606(b)(3) would require standardized reports on 
institutional order handling, which would be made available to 
customers upon request.
    Competition in the market for brokerage services could be further 
promoted by more transparent order routing practices and execution 
quality. The disclosures proposed in Rule 606(b)(3) would provide 
customers who submit institutional orders, including investment fund 
managers, standardized information regarding their broker-dealers' 
order routing practices and execution quality. To the extent that the 
reports required by proposed Rule 606(b)(3) increase the transparency 
of institutional order routing and execution quality, broker-dealers 
would be better able to compete along the execution quality dimensions 
provided in the reports, such as the fill rate, percentage of shares 
executed at the midpoint and priced at the near or far side of the 
quote, and average time between order entry and execution or 
cancellation for orders posted to the limit order book, in addition to 
commissions and other considerations that they currently compete on. 
The Commission preliminarily believes that broker-dealers would have an 
additional incentive to improve their order routing decisions as 
customers submitting institutional orders could use the reports 
required by the proposed amendments to Rule 606 to compare broker-
dealers, which in turn could lead to better execution quality for 
institutional orders.
    There could also be an effect on the competition between trading 
centers. If broker-dealers improve their order routing decisions for 
institutional orders, thereby routing orders to the trading centers 
that are more beneficial for their customers, this could further 
promote competition between trading centers and spur innovation on 
execution quality. To illustrate, if broker-dealers change their 
institutional order routing decisions to focus more on execution 
quality and route fewer orders to a given trading center, that trading 
center would have an incentive to take measures to attract and gain 
back order flow by innovating on execution quality.
    In addition to comparing broker-dealers based on the reports, 
customers may also initiate a dialogue with their broker-dealers, or 
broker-dealers they are considering to use, about their institutional 
order routing practices to better match the needs of the customers with 
the order routing practices of the broker-dealers to whom they send 
orders.
    As discussed in Section II.C., some customers currently request and 
receive reports about order routing and execution quality of their 
institutional

[[Page 49485]]

orders from their broker-dealers. However, these reports are not 
standardized and as a result, it may be difficult to compare broker-
dealers based on those reports. In addition, the availability, detail, 
and quality of such reports likely differ across customers, e.g., it 
might be the case that customers placing a greater volume of 
institutional orders have easier access to such reports compared to 
customers with a smaller volume of institutional orders. Moreover, the 
information provided by a broker-dealer may vary over time without any 
standardized or required content for the reports. Proposed Rule 
606(b)(3) addresses both of these concerns as the reports would be 
standardized for all broker-dealers and all institutional customers, 
making comparisons easier and analysis more useful. Furthermore, every 
institutional customer would be able to receive reports upon request 
from their broker-dealer.
    However, for customers who already receive reports from their 
broker-dealers on the handling of their institutional orders, the 
benefits of the reports required by proposed Rule 606(b)(3) may be 
modest or even non-existent, depending on the information the customers 
currently receive. For example, the reports that customers already 
receive may be more detailed and tailored to the particular customer. 
The reports also may provide different and potentially more information 
than what proposed Rule 606(b)(3) requires. Therefore, the proposed 
disclosure's benefits to customers who may continue to receive detailed 
tailored reports is preliminarily estimated to be minimal. 
Nevertheless, these customers would be able to more readily compare 
broker-dealers due to the proposed requirement that the disclosures be 
standardized.
    Additionally, proposed Rule 606(b)(3) requires that a broker-dealer 
assign its order routing strategies to one of three categories and that 
the reports contain information grouped by those order routing 
strategies: Passive, neutral, and aggressive. Proposed Rule 
606(b)(3)(v) defines ``passive order routing strategy'' as ``one that 
emphasizes minimization of price impact over the speed of execution''; 
``neutral order routing strategy'' as one ``that is relatively neutral 
between minimization of price impact and the speed of execution of the 
entire institutional order''; and ``aggressive order routing strategy'' 
as ``one that emphasizes the speed of execution of the entire 
institutional order over minimization of price impact.'' The Commission 
preliminarily believes that the requirement to group information by 
specified order routing strategy categories should make comparisons 
among broker-dealers by customers placing institutional orders as well 
as by the public possible because it would allow customers to control 
for the fact that broker-dealers may get different types of order flow. 
For example, to satisfy customer order instructions one broker-dealer 
may tend to use an aggressive order routing strategy and another 
broker-dealer may tend to use a passive order routing strategy, and 
simply comparing these two broker-dealers without considering the order 
routing strategy category may lead to incorrect or misleading 
conclusions.
    Customers preferring passive order routing strategies may be 
willing to wait longer for an execution but may want to limit price 
impact. Customers preferring aggressive order routing strategies, 
however, may endure some price impact to trade quickly. Therefore, a 
broker-dealer implementing a passive order routing strategy may, 
compared to an aggressive order routing strategy, tend to route to a 
dark pool where execution may be less certain, but likely at a better 
price.\366\ Similarly, a broker-dealer implementing passive order 
routing strategies may be able to place orders providing liquidity more 
often, thereby capturing more rebates.\367\ As a result, the routing 
statistics of a broker-dealer that implements predominantly passive 
order routing strategies should differ from those of a broker-dealer 
that implements predominantly aggressive order routing strategies. 
Therefore, including the categories of order routing strategies in the 
order handling report can facilitate an assessment of how well a 
broker-dealer manages its conflicts of interest and provides execution 
quality that matches customer preferences because it provides 
information on the preferences communicated by that broker-dealers' 
customers. It can also assist in comparing broker-dealers that may not 
receive the same mix of order instructions from customers.
---------------------------------------------------------------------------

    \366\ See, e.g., Albert J. Menkveld, Bart Zhou Yueshen, and 
Haoxiang Zhu, Shades of Darkness: A Pecking Order of Trading Venues, 
Working Paper (2015). The authors find that there exists a pecking 
order of trading venues that puts low-cost-low-immediacy venues on 
top and high-cost-high-immediacy venues at the bottom. This suggests 
that if an order is a passive order and executed with passive order 
routing strategy, the broker-dealer would prefer low-cost-low-
immediacy venues, which the paper identifies as dark pools that 
execute at the midpoint.
    \367\ Compared to an aggressive order routing strategy, a 
passive order routing strategy may reduce transaction costs and 
allow the capture of rebates, but immediate execution is not 
certain. See Lawrence Harris and Joel Hasbrouck, Market vs. Limit 
Orders: The SuperDOT Evidence on Order Submission Strategy, 31 
Journal of Financial and Quantitative Analysis 213, 230 (June 1996) 
(concluding that passive order routing strategies achieve better 
average performance than aggressive order routing strategies in 
certain markets). See also Maker-Taker Memo, supra note 55, at 18 
(discussing maker-taker fees in U.S. equity markets). A broker-
dealer can be more patient in implementing a passive order routing 
strategy and does not have to seek immediate execution.
---------------------------------------------------------------------------

    The requirement to differentiate the proposed disclosures into the 
three order routing strategy categories should help mitigate the 
possibility that the reports could be interpreted incorrectly. However, 
there could still be differences among broker-dealers in how they 
classify orders into the three strategy categories, which could make 
straight comparisons between broker-dealers difficult. Proposed Rule 
606(b)(3)(v) requires broker-dealers to ``assign each order routing 
strategy that it uses for institutional orders to one of [the] three 
categories in a consistent manner for each report it prepares,'' to 
``promptly update the assignments any time an existing strategy is 
amended or a new strategy is created that would change such 
assignments,'' and to ``document the specific methodologies it relies 
upon for making such assignments.'' The proposed Rule defines the 
general characteristics of the three order routing strategies in terms 
of the trade-off between the minimization of price impact and the speed 
of execution of the entire institutional order. However, the proposed 
Rule does not prescribe how this trade-off should be taken into 
consideration. Broker-dealers would have discretion to determine how to 
do this when establishing their methodologies to assign categories in a 
consistent manner and when applying the methodologies to assign into 
categories the routing strategies and, as a result, broker-dealers 
might not have the exact same definitions for the three order routing 
strategy categories.
    Under proposed Rule 606(b)(3), customers can obtain detailed 
information on the broker-dealer internalization rate and payment for 
order flow received. Currently, broker-dealers may prefer to 
internalize uninformed order flow.\368\ Under proposed Rule 606(b)(3), 
a customer would have information on whether its order flow is being 
internalized and could use this information in its relationships with 
its broker-dealers. Similarly, a customer would be able to examine the 
payment for order flow to determine if its order flow is sold to a 
third-party. In addition, customers may be interested in how maker-
taker fees affect where broker-dealers route their

[[Page 49486]]

institutional orders. If a customer pays a flat-rate commission to its 
broker-dealer, and any fraction of the rebate is retained by the 
broker-dealer, then the broker-dealer has a financial incentive to 
route the order to the trading center offering the highest rebate or 
lowest fee.\369\ At present, the brokerage commission, which is known 
to the customer, may be lowest when a broker-dealer concentrates order 
flow in a high rebate and/or low fee trading center.\370\ Customers 
might be concerned if orders routed to a high-rebate destination do not 
execute or do so with a delay, as information about the order may leak 
into the market, thereby affecting price impact.
---------------------------------------------------------------------------

    \368\ See Hitesh Mittal, Are You Playing in a Toxic Dark Pool? A 
Guide to Preventing Information Leakage, 3 Journal of Trading 20 
(Summer 2008).
    \369\ A broker-dealer may take into account rebates when setting 
its flat-rate commission by asking for a lower commission. As long 
as the rebates are not passed through to the customer, however, the 
broker-dealer still has the incentive to maximize rebate capture.
    \370\ See Shawn O'Donoghue, The Effect of Maker-Taker Fees on 
Investor Order Choice and Execution Quality in U.S. Stock Markets 
(January 23, 2015), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2607302.
---------------------------------------------------------------------------

    Proposed Rule 606(b)(3) requires the inclusion of actionable IOIs 
in institutional order handling disclosures. Proposed Rule 600(b)(1) 
defines an actionable IOI as ``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: (1) Symbol; (2) side (buy or sell); (3) 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 (4) a size that is at least equal to 
one round lot.''
    The inclusion of actionable IOIs in the proposed reporting 
requirements of broker-dealers should provide customers a more complete 
picture of how their institutional orders are handled. Since actionable 
IOIs can convey similar information as an order, a response to an 
actionable IOI may result in an execution at the venue of the IOI 
sender and thus can represent a portion of the liquidity available at a 
given price and time. The Commission therefore preliminarily believes 
that actionable IOIs should be included in the required disclosure of 
how institutional orders are handled. In addition, because an 
actionable IOI can convey similar information as an order, the use of 
actionable IOIs may contribute to information leakage in a similar way 
as the use of orders.\371\ Excluding actionable IOIs therefore would 
not provide a complete picture of institutional order routing and 
executions and could provide broker-dealers with an incentive to use 
actionable IOIs instead of orders to circumvent the proposed disclosure 
requirements in Rule 606.
---------------------------------------------------------------------------

    \371\ See supra Section II.C.4.
---------------------------------------------------------------------------

    The proposed definition of actionable IOI in Rule 600(b)(1), 
however, may limit the benefits achieved. Specifically, the proposed 
definition is substantively similar to the description of actionable 
IOI in the Regulation of Non-Public Trading Interest Release. Comments 
received on the Regulation of Non-Public Trading Interest Release 
indicated that some commenters are concerned that the discussion of 
actionable IOIs in that release was too stringent.\372\ If the proposed 
definition of actionable IOIs is, in fact, too stringent, then some 
IOIs would not be included in the definition of actionable IOI and 
would not be captured by the proposed reports on institutional order 
handling. Consequently, it is possible that institutional customers 
might find the reports to be less informative on institutional order 
handling than if the definition of actionable IOIs was broader. This 
suggests that defining actionable IOIs too narrowly may limit the 
benefits of the proposed amendments.
---------------------------------------------------------------------------

    \372\ Comments on the proposed rule for Regulation of Non-Public 
Trading Interest are available at http://www.sec.gov/comments/s7-27-09/s72709.shtml. Comments on actionable IOIs can be found in the 
following letters: http://www.sec.gov/comments/s7-27-09/s72709-46.pdf and http://www.sec.gov/comments/s7-27-09/s72709-8.pdf.
---------------------------------------------------------------------------

    An additional benefit of having the institutional order handling 
information available upon request is that institutional customers 
could combine the order handling information with existing TCA or 
enhance their TCA. As noted above, institutional customers often work 
with independent third-party vendors to perform TCA as a means of 
evaluating the cost and quality of brokerage services. Institutional 
customers can also conduct their own TCA in-house. TCA, whether 
conducted in-house or by a third-party, generally analyzes data on the 
parent orders, but typically cannot analyze data on the child orders 
because of the lack of standardization of the current ad hoc order 
handling information. As a consequence, existing TCA typically does not 
incorporate information on how many child orders exist, a broker-
dealer's institutional order routing strategy, nor cost, routing, and 
execution quality for individual child orders. The disclosures required 
by proposed Rule 606(b)(3) would close this informational gap, so that 
customers would have more information on how broker-dealers handle and 
execute parent and child institutional orders.
    With this additional information, institutional customers or their 
third-party vendors could combine the routing information with 
execution information to conduct a more thorough TCA than they can 
currently. In particular, the information in proposed Rule 606(b)(3) 
may be a factor that can explain transaction cost variations and thus, 
the reports from the proposed amendments could be combined with TCA to 
help explain differences in transaction costs and in performance as 
measured by TCA across broker-dealers. For example, TCA often includes 
transaction cost measures such as implementation shortfall, but 
proposed Rule 606(b)(3) would not.\373\ With TCA alone, a customer may 
observe different implementation shortfall across broker-dealers. The 
proposed amendments could allow the customers or their third-party 
vendors to correlate implementation shortfall with the routing 
decisions of the broker-dealers. This could assist the customers in 
assessing the execution quality provided by their broker-dealers. In 
summary, the Commission preliminarily believes that proposed Rule 
606(b)(3) may complement and enhance all customers' evaluations of 
institutional order handling quality, including those of customers who 
use TCA.
---------------------------------------------------------------------------

    \373\ For example, proposed Rule 606(b)(3) would not require 
reports to contain any information on implementation shortfall costs 
of parent orders, which are a key focus for investors placing 
institutional orders. In general, the proposed amendments are not 
intended to replace TCA and, therefore, do not include many metrics 
common to TCA. However, the Commission recognizes that the ability 
to use the proposed amendments to enhance TCA may make TCA more 
valuable and increase the incentives for customers to use TCA, 
either in-house or through a third-party vendor.
---------------------------------------------------------------------------

    Finally, proposed Rule 606(b)(3) would require reports to be made 
available using an XML schema and associated PDF renderer to be 
published on the Commission's Web site.\374\ The benefits, as well as 
the costs, associated with this requirement are discussed in Section 
V.C.4.
---------------------------------------------------------------------------

    \374\ See supra Section III.A.3.
---------------------------------------------------------------------------

ii. Costs
    As discussed above, some customers currently request reports about 
the handling of their institutional orders from their broker-dealers 
and those reports may be less or more detailed and provide different 
and potentially less or potentially more information than proposed Rule 
606(b)(3) would require. If the reports broker-dealers currently 
provide to a customer more or different information, proposed Rule 
606(b)(3)

[[Page 49487]]

could impose a cost on such a customer to the extent broker-dealers 
stop providing the more detailed or additional information and instead 
provide only the data required for institutional order handling by 
proposed Rule 606(b)(3). The Commission preliminarily believes that 
this scenario is not very likely because, even if Rule 606(b)(3) is 
adopted, customers could still request additional information or 
customized reports from their broker-dealers and broker-dealers are 
likely to satisfy such requests, to the extent they currently do, to 
retain their customers. As discussed above, the willingness of broker-
dealers to provide such customized reports to customers and how 
detailed such a report is might depend on the business relationship 
between the broker-dealer and the customer. Customers who send or may 
send a large number of orders to a broker-dealer might be able to get 
customized reports more easily compared to customers who send fewer 
orders, and those reports might be more detailed compared to reports 
that customers who send fewer orders receive. While proposed Rule 
606(b)(3) mitigates this issue in that every customer would be able to 
request the standardized reports required by proposed Rule 606(b)(3), 
the Commission recognizes that to the extent large institutional 
customers are able to receive customized reports that provide 
information not contained in the required reports, those large 
institutional customers would continue to have an advantage over 
smaller institutional customers who are not able to receive the same 
reports.
    In addition, the greater transparency provided as a result of the 
new reports required under proposed Rule 606(b)(3) might lead broker-
dealers to change how they handle institutional orders. Given that 
broker-dealers would be aware of the metrics to be used a priori, they 
might route institutional orders in a manner that promotes a positive 
reflection on their respective services but which may be suboptimal for 
their customers. Any changes to broker-dealers' order routing decisions 
due to proposed Rule 606(b)(3) may be intended to benefit customers 
placing institutional orders, but if broker-dealers and customers focus 
exclusively on the metrics in the reports required by proposed Rule 
606(b)(3), the order routing decisions could also be viewed as 
suboptimal for some customers.
    For example, suppose a broker-dealer routes institutional orders so 
that the orders execute at lower cost with a higher fill rate, shorter 
duration, and more price improvement than the broker-dealer's 
competitors. However, it could be the case that, in order to achieve 
these objectives, the broker-dealer routes the majority of non-
marketable limit order shares to the trading center offering the 
highest rebate. An institutional customer that reviews the proposed 
routing reports might suspect that the broker-dealer acted in its self-
interest by selecting the highest rebate venue in order to maximize 
rebates when in fact, the broker-dealer made the decision based on 
other variables, which might not be completely reflected in the 
proposed reports. Under the proposed amendments to Rule 606, the 
broker-dealer may be concerned about the perception of acting on a 
conflict of interest, when the broker-dealer is in fact acting in the 
customers' interests. As a result, a broker-dealer may be incentivized 
to route fewer non-marketable limit order shares to the trading center 
offering the highest rebate, even if this imposes additional costs on 
the broker-dealer's customers, in an effort to ensure that a customer 
does not misconstrue the intent behind the broker-dealer's routing 
decisions. Such a potential outcome could reduce the intensity of 
competition between broker-dealers on the dimension of execution 
quality.
    In addition, as noted above, proposed Rule 606(b)(3) requires the 
inclusion of actionable IOIs in the reports on institutional order 
handling broker-dealers would provide to their customers. The 
Commission expects that broker-dealers will incur costs from the 
inclusion of actionable IOIs in the reports as a result of having to 
process additional data and run additional calculations. The estimated 
cost of including actionable IOIs in the proposed reports is included 
in the aggregate costs described in the discussion below and in greater 
detail in Section IV.D.1.
    The disclosure requirements of proposed Rule 606(b)(3) would also 
impose a monetary cost, as the required disclosures could entail some 
reprogramming by broker-dealers that execute or route institutional 
orders. These costs may be low for a given broker-dealer if the broker-
dealer already supplies similar reports on institutional order handling 
upon requests by their customers. In addition to reprogramming, 
receiving and processing customer requests as well as preparing and 
transmitting the data to customers on request would impose costs.
    As discussed in Section IV.D.1., the Commission preliminarily 
estimates that the one-time, initial burden for a broker-dealer that 
routes institutional orders that does not currently retain the proposed 
order handling information to program systems in-house to implement the 
requirements imposed by the proposed amendments to Rule 606 would be 
200 hours resulting in a monetized cost burden of $60,420 per broker-
dealer.\375\ The Commission preliminarily estimates the one-time, 
initial burden for a broker-dealer that routes institutional orders 
that does not currently create the proposed order handling information 
to engage a third-party to program their systems to implement the 
requirements of the proposed amendments to Rule 606(b)(3) to be 50 
hours resulting in a monetized cost burden of $15,125 per broker-
dealer.\376\ In these cases, the Commission further preliminarily 
estimates a fee of $35,000 per broker-dealer to engage the third-party 
service provider.\377\ The Commission preliminarily believes that most 
broker-dealers either have systems that currently retain the 
information required by the proposed rule, or use third-party vendors 
who have systems that retain such information. The Commission therefore 
preliminarily estimates that 25 broker-dealers that route institutional 
orders do not currently have systems that retain the information 
required by the proposed amendments or use a third-party vendor to 
retain such information.\378\ The Commission preliminarily estimates 
that of the 25 broker-dealers that route institutional orders who do 
not currently have systems in place to retain the information required 
by the proposed rule, 10 such broker-dealers will perform the necessary 
programming upgrades in-house, and 15 will engage a third-party to 
perform the programming upgrades. Additionally, of the 25 broker-
dealers that route institutional orders who do not currently have 
systems in place to retain the information required by the rule, the 
Commission preliminarily estimates that 10 such broker-dealers will 
need to purchase hardware and software upgrades to fulfill the 
requirements of the proposed rule at an average cost of $15,000 per 
broker-dealer, and that the remaining 15 broker-dealers have adequate 
hardware and software to retain the information proposed by the rule. 
Therefore, the total initial burden for all broker-dealers that route 
institutional orders who do not currently retain order handling

[[Page 49488]]

information required by the proposed rule to program systems to comply 
with the proposed rule change is 2,750 hours resulting in a monetized 
cost burden of $831,075, plus an additional fee of $675,000 to engage 
the third-party service providers.\379\
---------------------------------------------------------------------------

    \375\ See supra note 237.
    \376\ See supra note 238.
    \377\ See supra note 239.
    \378\ See supra note 236.
    \379\ See supra note 240.
---------------------------------------------------------------------------

    As discussed in Section IV.D.1., the Commission preliminarily 
estimates the average cost for a broker-dealer who routes institutional 
orders who already retains information required by the proposed rule to 
format its systems to produce a report to comply with the proposed rule 
to be 40 hours resulting in a monetized cost burden of $12,084.\380\ 
The Commission preliminarily estimates the average burden for a broker-
dealer who routes institutional orders who uses a third-party service 
provider to work with such service provider to ensure proper reports 
are produced to be 20 hours resulting in a monetized cost burden of 
$5,726.\381\ In these cases, the Commission further preliminarily 
estimates a fee of $5,000 per-broker to engage the third-party service 
provider.\382\ The Commission preliminarily estimates that, of the 175 
broker-dealers who route institutional orders who currently retain the 
information required pursuant to the rule and need only format their 
systems to produce a report required by the rule, 50 such broker-
dealers will use a third-party vendor to ensure proper reports are 
produced and the remaining 125 broker-dealers will perform the 
necessary work in-house. Thus, the total cost for all broker-dealers 
who route institutional orders who only need to format their systems to 
prepare a report to comply with the proposed rule is preliminarily 
estimated to be 6,000 hours resulting in a monetized cost burden of 
$1,796,800, plus an additional fee of $250,000 to engage the third-
party service providers.\383\ Therefore, the total initial burden for 
all broker-dealers to comply with proposed Rule 606(b)(3) is 
preliminarily estimated to be 8,750 hours resulting in an estimated 
cost of $2,627,875, plus an additional fee of $925,000 to engage the 
third-party service providers.\384\
---------------------------------------------------------------------------

    \380\ See supra note 242.
    \381\ See supra note 243.
    \382\ See supra note 244.
    \383\ See supra note 245.
    \384\ See supra note 247.
---------------------------------------------------------------------------

    As discussed in Section IV.D.1, the Commission preliminarily 
estimates that an average response to a Rule 606(b)(3) request for a 
broker-dealer who handles its own responses will take approximately 2 
hours per response resulting in a monetized cost burden of $380.\385\ 
For a broker-dealer that routes institutional orders who will use a 
third-party service provider to respond to requests pursuant to Rule 
606(b)(3), the Commission preliminarily estimates the burden to be 1 
hour per response resulting in a monetized cost burden of $283.\386\ In 
these cases, the Commission preliminarily estimates an additional 
third-party service provider fee of $100 per response.\387\ The 
Commission preliminarily estimates that an average broker-dealer will 
receive approximately 200 requests annually.\388\ Therefore, the total 
annual burden for all 200 broker-dealers that route institutional 
orders to comply with the customer response requirement in proposed 
Rule 606(b)(3) is preliminarily estimated to be 67,000 hours, resulting 
in a monetized cost burden of $13,939,000, plus an additional fee of 
$1,300,000 to compensate third-party service providers for producing 
the reports.\389\
---------------------------------------------------------------------------

    \385\ See supra note 250.
    \386\ See supra note 254.
    \387\ See supra note 255.
    \388\ See supra note 251.
    \389\ See supra notes 259 and 260.
---------------------------------------------------------------------------

    Further, as a result of proposed Rule 606(b)(3), broker-dealers 
that route institutional orders would likely re-evaluate their best 
execution methodologies to take into account the availability of new 
statistics and other information that may be relevant to their decision 
making. This may impose a cost only to the extent that broker-dealers 
choose to build the proposed statistics into their best execution 
methodologies. In addition, they may only choose to do so if the 
benefits justify the costs.
    Another potential cost of proposed Rule 606(b)(3) is that the 
reports could be viewed as a replacement of TCA and therefore have a 
negative impact on the market for TCA. Specifying a minimum length of 
time for making the Rule 606 reports publicly available may further 
impose a cost on third-party vendors that aggregate the time series of 
the reports. For example, suppose that a customer chooses to no longer 
purchase TCA once reports from proposed Rule 606(b)(3) become 
available, because the customer decides that the information contained 
in proposed Rule 606(b)(3) reports is sufficient. If fewer customers 
purchase TCA, it would have a negative impact on third-party providers 
of TCA as well as third-party data vendors, e.g., in terms of less 
demand for their services, and the quality of TCA provided by third-
parties may decrease because third-party providers of TCA might have 
fewer resources for the development and maintenance of their product 
offerings and because fewer customers may also lead to less data the 
third-party providers can base their models on.\390\ However, as 
discussed in Section V.C.1.b.i, the reports required by proposed Rule 
606(b)(3) would provide information that could be complementary to TCA. 
As discussed above, in fact, proposed Rule 606(b)(3) could make TCA 
more useful and provide incentives to customers to use TCA. As a 
result, the Commission preliminarily believes that proposed Rule 
606(b)(3) will not replace TCA.
---------------------------------------------------------------------------

    \390\ Based on staff experience, the Commission understands that 
customers of third-party TCA providers typically transmit their 
execution data to their TCA providers. The third-party TCA providers 
in turn base their models on the data they receive from all their 
customers. Having more data to base models on is generally 
beneficial and may result in better models.
---------------------------------------------------------------------------

    As discussed in Section V.C.1.b.i, proposed Rule 606(b)(3) would 
require differentiating order routing strategies for institutional 
orders into three types: Passive, neutral, and aggressive order routing 
strategies. The Commission preliminarily believes that broker-dealers 
would incur costs associated with creating their methodologies, 
assigning each order routing strategy for institutional orders into one 
of these three categories according to the methodologies, promptly 
updating the assignments any time an existing strategy is amended or a 
new strategy is created that would change such assignments, and 
documenting the specific methodologies it relies upon for making such 
assignments. The Commission preliminarily estimates the one-time, 
initial burden for a broker-dealer that routes institutional orders to 
establish and document in-house its specific methodologies for 
assigning order routing strategies as required by proposed Rule 
606(b)(3)(v) to be 40 hours resulting in a monetized cost burden of 
$12,620.\391\ The Commission preliminarily estimates the one-time, 
initial burden for a broker-dealer that routes institutional orders who 
will work with a third-party service provider to assign into categories 
its current order routing strategies and establish and document its 
specific methodologies as required by Rule 606(b)(3)(v) to be 10 hours 
resulting in a monetized cost burden of $2,896 plus an additional fee 
of $5,000 to the third-party service provider.\392\ These figures are 
based on the estimated number of hours to establish and review such 
methodologies. As noted above, the

[[Page 49489]]

Commission preliminarily estimates that 135 broker-dealers who route 
institutional orders will create the required reports themselves while 
65 such broker-dealers will use a third-party service provider to 
create the required reports. Therefore, the total initial burden for 
all broker-dealers that route institutional orders to assign its 
routing strategies into passive, neutral, and aggressive strategies is 
preliminarily estimated to be 6,050 hours resulting in a monetized cost 
burden of $1,891,940 plus an additional fee of $325,000 to the third-
party service providers.\393\
---------------------------------------------------------------------------

    \391\ See supra note 277.
    \392\ See supra notes 279 and 280.
    \393\ See supra notes 283 and 284.
---------------------------------------------------------------------------

    Once the methodologies are established and documented, broker-
dealers that route institutional orders would be required to assign 
each order routing strategy for institutional orders into one of these 
three categories according to the methodologies in a consistent manner 
and promptly update the assignments any time an existing strategy is 
amended or a new strategy is created that would change such 
assignments.\394\ The Commission preliminarily estimates that the 
annual cost for a broker-dealer who will assign its order routing 
strategies to one of the three categories and update such assignments 
in-house to comply with Rule 606(b)(3)(v) will be 15 hours resulting in 
a monetized cost burden of $3,500.\395\ The Commission preliminarily 
estimates that the annual burden for a broker-dealer who routes 
institutional orders who engages a third-party service provider to 
assign the order routing strategies into categories to comply with Rule 
606(b)(3)(v) will be 5 hours resulting in a monetized cost burden of 
$1,609 plus an additional third-party service provider fee of 
$1,000.\396\ As noted above, the Commission preliminarily estimates 
that 135 broker-dealers who route institutional orders will create the 
required reports themselves while 65 such broker-dealers will use a 
third-party service provider to create the required reports. Therefore, 
the total annual burden for broker-dealers that route institutional 
orders to assign the routing strategies of their institutional orders 
into passive, neutral, and aggressive strategies is preliminarily 
estimated to be 2,350 hours resulting in a monetized cost burden of 
$577,085 plus an additional third-party service provider fee of 
$65,000.\397\
---------------------------------------------------------------------------

    \394\ For example, a broker-dealer may develop new order routing 
strategies, change existing order routing strategies, or change the 
descriptions of existing order routing strategies.
    \395\ See supra note 285.
    \396\ See supra notes 287 and 288.
    \397\ See supra notes 291 and 292.
---------------------------------------------------------------------------

iii. Request for Comment
    The Commission requests comment on the Commission's analysis of the 
costs and benefits of the proposed amendments in Rule 606(b)(3). In 
particular, the Commission solicits comment on the following:
    137. Are the assumptions underlying the Commission's estimates for 
the costs of implementation and ongoing costs to comply with the 
proposal appropriate? Please provide data and analysis to support your 
view.
    138. Do commenters believe that broker-dealers currently have 
systems that contain the data that would be used in the reports? What 
data would be incremental to that already maintained by broker-dealers? 
What incremental costs would be necessary to modify and maintain 
information systems architecture?
    139. Do commenters believe there are additional costs or benefits 
that could be quantified or otherwise monetized? If so, please identify 
these costs and benefits. Please explain and provide specific data and 
estimates.
    140. Do commenters believe there are any additional costs or 
benefits that may arise from the proposal? Are there costs and benefits 
described that would likely not result from the proposed amendments? 
Are there any unintended consequences that have not been discussed that 
may result from the proposal?
    141. Do commenters believe that there are methods by which the 
Commission could reduce the costs imposed by the proposal, while still 
achieving its stated goals? Please explain in detail.
    The Commission also seeks comment on the analysis of the costs and 
benefits for the definition of an actionable IOI in proposed Rule 
600(b)(1). In particular, the Commission solicits comment on the 
following:
    142. Do commenters believe that the Commission's proposed 
definition of actionable IOI is appropriate in light of the estimated 
costs and benefits? If not, please provide alternative definitions with 
a detailed discussion of what the benefits and costs of those 
alternatives would be. Please provide data and analysis to support your 
view.
c. Public Reports for Institutional Orders Under Proposed Rule 606(c)
i. Benefits
    Proposed Rule 606(c) would require public quarterly reports broken 
down by calendar month on the order routing and execution quality of 
institutional orders by each broker-dealer. As a result, proposed Rule 
606(c) would provide the public with standardized information regarding 
all broker-dealers' institutional order routing practices and execution 
quality aggregated across each broker-dealer's customers.
    While these reports would be aggregated across all customers a 
broker-dealer serves, the reports would allow current and prospective 
customers to compare broker-dealers' institutional order routing 
practices and execution quality and ultimately, to inform their choice 
of broker-dealers. For example, customers may use the quarterly public 
reports broken down by calendar month to decide whether they should 
enter into a business relationship with broker-dealers to whom they do 
not currently send orders. Additionally, the reports may allow 
customers to compare the execution services of their current broker-
dealers with other competitors, who might offer the same execution 
quality at lower costs, improved execution quality at the same costs, 
or lower cost services and better execution quality.
    As discussed in Section V.C.1.b.i, greater transparency about order 
routing practices and execution quality may promote competition in the 
market for brokerage services and between trading centers. The 
Commission preliminarily believes that public aggregated institutional 
order handling reports required by proposed Rule 606(c) would increase 
the transparency of institutional order routing and execution quality 
and provide additional information to customers beyond that provided by 
customer-specific reports required by proposed Rule 606(b)(3). 
Customers would be able to compare their broker-dealers not just based 
on the orders they send to the broker-dealers, but also based on all 
institutional orders handled by the broker-dealers. In addition, 
customers would be able to evaluate the order routing and execution 
quality of broker-dealers they do not send orders to and could 
determine whether to send orders to a given broker-dealer based on such 
evaluation.
    Broker-dealers, in turn, might be able to adjust their business 
practices to compete better, specifically along the dimensions of order 
routing and execution quality and, through the public aggregated 
institutional order handling reports, try to attract orders from 
customers with whom they do not yet have a business relationship. The 
Commission preliminarily believes that the broker-dealers would have 
greater incentive to route institutional orders in a manner beneficial 
to a customer in order to attract additional order flow from those 
customers who may use the public aggregated institutional order

[[Page 49490]]

handling reports required by proposed Rule 606(c) to compare relative 
broker-dealer execution quality. Ultimately, greater transparency may 
increase competition in the brokerage services market, thereby 
potentially reducing costs to customers in terms of cost of services 
and execution quality for institutional orders, of which transaction 
costs is one measure.
    As discussed in Section V.C.1.b.i, if broker-dealers change their 
institutional order routing decisions, it might promote competition 
among trading centers. The public aggregated institutional order 
handling reports required by proposed Rule 606(c) would allow trading 
centers to compare the execution quality of orders on different trading 
centers as well as the routing behavior of broker-dealers. The trading 
centers would have a further incentive to improve execution quality to 
attract order flow and the public aggregated institutional order 
handling reports that are broken down by month would allow them to see 
the effects of any changes they implement. In addition, this may lead 
to innovation by existing trading centers and it may attract new 
entrants and the formation of new trading centers.
    As discussed for the customer-specific reports required by proposed 
Rule 606(b)(3) in Section V.C.1.b.i, customers may also initiate a 
dialogue with their broker-dealers, or broker-dealers they are 
considering to use, based on the public aggregated institutional order 
handling reports required by proposed Rule 606(c). This dialogue may 
include discussions about conflicts of interest \398\ and how to match 
the needs of customers with the order routing practices of the broker-
dealers to whom they send orders.
---------------------------------------------------------------------------

    \398\ As noted above, institutional customers may be able to 
utilize the customer-specific reports as required by proposed Rule 
606(b)(3) to examine the venues their broker-dealers are routing 
orders to and the rebates received and fees paid. The Commission 
notes that similar information would be reflected in the public 
aggregated institutional order handling reports and could be useful 
for institutional customers to discuss order routing practices and 
management of conflicts of interest with broker-dealers or 
prospective broker-dealers.
---------------------------------------------------------------------------

    Further, third-party vendors offering analytical services may use 
the information in the public aggregated institutional order handling 
reports in an attempt to sell customized reporting tools and services. 
These types of consulting services may allow customers and the public 
to better identify the potential conflicts of interest that broker-
dealers face with directing order flow to trading centers offering 
liquidity rebates and fees.
    Greater transparency of institutional order routing and execution 
could help shed light on the effect of today's dispersed and complex 
market structure on order routing decisions and related execution 
quality. The Commission preliminarily believes that the requirement in 
proposed Rule 606(c) for quarterly disclosure on order routing, order 
execution, and orders that provide and remove liquidity for each venue 
broken down by order routing strategy should provide the public with a 
better understanding of the operating procedures of broker-dealers and 
how their decisions are affected by the current market structure. In 
addition, the information on rebates and fees broker-dealers receive or 
incur would allow the public to assess how broker-dealers manage 
potential conflicts of interest they face when routing institutional 
orders.
    As discussed for the customer-specific reports required by proposed 
Rule 606(b)(3) in Section V.C.1.b.i., the public aggregated 
institutional order handling reports broken down by calendar month 
required by proposed Rule 606(c) would also give customers information 
about broker-dealer internalization rates and the rebates received and 
fees paid by broker-dealers. As described above, the public aggregated 
institutional order handling reports would require the disclosure of 
information by all broker-dealers that receive institutional orders. 
Customers would be able to compare internalization rates of their 
broker-dealers and rebates received and fees paid by their broker-
dealers to those of broker-dealers they do not send orders to. As such, 
the information about broker-dealer internalization rates, rebates, and 
fees in the public aggregated institutional order handling reports 
required by proposed Rule 606(c) would be complementary to the 
customer-specific reports required by proposed Rule 606(b)(3), which 
would provide customers only information about their orders rather than 
all orders a given broker-dealer receives.
    In addition, proposed Rule 606(c) would require the public 
aggregated institutional order handling reports to be posted on an 
Internet Web site that is free and readily accessible to the public for 
a period of three years from the initial date of posting on the 
Internet Web site. This requirement would allow customers and the 
public to readily access historical data for at least three years 
without the need to download the reports frequently, e.g., quarterly, 
or purchasing the data from a third-party vendor. Customers and the 
public could analyze the historical data and evaluate the order routing 
decisions and execution quality provided by broker-dealers based on the 
historical data.
    Further, the public aggregated institutional order handling reports 
required by proposed Rule 606(c) could improve the extent and quality 
of information available to the Commission and other regulatory 
agencies, thereby assisting in the regulatory oversight of broker-
dealers' operations.
    Finally, proposed Rule 606(c) would require the public aggregated 
institutional order handling reports be made available using an XML 
schema and associated PDF renderer to be published on the Commission's 
Web site.\399\ The benefits and costs associated with this requirement 
are discussed in Section V.C.4.
---------------------------------------------------------------------------

    \399\ See supra Section III.A.3.
---------------------------------------------------------------------------

ii. Costs
    The Commission considered whether the public aggregated 
institutional order handling reports that would be required pursuant to 
proposed Rule 606(c) may disclose information about specific 
institutional orders that currently is not publicly available, and 
preliminarily believes that the possibility of such disclosure and 
associated costs are small. First, the reports required by proposed 
Rule 606(c) would be quarterly reports broken down by calendar month 
made public within one month after the end of the quarter. As a result, 
it is very unlikely that the reports would contain any information 
about orders that are being worked by broker-dealers at the time of 
publication. Second, the reports would be aggregated across all 
customers a broker-dealer serves. To the extent that a broker-dealer 
serves multiple customers placing institutional orders, it would be 
difficult to identify the orders of a particular customer in the 
proposed reports. However, it is possible that, for example, a smaller 
broker-dealer may have one customer placing institutional orders that 
represents the majority of its business and this may be known to other 
market participants. In this case, it may be possible to learn from the 
reports some information about the order flow of that customer, 
particularly the order flow given to the specific broker-dealer. This 
information would not be about active orders but could provide 
historical information about the general characteristics of the 
customer's order flow, e.g., how much of its order flow has been 
handled using aggressive or passive order routing strategies. To the 
extent that these characteristics apply to future orders, this 
information

[[Page 49491]]

may be useful to other market participants. Such a potential outcome 
could put smaller broker-dealers (that is, those with a small set of 
customers or handling a relatively small number of institutional 
orders) at a competitive disadvantage relative to larger broker-
dealers, as customers might avoid using smaller broker-dealers to avoid 
possible disclosure that could be traced back to the customer. However, 
because the proposed public aggregated institutional order handling 
report would not disclose the specific orders and the historical data 
would reflect prior calendar quarters, the Commission preliminarily 
believes that the potential risks and costs due to this would be small.
    Proposed Rule 606(c) would require each broker-dealer to post the 
public aggregated institutional order handling report for a period of 
three years from the initial date of posting on the Internet Web site. 
As noted above, the Commission preliminarily believes that, once the 
report is posted, maintaining the report on the Web site will not 
impose any additional burden on broker-dealers, and thus any additional 
costs to maintain the report on the Web site would be negligible.
    The disclosure requirements of proposed Rule 606(c) would impose a 
cost, as they would require some reprogramming by broker-dealers that 
handle institutional orders. In addition, preparing and disseminating 
the data to the public in the form required by proposed Rule 606(c) 
would impose costs on such broker-dealers. However, a broker-dealer 
could use the infrastructure and processes they put in place for the 
customer-specific reports required by proposed Rule 606(b)(3) such that 
the additional cost to comply with proposed Rule 606(c) may be low. The 
Commission preliminarily estimates that a broker-dealer who handles 
institutional orders and formats and creates public aggregated 
institutional order handling reports itself will incur an initial 
burden of 20 hours resulting in a monetized cost burden of $4,990 to 
comply with the quarterly reporting requirement of proposed Rule 
606(c).\400\ The Commission preliminarily estimates that a broker-
dealer who uses a third-party service provider to create the public 
aggregated institutional order handling reports would incur an initial 
burden of 5 hours resulting in a monetized cost burden of $1,415 plus 
an additional third-party service provider fee of $2,500.\401\ As noted 
above, the Commission preliminarily estimates that 135 broker-dealers 
who route institutional orders will create the required reports 
themselves while 65 such broker-dealers will use a third-party service 
provider to create the required reports. Therefore, the total initial 
burden for broker-dealers that route institutional orders to produce 
the quarterly report is preliminarily estimated to be 3,025 hours 
resulting in a monetized cost burden of $765,625 plus an additional 
$162,500 fee to compensate third-party service providers for producing 
the reports.\402\
---------------------------------------------------------------------------

    \400\ See supra note 261.
    \401\ See supra notes 262 and 263.
    \402\ See supra note 264.
---------------------------------------------------------------------------

    Further, the Commission preliminarily estimates that each broker-
dealer that routes institutional orders who prepares its own reports 
will incur an average burden of 10 hours resulting in a monetized cost 
burden of $1,600 \403\ to prepare, disseminate, and keep for a period 
of three years a quarterly report required by proposed Rule 606(c), or 
a burden of 40 hours resulting in a monetized cost burden of $6,400 per 
year.
---------------------------------------------------------------------------

    \403\ See supra note 266.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that each broker-dealer that 
routes institutional orders that uses a third-party service provider to 
prepare the reports required under proposed Rule 606(c) will incur an 
average burden of 2 hours resulting in a monetized cost burden of $443 
plus an additional third-party service provider fee of $500 \404\ to 
prepare and make publicly available a quarterly report, or a burden of 
8 hours resulting in a monetized cost burden of $1,772 plus an 
additional third-party service provider fee of $2,000 per year.\405\ As 
noted above, the Commission preliminarily estimates that 135 broker-
dealers who route institutional orders will create the required reports 
themselves while 65 such broker-dealers will use a third-party service 
provider to create the required reports. Therefore, the total burden 
per year for all broker-dealers who route institutional orders to 
comply with the reporting requirement in proposed Rule 606(c) is 
preliminarily estimated to be 5,920 hours resulting in a monetized cost 
burden of $979,180 plus an additional third-party service provider fee 
of $130,000.\406\
---------------------------------------------------------------------------

    \404\ See supra notes 269 and 270.
    \405\ See supra notes 271 and 272.
    \406\ See supra notes 275 and 276.
---------------------------------------------------------------------------

iii. Request for Comment
    The Commission requests comment on the Commission's analysis of the 
costs and benefits of the proposed amendments in Rule 606(c). In 
particular, the Commission solicits comment on the following:
    143. Do commenters believe that the assumptions underlying the 
Commission's estimates for the costs of implementation and ongoing 
costs to comply with the proposal are appropriate? Please provide data 
and analysis to support your view.
    144. Do commenters believe there are additional costs or benefits 
that could be quantified or otherwise monetized? If so, please identify 
these costs and benefits. Please explain and provide specific data and 
estimates.
    145. Do commenters believe there are any additional costs or 
benefits that may arise from the proposal? Are there costs and benefits 
described that would likely not result from the proposed amendments? 
Are there any unintended consequences not discussed above that may 
result from the proposal?
    146. Do commenters believe that there are methods by which the 
Commission could reduce the costs imposed by the proposal, while still 
achieving its stated goals? Please explain in detail.
2. Disclosures for Retail Orders
    Rule 606(a) requires each broker-dealer to make publicly available 
quarterly reports on its routing of non-directed orders in NMS 
securities. The Commission preliminarily believes that the proposed 
amendments to Rule 606(a) would increase the level of transparency 
about order routing and execution quality for retail orders through the 
enhanced disclosure of data regarding order routing and execution. The 
proposed amendments to Rule 606(a) require that the public quarterly 
reports be broken down by calendar month and differentiate between 
marketable and non-marketable limit orders. The proposed amendments 
also would remove the requirement that the quarterly reports be divided 
into three separate sections for securities that are listed on the 
NYSE, Nasdaq, and Amex. The proposed amendments to Rule 606(a)(1)(iii) 
also require that the reports include for Specified Venues the net 
aggregate amount of any payment for order flow, payment from any 
profit-sharing relationship received, transaction fees paid, and 
transaction rebates received, both as a total dollar amount and on a 
per share basis, for specified types of orders. The proposed amendment 
to Rule 606(a)(1)(iv) would add the requirement that broker-dealers 
describe any terms of payment for order flow arrangements and profit-
sharing relationships with Specified Venues that may influence their 
order routing decisions, including, among other things: (1) Incentives 
for equaling or

[[Page 49492]]

exceeding an agreed upon order flow volume threshold, such as 
additional payments or a higher rate of payment; (2) disincentives for 
failing to meet an agreed upon minimum order flow threshold, such as 
lower payments or the requirement to pay a fee; (3) volume-based tiered 
payment schedules; and (4) agreements regarding the minimum amount of 
order flow that the broker-dealer would send to a venue.\407\ In 
addition, the proposed amendments to Rule 606(a) would require broker-
dealers to keep their reports posted on an Internet Web site that is 
free and readily accessible to the public for a period of three years 
from the initial date of posting on the Internet Web site, and would 
require such reports to be made available using an XML schema and 
associated PDF renderer to be published on the Commission's Web site.
---------------------------------------------------------------------------

    \407\ See proposed Rule 606(a)(1)(iv).
---------------------------------------------------------------------------

    The benefits and costs of each of these proposed amendments are 
discussed below. Wherever possible, we quantify cost estimates for a 
given amendment. For the remaining amendments concerning retail orders, 
we provide total quantitative cost estimates for these amendments in 
Section V.C.2.e.
a. Marketable Limit Orders and Non-Marketable Limit Orders
i. Benefits
    The proposed amendments to Rule 606(a), which applies to retail 
orders, would require broker-dealers to differentiate between 
marketable and non-marketable limit orders. Marketable and non-
marketable limit orders generally are handled differently, i.e., non-
marketable limit orders are typically posted to an order book, which 
may result in a different fee or rebate compared to a marketable limit 
order that may be immediately executed and not posted to the book.
    The proposed amendments could allow the public, including customers 
placing retail orders, to better understand the potential for conflicts 
of interest broker-dealers face when routing retail orders. For 
example, if a broker-dealer routes all non-marketable limit orders to 
the trading centers that pay the highest rebate for orders providing 
liquidity, the broker-dealer may be maximizing its revenue potentially 
to the detriment of execution quality. Recent academic research has 
identified indications of such routing behavior for retail orders.\408\ 
On examining the order routing of ten broker-dealers, the researchers 
find that four of the broker-dealers sell market orders to market 
makers and route limit orders to market makers or exchanges offering 
the largest liquidity rebates. In addition, their study indicates that 
a negative relation exists between take fees and the likelihood that a 
limit order fills and the speed and realized spread of the associated 
fill.\409\ The disclosure of order routing data broken down by 
marketable and non-marketable limit orders could incentivize broker-
dealers to better manage these and other potential conflicts of 
interest, which may result in improved order routing decisions and 
execution quality for retail orders. The disclosure could also help 
customers and others to assess if and how well broker-dealers manage 
the potential conflicts of interest they face when routing retail 
orders, and would be a way for broker-dealers to show that they are 
indeed managing these potential conflicts of interest.
---------------------------------------------------------------------------

    \408\ See Battalio, Corwin, and Jennings Paper, supra note 57.
    \409\ See id.
---------------------------------------------------------------------------

    In addition, if the additional proposed disclosure results in 
broker-dealers improving their order routing for retail orders, which, 
in turn, may change which trading centers the broker-dealers route 
retail orders to, the proposed disclosure could further promote 
competition among trading centers. The new information that would be in 
the public reports required by proposed Rule 606(a)(1) would allow 
trading centers to compare the order routing decisions of broker-
dealers and the trading centers retail orders are routed to, which 
could then inform how the trading centers attempt to attract retail 
order flow. The quarterly public reports, which would be broken down by 
month, would allow trading centers to see effects of any adjustments 
they implement in response to broker-dealers changing their order 
routing strategies. In addition, this proposed new disclosure may lead 
to innovation by existing trading centers and it may attract new 
entrants and the formation of new trading centers.\410\
---------------------------------------------------------------------------

    \410\ In particular, a trading center that loses order flow to 
venues that offer better execution quality would have the incentive 
to innovate to improve its execution quality. Therefore, because the 
proposed disclosures may encourage broker-dealers to route for 
better execution quality, they may lead to innovation on trading 
centers.
---------------------------------------------------------------------------

ii. Costs
    The proposed amendments to Rule 606(a) to require broker-dealers to 
differentiate between marketable and non-marketable limit orders would 
impose costs on broker-dealers. Preliminary estimates for compliance 
costs are contained in the estimates for the costs of producing the 
reports discussed in Section V.C.2.e.
iii. Request for Comment
    The Commission requests comment on the Commission's analysis of the 
costs and benefits of the proposed amendments in Rule 606(a). In 
particular, the Commission solicits comment on the following:
    147. Do commenters believe that the assumptions underlying the 
Commission's estimates for the costs of implementation and ongoing 
costs to comply with the proposal are appropriate? Please provide data 
and analysis to support your view.
    148. Do commenters believe there are additional costs or benefits 
that could be quantified or otherwise monetized? If so, please identify 
these costs and benefits. Please explain and provide specific data and 
estimates.
    149. Do commenters believe there are any additional costs or 
benefits that may arise from the proposal? Are there costs and benefits 
described that would likely not result from the proposed amendments? 
Are there any unintended consequences not discussed above that may 
result from the proposal?
    150. Do commenters believe that there are methods by which the 
Commission could reduce the costs imposed by the proposal, while still 
achieving its stated goals? Please explain in detail.
b. Net Payment for Order Flow and Transaction Fees and Rebates by 
Specified Venue
i. Benefits
    Under the proposed amendments to Rule 606(a)(1)(iii), for retail 
orders, broker-dealers would be required to publicly report the net 
aggregate amount of any payment for order flow, payment from any 
profit-sharing relationship received, the transaction fees paid, and 
transaction rebates received, both as a total dollar amount and on a 
per share basis, for each of the following order types: market orders, 
marketable limit orders, non-marketable limit orders, and other orders.
    Similarly to differentiating marketable and non-marketable limit 
orders discussed in Section V.C.2.a.i, the information required by 
proposed Rule 606(a)(1)(iii) could also allow the public, including 
customers placing retail orders, to better understand the potential 
conflicts of interest broker-dealers face when routing retail 
orders.\411\ The proposed disclosure of information could provide 
additional

[[Page 49493]]

incentives to broker-dealers to monitor the potential conflicts of 
interest, and to review and alter how they route retail orders, which 
could result in improved order routing decisions and execution quality 
for retail orders. The disclosure could also help the public to assess 
better if and how well broker-dealers manage the potential conflicts of 
interest they face when routing retail orders.
---------------------------------------------------------------------------

    \411\ See supra Section II.C. for an example of routing 
decisions being affected by conflicts of interest.
---------------------------------------------------------------------------

    Under proposed Rule 606(a)(1)(iii), broker-dealers would be 
required to disclose on a quarterly basis more detailed information on 
net payment for order flow, payment from any profit-sharing 
relationship received, transaction fees paid, and transaction rebates 
received per share and in total. Customers and the public could use 
this information to gauge whether payments for order flow or maker-
taker fees affect the order routing decisions of broker-dealers. For 
example, if a customer pays a flat-rate commission to its broker-
dealer, and any rebate received, or any fraction thereof, is retained 
by the broker-dealer, then the broker-dealer may have a financial 
incentive to route the retail order to the trading center offering the 
highest rebate or lowest fee.\412\ Brokerage commissions, which are 
known to the customer, may depend on the rebates and take fees 
collected or paid by broker-dealers.\413\ For example, broker-dealers 
that collect more in rebates may pass this income on to customers by 
charging lower commissions. However, routing solely to maximize rebates 
or minimize take fees may result in lower execution quality than other 
routing strategies. Without the proposed disclosures customers might 
take only brokerage commissions into account and might, therefore, 
suboptimally choose the lowest commission broker-dealer, without 
considering other relevant costs. Such customers could, in fact, end up 
paying higher net costs if the lower commission broker-dealers do not 
obtain good execution quality for the retail orders. The information 
required by proposed Rule 606(a)(1)(iii), together with the proposed 
amendments to Rule 606(a) requiring differentiating of marketable and 
non-marketable limit orders, would give customers additional 
information to make decisions based on more than the brokerage 
commissions.
---------------------------------------------------------------------------

    \412\ See, e.g., Battalio, Corwin, and Jennings Paper, supra 
note 57.
    \413\ The Commission notes that it does not believe that fees 
and rebates are the only determinants of brokerage commissions.
---------------------------------------------------------------------------

    In addition, as discussed in Section V.C.2.a.i, if broker-dealers 
improve their order routing for retail orders, which may result in 
changes to which trading centers they route retail orders to, it could 
promote competition between trading centers. The trading centers could 
gauge, like customers, whether payment for order flow or maker-taker 
fees affect the order routing decision of broker-dealers. The trading 
centers may change their fees or attempt otherwise to attract retail 
order flow and the quarterly public reports that are broken down by 
calendar month would allow them to see effects of any changes they 
implement. In addition, this may lead to innovation by existing trading 
centers and it may attract new entrants and the formation of new 
trading centers.
ii. Costs
    Proposed Rule 606(a)(1)(iii) would impose initial costs on broker-
dealers in creating a new process to complete the reports and increase 
ongoing costs related to incorporating additional information into the 
reports. Preliminary estimates for the compliance costs are contained 
in the estimates for the costs of producing the reports discussed in 
Section V.C.2.e. It is possible that increased transparency about the 
net aggregate amount of any payment for order flow, payment from any 
profit-sharing relationship, transaction fees paid, and transaction 
rebates received, and subsequent scrutiny by retail customers, the 
public, academics, regulators, and the financial media, may lead 
broker-dealers to decrease the degree to which they internalize orders 
and route orders to high rebate or low fee exchanges to avoid the 
perception of conflicts of interest. Broker-dealers might do this if 
they perceive the potential costs from increased public scrutiny that 
would result from the enhanced disclosures to be relatively high 
compared to the benefit from sending retail orders to internalizers or 
routing retail orders to high rebate and low fee trading centers. If 
this were to occur then these retail orders might be more likely to be 
routed to trading centers other than internalizers, such as exchanges 
or alternative trading systems,\414\ regardless of potential execution 
quality differences such as relatively less price improvement, or they 
might be more likely to be routed to other lower rebate or higher fee 
venues, regardless of the potential execution quality differences. In 
addition, if broker-dealers were to reduce the retail order flow sent 
to internalizers who pay for it, the broker-dealers would receive less 
payment for retail order flow and might pass the lost payments onto 
their retail customers by raising brokerage commissions or other fees. 
Similarly, if broker-dealers were to route retail orders to trading 
centers with lower rebates and higher fees, they might pass the 
reduction in rebate revenue and increase in fee costs on to their 
retail customers by raising brokerage commissions or other fees.
---------------------------------------------------------------------------

    \414\ See supra note 3.
---------------------------------------------------------------------------

    It is possible that increased transparency about net payment for 
order flow and payments from profit-sharing relationships, and 
subsequent scrutiny by retail customers, the public, academics, 
regulators, and the financial media, might lead broker-dealers to alter 
their payment for order flow or profit-sharing relationships or not 
enter such relationships. Broker-dealers might do this if they perceive 
the potential costs from increased public scrutiny to be relatively 
high compared to a broker-dealer's benefit from such relationships. 
This could lead to lower payments received from such relationships. The 
affected broker-dealers might offset these lower revenues or higher 
costs by increasing brokerage commissions or other fees for retail 
customers.
iii. Request for Comment
    The Commission requests comment on the Commission's analysis of the 
costs and benefits of the proposed amendments in Rule 606(a)(1)(iii). 
In particular, the Commission solicits comment on the following:
    151. Do commenters believe that the assumptions underlying the 
Commission's estimates for the costs of implementation and ongoing 
costs to comply with the proposal are appropriate? Please provide data 
and analysis to support your view.
    152. Do commenters believe there are additional costs or benefits 
that could be quantified or otherwise monetized? If so, please identify 
these costs and benefits. Please explain and provide specific data and 
estimates.
    153. Do commenters believe there are any additional costs or 
benefits that may arise from the proposal? Are there costs and benefits 
described that would likely not result from the proposed amendments? 
Are there any unintended consequences not discussed above that may 
result from the proposal?
    154. Do commenters believe that there are methods by which the 
Commission could reduce the costs imposed by the proposal, while still 
achieving its stated goals? Please explain in detail.
c. Discussion of Arrangement Terms With a Specified Venue
i. Benefits
    As discussed in Section III.B.3., the proposed amendment to Rule

[[Page 49494]]

606(a)(1)(iv) would require broker-dealers to describe in their 
quarterly public report any terms of payment for order flow 
arrangements and profit-sharing relationships, whether written or oral, 
with a Specified Venue that may influence their order routing 
decisions, including, among other things: (1) Incentives for equaling 
or exceeding an agreed upon order flow volume threshold, such as 
additional payments or a higher rate of payment; (2) disincentives for 
failing to meet an agreed upon minimum order flow threshold, such as 
lower payments or the requirement to pay a fee; (3) volume-based tiered 
payment schedules; and (4) agreements regarding the minimum amount of 
order flow that the broker-dealer would send to a venue. The Commission 
preliminarily believes that the description provided by proposed Rule 
606(a)(1)(iv) would help ensure consistent, accurate, and comprehensive 
disclosure of terms of payment for order flow and profit-sharing 
relationships that influence broker-dealer order routing decisions. 
This would make the public reports required by amended Rule 606(a) more 
useful to customers and the public, and the benefits of the description 
required by proposed Rule 606(a)(1)(iv) are similar to the benefits of 
the disclosures of the net payment for order flow and transaction fees 
and rebates by Specified Venue required by proposed Rule 606(a)(1)(iii) 
and discussed in Section V.C.2.b.i.
    The disclosures required by proposed Rule 606(a)(1)(iv) could allow 
the public, including customers placing retail orders, to better 
understand the potential conflicts of interest broker-dealers face when 
routing retail orders.\415\ Together with the proposed amendments to 
Rule 606(a) concerning differentiating marketable and non-marketable 
limit orders and with proposed Rule 606(a)(1)(iii), proposed Rule 
606(a)(1)(iv) could give customers placing retail orders useful 
information about potential conflicts of interest. The disclosures 
required by Rule 606(a)(1)(iv) would give customers access to 
information on the terms of payment for order flow arrangements and 
profit-sharing relationships between broker-dealers and Specified 
Venues. Customers could use that information to gauge whether those 
arrangements affect the order routing decisions of broker-dealers. The 
proposed disclosures could incentivize broker-dealers to monitor their 
potential conflicts of interest, and to review and alter how they route 
retail orders, which could result in improved order routing decisions 
and execution quality for retail orders. The disclosure could also help 
the public to assess if and how well broker-dealers manage the 
potential conflicts of interest they face when routing retail orders.
---------------------------------------------------------------------------

    \415\ See supra Section II.C. for an example of routing 
decisions being affected by conflicts of interest.
---------------------------------------------------------------------------

    In addition, as discussed in Section V.C.2.a.i, if broker-dealers 
improve their order routing for retail orders, which may result in 
changes to which trading centers they route retail orders to, it could 
promote competition between trading centers. The trading centers could 
gauge, like customers, whether payment for order flow arrangements and 
profit-sharing relationships between broker-dealers and Specified 
Venues affect the order routing decisions of broker-dealers. The 
trading centers may change their payment for order flow arrangements 
and profit-sharing relationships with broker-dealers or attempt 
otherwise to attract retail order flow and the quarterly public reports 
that are broken down by calendar month would allow them to see effects 
of any changes they implement. In addition, this may lead to innovation 
by existing trading centers and it may attract new entrants and the 
formation of new trading centers.
ii. Costs
    Given that the proposed changes to Rule 606(a)(1)(iv) constitute an 
amendment to an existing disclosure, the Commission preliminarily 
estimates the initial paperwork burden for a broker-dealer that handles 
retail orders to review and assess its payment for order flow 
arrangements and profit-sharing relationships, whether written or oral, 
with a Specified Venue that may influence their order routing 
decisions, and describe terms of such arrangements to be 10 hours 
resulting in a monetized cost burden of $3,155.\416\ With 266 broker-
dealers that route retail orders required to comply with the rule, the 
Commission preliminarily estimates the total initial paperwork burden 
for complying with proposed Rule 606(a)(1)(iv) to be 2,660 hours 
resulting in a cost of $839,230.\417\ The Commission preliminarily 
estimates the annual paperwork burden for a broker-dealer that handles 
retail orders to describe and update any terms of payment for order 
flow arrangements and profit-sharing relationships, whether written or 
oral, with a Specified Venue that may influence their order routing 
decisions to be 15 hours resulting in a monetized cost burden of 
$3,500.\418\ With 266 broker-dealers that route retail orders required 
to comply with the rule, the Commission preliminarily estimates the 
total annual paperwork burden for complying with proposed Rule 
606(a)(1)(iv) to be 3,990 hours resulting in a cost of $931,000.\419\
---------------------------------------------------------------------------

    \416\ See supra note 318.
    \417\ See supra note 319.
    \418\ See supra note 323.
    \419\ See supra note 324.
---------------------------------------------------------------------------

    Increased disclosure about payment for order flow arrangements and 
profit-sharing relationships may lead broker-dealers to decrease the 
amount of internalization used in the execution of market and 
marketable limit orders and to alter such arrangements and 
relationships. Section V.C.2.b.ii. discusses this in detail and the 
associated costs and other effects.
iii. Request for Comment
    The Commission requests comment on the Commission's analysis of the 
costs and benefits of the proposed amendments in Rule 606(a)(1)(iv). In 
particular, the Commission solicits comment on the following:
    155. Do commenters believe that the assumptions underlying the 
Commission's estimates for the costs of implementation and ongoing 
costs to comply with the proposal are appropriate? Please provide data 
and analysis to support your view.
    156. Do commenters believe there are additional costs or benefits 
that could be quantified or otherwise monetized? If so, please identify 
these costs and benefits. Please explain and provide specific data and 
estimates.
    157. Do commenters believe there are any additional costs or 
benefits that may arise from the proposal? Are there costs and benefits 
described that would likely not result from the proposed amendments? 
Are there any unintended not discussed above consequences that may 
result from the proposal?
    158. Do commenters believe that there are methods by which the 
Commission could reduce the costs imposed by the proposal, while still 
achieving its stated goals? Please explain in detail.
d. Additional Amendments to Retail Disclosures
    In addition to the amendments discussed above, the Commission is 
proposing to amend disclosures for retail orders by aggregating reports 
across listing exchanges, requiring quarterly reports to be broken down 
by month, and providing reports in a specific format that are available 
for a minimum length of time. The benefits and costs of these 
additional amendments are discussed below.

[[Page 49495]]

i. Aggregated Reporting
(a) Benefits
    The proposed amendment to Rule 606(a)(1) that requires reports on 
retail orders be aggregated across all securities may reduce the 
ongoing costs of the Rule 606(a) reports. Current Rule 606(a)(1) 
requires that NMS stocks be ``divided into three separate sections for 
securities that are listed on the New York Stock Exchange, Inc., 
securities that are qualified for inclusion in The Nasdaq Stock Market, 
Inc., and securities that are listed on the American Stock Exchange LLC 
or any other national securities exchange.'' To satisfy this 
requirement, broker-dealers have to determine the primary listing of 
all NMS stocks and incur a cost on an ongoing basis in doing so. 
Eliminating this requirement would save broker-dealers this cost. In 
addition, new broker-dealers currently have to create the initial 
report format for the three groups of NMS stocks, which also imposes a 
one-time cost.\420\ Under the proposed amendment, new broker-dealers 
would not incur that cost.
---------------------------------------------------------------------------

    \420\ NYSE Arca, Inc. (``NYSE Arca'') and Bats BZX are also 
listing exchanges but only for exchange traded funds not stocks.
---------------------------------------------------------------------------

(b) Costs
    The Commission's proposal to aggregate reports on retail order 
routing across listing exchanges would also impose costs, according to 
a staff analysis.\421\ In particular, the staff analysis indicates that 
the aggregation across listing exchanges would reduce the value of the 
606 reports for monitoring execution quality from broker-dealers 
because it would make it harder for retail customers to assess the 
execution quality provided by their broker-dealers. This section 
describes the staff's analysis.
---------------------------------------------------------------------------

    \421\ In addition, this proposed amendment would impose an 
initial cost for broker-dealers who currently capture the data 
required by the proposed modification to Rule 606(a) to change the 
process for preparing the reports. These costs are reflected in the 
cost estimates discussed in Section V.C.2.e.
---------------------------------------------------------------------------

    The staff's analysis focuses on whether customers or others can use 
the market-specific routing information to assess the execution quality 
they get from their broker-dealers. Specifically, if the order routing 
decisions by broker-dealers differ for stocks listed on different 
exchanges, e.g., if broker-dealers route orders differently for NYSE-
listed stocks compared to NASDAQ-listed stocks, the proposed aggregated 
reports would not provide this information to customers and the 
public.\422\ Such information can be useful for customers and the 
public as long as order routing decisions determine execution quality 
and execution costs. Specifically, Commission staff analyzed execution 
costs as measured by effective spreads from Rule 605 reports (``Rule 
605 data'') for common stocks with different primary listing exchanges 
and on different market centers to determine whether the cost of 
executing a market or a marketable limit order for common stock varies 
across market centers and primary listing exchange.\423\ The staff's 
analysis controls for stock and order characteristics.\424\ 
Accordingly, the staff's analysis considers whether execution quality 
depends on primary listing exchanges, and specifically which market 
centers provide better execution, as a means to assess whether the 
proposal might reduce the usefulness of the reports.\425\
---------------------------------------------------------------------------

    \422\ The Commission notes that there are differences in order 
routing decisions depending on primary listing exchange due to 
existing rules, regulations, and practices. For example, the NYSE 
does not trade NASDAQ- or NYSE MKT-listed stocks. As a result, 
orders for a NYSE-listed stock can be routed to the NYSE, NASDAQ, 
and other market centers, whereas orders for NASDAQ-listed stocks 
can be routed to NASDAQ and other market centers, but not to the 
NYSE. This level of information would be lost in aggregated reports.
    \423\ The Commission purchased the Rule 605 data from CoreOne 
Technologies, a provider of financial data. The data used in this 
analysis spans the period from January 1, 2012 through December 31, 
2014. The CRSP US Stock Database from Wharton Research Data Services 
contains daily and monthly market and corporate action data for 
securities, and is used to estimate control variables.
    \424\ Specifically, the analysis consists of a regression that 
uses dollar volume, market capitalization, and mean variance of 
daily returns to control for stock characteristics, and order type 
and order size to control for order characteristics.
    \425\ Similarly, if any of the information required to be 
disclosed by proposed Rules 606(a)(iii) and (iv) differs for stocks 
with different listing exchanges, then the proposed aggregation will 
reduce the information content of the reports, provided that 
information is valuable to institutions as discussion in Section 
II.C. For example, it may be the case that payment for order flow 
arrangements are different for stocks with different primary listing 
exchanges or an exchange may implement different fees and rebates 
for stocks with a different primary listing exchange.
---------------------------------------------------------------------------

    While the staff's analysis is not a direct test of whether order 
routing differs for stocks with different primary listing 
exchanges,\426\ it does directly measure one important factor in 
whether such routing information would be useful--differences in 
execution costs. Information on both execution costs and routing allows 
customers (or someone acting on behalf of customers) to assess the 
extent to which their broker-dealer routes customer orders to the 
market centers with the lowest execution costs. If the execution cost 
measures show that listing exchange matters for which market centers 
offer better execution quality, then aggregating the routing 
information across listing exchanges could reduce the ability for 
customers to assess one of the components of best execution. Hence, the 
staff's analysis provides some indication of whether aggregated 
reporting, as required by the proposed amendment, would deprive 
customers and the public of useful information regarding the impact of 
routing decisions.
---------------------------------------------------------------------------

    \426\ Commission staff was unable to obtain historical quarterly 
reports for retail orders required by current Rule 606(a). 
Therefore, the Commission staff did not analyze current 606 reports 
to see if routing differs by listing exchange of the stock.

   Table 1--Association Between Trading Center and Mean Effective Spread for Common Stocks by Listing Exchange
----------------------------------------------------------------------------------------------------------------
                                                         Mean effective spread (basis points)
                                    ----------------------------------------------------------------------------
                                               (1)                       (2)                       (3)
                                    ----------------------------------------------------------------------------
                                           NYSE-listed              NASDAQ-listed            NYSE MKT-listed
----------------------------------------------------------------------------------------------------------------
Intercept..........................       *** 18.02 (227.48)         *** 92.01 (412.45)      *** 177.29 (122.39)
BATS BYX...........................        ***-4.12 (-48.43)        ***-35.78 (-141.56)       ***-37.58 (-20.35)
BATS BZX...........................        ***-7.04 (-77.28)        ***-40.70 (-161.74)       ***-50.60 (-31.87)
BX.................................        ***-1.31 (-14.26)        ***-29.21 (-107.52)       ***-34.06 (-19.01)
CBSX...............................          *** 1.12 (8.76)         ***-17.02 (-41.94)         *** 14.94 (4.70)
CHX................................        ***-2.27 (-10.93)         ***-37.72 (-43.53)        ***-21.04 (-2.90)
EDGA...............................        ***-4.69 (-55.75)        ***-35.49 (-131.77)       ***-41.53 (-25.03)
EDGX...............................        ***-4.28 (-48.53)         ***-27.64 (-96.80)       ***-29.09 (-15.71)

[[Page 49496]]

 
NASDAQ.............................         *** 1.63 (17.33)  .........................           ** 3.98 (2.53)
NSX................................        ***-2.85 (-28.76)        ***-37.17 (-118.44)       ***-41.72 (-22.17)
NYSE ARCA..........................        ***-5.75 (-70.19)        ***-36.71 (-152.46)       ***-48.49 (-30.82)
NYSE MKT...........................  .......................        ***-57.02 (-113.92)  .......................
Off Exchange.......................        ***-3.08 (-43.57)        ***-31.85 (-168.35)       ***-34.54 (-26.76)
PSX................................        ***-3.10 (-39.77)        ***-57.54 (-256.34)       ***-81.01 (-54.98)
Marketable limit order.............            -0.004 (-.11)           *** 2.90 (28.78)       ***-10.83 (-15.95)
500-1,999 shares...................         *** 0.67 (15.32)          ***-2.32 (-21.67)           *-1.23 (-1.87)
2,000-4,999 shares.................         *** 2.22 (44.37)          ***-3.31 (-26.89)           ** 1.87 (2.37)
>=5,000 shares.....................         *** 3.41 (61.79)          ***-4.23 (-28.66)          *** 2.98 (3.12)
Dollar volume......................    ***-2.86E-08 (-178.5)       *** 2.21E-09 (11.38)        -3.04E-08 (-1.49)
Market capitalization..............     *** 8.03E-12 (12.49)     ***-3.65E-10 (-121.35)    ***-1.96E-08 (-57.69)
Variance of daily return...........       *** 334.54 (21.14)         *** 438.14 (11.66)       *** 877.18 (11.53)
H0: All exchange dummies = 0
    Chi-square.....................               *** 17,580                 *** 75,339                *** 6,346
H0: EDGX = Bats BYX
    Chi-square.....................                  ** 4.13                 *** 806.78                *** 18.70
Observations.......................                9,792,105                 10,764,324                  688,305
Adjusted R\2\......................                    1.02%                      1.18%                    1.98%
Year fixed effects.................                      Yes                        Yes                      Yes
----------------------------------------------------------------------------------------------------------------
Note: Data are SEC Rule 605 data purchased from CoreOne Technologies and CRSP, and include years 2012-2014. The
  mean effective spread is equally-weighted by stock. The variable categories that are dropped are: One trading
  center, market orders (for the regressions involving mean effective spreads), inside-the-quote limit orders
  (for regressions involving mean realized spreads), order size from 100-499 shares, and the 2012 calendar year.
  The Chi-square test is used to test the null hypothesis that all of the exchange coefficients, with the
  exception of the intercept coefficient, are jointly zero. The null hypothesis would imply that all exchanges
  would not be associated with a mean effective spread different from that associated with NYSE-listed stock
  orders executed at NYSE. T-statistics estimated from White standard errors are in parentheses. * indicates
  significance of a 2-tailed test at the 10% level; ** at the 5% level; *** at the 1% level.

    Table 1 presents the results of the staff's analysis of effective 
spreads for common stocks listed on the NYSE, NASDAQ, and NYSE MKT. 
Columns 1 through 3 report the results for each of these primary 
listing exchanges.\427\ The market center rows in the table report the 
basis point difference between the average effective spreads on that 
market center and the average effective spreads on the primary listing 
exchange. In tests of whether effective spreads of each market center 
are the same as the listing exchange, the rows with stars indicate that 
the market center effective spreads are statistically significantly 
different, with more stars indicating stronger confidence in the 
significance. For illustration, the intercept in Column 1 indicates 
that the average effective spread for market orders for NYSE-listed 
stocks that are executed on the NYSE is 18.02 basis points and the -
4.12 estimate for Bats BYX Exchange, Inc. (``Bats BYX'') indicates that 
the effective spreads for NYSE-listed stocks on Bats BYX are 4.12 basis 
points lower after controlling for differences due to stock and order 
characteristics.\428\
---------------------------------------------------------------------------

    \427\ The Rule 605 data and, thus, this analysis weight the 
effective spread statistics equally by stock. Therefore, these 
effective spreads appear larger than if they were weighted by dollar 
volume or by share volume.
    \428\ For perspective, a one penny effective spread on a $40 
stock is 2.5 basis points. A 2.5 basis point cost on a 100 share 
trade in a $40 stock would be $1.00. An ordinary least squares 
estimate is consistent when the explanatory variables are exogenous, 
perfect multicollinearity does not exist, and optimal in the class 
of linear unbiased estimators when the errors are homoscedastic and 
serially uncorrelated. Under these assumptions, the method of 
ordinary least squares provides minimum-variance mean-unbiased 
estimates when the errors have finite variances. If any one or more 
of these assumptions does not hold then the estimate may not be the 
best linear unbiased estimator.
---------------------------------------------------------------------------

    Table 1 indicates that the average effective spreads vary 
significantly by the market center where the orders were executed. 
Table 1 shows that most market center effective spreads are 
significantly different than those of the listing exchange. For 
example, Column 1 shows that, for NYSE-listed stocks, the average 
effective spread on Bats BZX is 7.04 basis points less than on the NYSE 
itself, and the average effective spread on NASDAQ is 1.63 basis points 
higher than on the NYSE. In addition, some differences in effective 
spreads are also economically meaningful. For example, Column 2 reports 
that the average effective spread for orders in NASDAQ-listed stocks 
that are executed on NASDAQ is 92.01 basis points and the average 
effective spread for such orders that are executed on NYSE Arca is 
36.71 basis points lower, which corresponds to a 55.3 basis point 
difference and represents a reduction of almost 40%.\429\ Differences 
of such magnitude may be important to broker-dealers when making order 
routing decisions and to customers in monitoring the execution quality 
their broker-dealers provide as measured by the current Rule 605 
reports.
---------------------------------------------------------------------------

    \429\ 36.71/92.01 = 39.9%.
---------------------------------------------------------------------------

    Table 1 also indicates that the average effective spreads vary 
significantly by listing exchange. The staff's analysis suggests that 
NASDAQ-listed stocks tend to have higher average effective spreads than 
NYSE-listed stocks because the intercept estimates are much larger in 
Column 2 compared to Column 1.\430\ Table 1 also shows that NYSE MKT-
listed stocks tend to have even higher average effective spreads

[[Page 49497]]

than NASDAQ-listed stocks by comparing the results in Column 3 with 
those in Column 2. The Commission notes that neither this result alone 
nor this result in conjunction with the results in the previous 
paragraph directly measure whether the proposed amendment would reduce 
the usefulness of the Rule 606 routing information.
---------------------------------------------------------------------------

    \430\ The Commission recognizes that the staff analysis did not 
control for stock and order characteristic differences across the 
columns and the staff did not estimate a matched-sample comparison. 
These other analysis types would facilitate a more fulsome 
comparison of effective spreads in similar stocks by listing 
exchange than the staff's analysis in Table 1. However, because the 
606 reports do not distinguish individual stocks, the Commission 
preliminarily believes that the staff analysis is appropriate for 
assessing the costs of the proposed amendments.
---------------------------------------------------------------------------

    However, a deeper analysis of Table 1 can inform on these costs. 
Specifically, the results in the table suggest that because the 
relative ranking of each market center changes depending on the listing 
exchange, the proposed amendment to aggregate routing information 
across listing exchanges could reduce the usefulness of Rule 606 
reports. Commission staff compared the effective spreads across the 
various market centers for stocks listed on each of the primary listing 
exchanges, as indicated by Table 1.
    If the ranking of the effective spreads on each market center were 
the same across the three primary listing exchanges, where a stock is 
listed would have little or no relationship to whether order routing 
information informs on execution quality. Such a result would imply 
that aggregating the reports across primary listing exchanges would not 
reduce the amount of information in the reports. However, upon 
examination, Table 1 shows that the ranking of the market centers by 
effective spreads is different depending on the primary listing 
exchange. For example, the coefficient estimates in Table 1 suggest 
that for NYSE-listed stocks, Bats EDGX Exchange, Inc. (``EDGX'') has 
lower execution costs than Bats BYX, but for NASDAQ-listed stocks, EDGX 
has higher execution costs than Bats BYX. In Column 1 for NYSE-listed 
stocks, the differential cost of trading a stock on EDGX versus Bats 
BYX is small, 0.17 basis points, but statistically significant. 
However, in Column 2 for NASDAQ-listed stocks, the stocks differ in 
cost by a statistically significant 8.14 basis points between the same 
two exchanges. This indicates that there seem to be differences between 
market centers in terms of effective spreads for stocks with different 
primary listings that, together with routing information by listing 
exchange, may inform customers in assessing the execution quality their 
broker-dealers provide. Therefore, the staff's analysis indicates that 
aggregating the reports, as in the proposed amendment, could result in 
an informational cost to customers and the public.
    As noted above in Section III.B.4., while the Commission recognizes 
that eliminating the division of reports by the three distinct listing 
markets may potentially cause some reduction in informational content, 
as indicated in the analysis above, the Commission preliminarily 
believes that any diminution in granular listing market data is 
appropriate in light of the proposed requirement to provide retail 
customers with pertinent order routing data that reflects today's 
multiple trading centers and practices. The Commission solicits comment 
on the foregoing.
ii. Other Proposed Amendments to Reporting
    The Commission is also proposing to require that the quarterly 
public retail order routing reports required by Rule 606(a)(1) be 
broken down by calendar month. Current Rule 606(a)(1) requires broker-
dealers to make retail order routing reports publicly available for 
each calendar quarter, and such reports contain aggregate quarterly 
information on the routing of retail orders. As noted above, the 
Commission understands that trading centers frequently change their fee 
structures, including the amount of fees and rebates, in order to 
attract order flow, and these changes typically occur at the beginning 
of a calendar month. The changes in fee structures at trading centers 
likely will affect a broker-dealer's routing decisions. Disclosing 
retail order routing information on an aggregated quarterly basis can 
mask changes in routing behavior in response to changes in a trading 
center's fee structure. The Commission preliminarily believes that 
disclosing the information contained in the public retail routing 
reports by calendar month would allow customers to better assess 
whether their broker-dealers' routing decisions are affected by changes 
in fee structures and the extent to which such changes affect execution 
quality. This proposed amendment would, however, require an initial 
cost to change the process for completing the reports. The Commission 
preliminarily believes this cost to be small because broker-dealers 
typically process data daily and reporting the data broken down by 
month would only be a change in the aggregation of the data, from 
quarterly to monthly.
    In addition, the Commission is proposing that the public retail 
order routing report required by Rule 606(a)(1) and customer-specific 
order routing report required by Rule 606(b)(1) be made available using 
an XML schema and associated PDF renderer to be published on the 
Commission's Web site. The benefits and costs associated with this 
requirement are discussed in Section V.C.4. The Commission 
preliminarily believes that requiring both the public and customer-
specific retail order routing reports to be provided in this format 
should be useful to customers as it would allow them to more easily 
analyze and compare the data provided in both types of reports across 
broker-dealers, for the reasons discussed above.\431\ The proposed 
amendments to Rule 606(a)(1) and Rule 606(b)(1) would require an 
initial cost to change the process for completing the reports.\432\ The 
benefits and costs associated with this requirement are discussed in 
further detail in Section V.C.4.
---------------------------------------------------------------------------

    \431\ See supra Section III.A.3.
    \432\ The benefits and costs associated with this requirement 
more generally are discussed in Section V.C.4.
---------------------------------------------------------------------------

    Finally, the Commission is proposing to amend Rules 605(a)(2) and 
606(a)(1) to require market centers and broker-dealers to keep the 
reports posted on an Internet Web site that is free of charge and 
readily accessible to the public for a period of three years. Requiring 
that data be available to customers and the public for three years 
could be useful to those seeking to analyze past execution quality by 
market center and routing behavior of broker-dealers. Such analysis may 
lead to increased transparency with regards to execution quality and 
may lead broker-dealers to compete along this dimension through routing 
decisions, resulting in a higher probability of execution and improved 
execution in terms of costs. Current Rules 605 and 606 do not specify 
the minimum length of time that market centers need to publish the 
order execution reports and broker-dealers need to publish the retail 
order routing reports, respectively. As a result, the public may not be 
able to examine the order execution of a market center and the routing 
of retail orders by a broker-dealer through time if past reports are 
not currently available or they have to rely on third-party vendors to 
supply past reports.
    The requirement to make the reports available for three years may 
also produce costs. As noted above, however, the Commission 
preliminarily believes that, once the report is posted, maintaining the 
reports on the Web site will not pose any additional burden on broker-
dealers, and thus any additional costs to maintain the report on the 
Web site would be negligible. Any costs of maintaining the report are 
included in the Commission's estimates of the costs broker-dealers will 
incur to produce the reports, as explained above.\433\ In addition, 
third-party vendors that

[[Page 49498]]

aggregate the time series of 605 and 606 reports may find that their 
data is less useful, particularly for the three years that the reports 
are publicly available.
---------------------------------------------------------------------------

    \433\ See infra Section V.C.1.c.ii.
---------------------------------------------------------------------------

iii. Request for Comment
    The Commission requests comment on the Commission's analysis of the 
costs and benefits of the proposed amendments in Rule 605(a)(2), 
606(a)(1) and 606(b)(1). In particular, the Commission solicits comment 
on the following:
    159. Do commenters believe that the assumptions underlying the 
Commission's estimates for the costs of implementation and ongoing 
costs to comply with the proposal are appropriate? Please provide data 
and analysis to support your view.
    160. Do commenters believe there are additional costs or benefits 
that could be quantified or otherwise monetized? If so, please identify 
these costs and benefits. Please explain and provide specific data and 
estimates.
    161. Do commenters believe there are any additional costs or 
benefits that may arise from the proposal? Are there costs and benefits 
described that would likely not result from the proposed amendments? 
Are there any unintended consequences that may result from the 
proposal?
    162. Do commenters believe that there are methods by which the 
Commission could reduce the costs imposed by the proposal, while still 
achieving its stated goals? Please explain in detail.
e. Compliance Costs for Retail Order Routing Reports
    As discussed in more detail in Section IV.D.4., the Commission 
preliminarily estimates the costs to comply with the proposed 
amendments to Rule 606(a) that require broker-dealers to distinguish 
between marketable and non-marketable limit orders and with proposed 
Rule 606(a)(1)(iii) that requires disclosure of net payment for order 
flow and transaction fees and rebates by Specified Venue as follows. 
The Commission preliminarily estimates that most of the 266 broker-
dealers that route retail orders already obtain the information 
required by the proposed rule and that 50 broker-dealers do not 
currently obtain such information. The Commission preliminarily 
estimates that the initial burden for a broker-dealer who routes retail 
orders to update its systems to capture the information required by 
proposed Rule 606(a) and format that information into a report to 
comply with the rule will be 80 hours resulting in a cost of 
$22,648.\434\ The Commission preliminarily estimates that 25 broker-
dealers whose systems do not currently capture all of the information 
required by proposed Rule 606(a) will engage a third-party service 
provider to perform the necessary upgrades. The Commission 
preliminarily estimates that the initial burden for a broker-dealer 
that routes retail orders to engage a third-party to perform the 
necessary system updates to comply with proposed Rule 606(a) will be 20 
hours resulting in a monetized cost burden of $5,985 plus an additional 
third-party service provider fee of $10,000.\435\ Therefore, the 
Commission preliminarily estimates the total initial burden for all 50 
broker-dealers who need to update their systems and create a new report 
to be 2,500 hours resulting in a monetized cost burden of $715,825 plus 
an additional $250,000 fee to the third-party service providers.\436\
---------------------------------------------------------------------------

    \434\ See supra note 299.
    \435\ See supra notes 301 and 302.
    \436\ See supra notes 304 and 305.
---------------------------------------------------------------------------

    For the remaining 216 broker-dealers who the Commission 
preliminarily estimates currently capture the data required by the 
proposed modifications to Rule 606(a), such broker-dealers would need 
only to format their reports to incorporate such data. The Commission 
preliminarily estimates for broker-dealers that already capture such 
data, 108 would format the reports in-house. The cost to format that 
data into its existing reports in-house is preliminarily estimated to 
be 20 hours resulting in a monetized cost burden of $4,975.\437\ The 
Commission preliminarily estimates that 108 broker-dealers currently 
engage a third-party service provider to provide reports pursuant to 
existing Rule 606(a) and such broker-dealers would continue to use 
third-party service providers to format reports to comply with proposed 
Rule 606(a). The Commission preliminarily estimates the initial burden 
for a broker-dealer who engages a third-party service provider to 
format reports to comply with proposed Rule 606(a) would be 8 hours 
resulting in a monetized cost burden of $2,555 plus an additional fee 
of $2,000.\438\ As such, the Commission preliminarily estimates that 
the total cost for the 216 broker-dealers who the Commission 
preliminarily estimates currently capture the data required by proposed 
Rule 606(a) to format their reports to incorporate such data to be 
3,024 hours resulting in a monetized cost burden of $813,240 plus an 
additional $216,000 third-party service provider fee.\439\ Therefore, 
the Commission preliminarily estimates that the total initial burden to 
comply with Rule 606(a) for all 266 broker-dealers which the Commission 
preliminarily estimates route retail orders is 5,524 hours resulting in 
a monetized cost burden of $1,529,065 plus an additional fee of 
$466,000 to third-party service providers.\440\
---------------------------------------------------------------------------

    \437\ See supra note 306.
    \438\ See supra notes 308 and 309.
    \439\ See supra notes 312 and 313.
    \440\ See supra notes 314 and 315.
---------------------------------------------------------------------------

    The Commission preliminarily believes that once the initial costs, 
described above, have been incurred to allow a broker-dealer to obtain 
the required information, the cost to produce a quarterly report would 
remain the same compared to a quarterly report required under current 
Rule 606(a).\441\ However, broker-dealers would need to monitor payment 
for order flow or profit-sharing relationships and potential SRO rule 
changes that could impact their order routing decisions and incorporate 
any new information into their reports. Thus, the Commission 
preliminarily estimates the annual burden for a broker-dealer to comply 
with the proposed amendments to Rule 606(a)(1)(i)-(iii) to be 10 hours 
resulting in a monetized cost burden of $3,155.\442\ With 266 broker-
dealers that route retail orders required to comply with the proposed 
amendments, the Commission preliminarily estimates the total annual 
burden to be 2,660 hours resulting in a monetized cost burden of 
$839,230.\443\
---------------------------------------------------------------------------

    \441\ See supra Section IV.D.4.b.
    \442\ See supra note 321.
    \443\ See supra note 322.
---------------------------------------------------------------------------

i. Request for Comment
    The Commission requests comment on the Commission's discussion of 
implementation considerations of the proposed amendments in Rules 
606(a)(1) and 606(b)(1). In particular, the Commission solicits comment 
on the following:
    163. Do commenters agree with the Commission's estimates of the 
costs to comply with the proposed amendments in Rules 606(a)(1) and 
606(b)(1) for retail orders? Specifically, do commenters agree with the 
Commission's estimates for initial costs and for ongoing costs? Please 
be specific in your response and provide data to support your response.
3. Disclosure of Order Execution Information
    The proposed amendment to Rule 605(a)(2) requires market centers to 
keep reports required pursuant to Rule

[[Page 49499]]

605(a)(1) posted on an Internet Web site that is free of charge and 
readily accessible to the public for a period of three years from the 
initial date of posting on the Internet Web site.
a. Benefits
    Similar to the analogous requirements proposed in Rules 606(a) and 
606(c) described above, the Commission preliminarily believes that 
requiring the previous three years of past order execution information 
to be available to customers and the public generally should be useful 
to those seeking to analyze historical order execution information at 
various market centers. Currently, customers and the public who want to 
analyze historical order execution information have to either download 
the data every quarter or they have to rely on third-party vendors to 
get access to such data. The proposed requirement to make the data 
readily accessible to the public for three years would allow customers 
and the public to access and analyze historical order execution 
information more easily by requiring that historical data are kept 
posted by the market centers. The public includes other market 
participants. For example, the proposed requirement to make the data 
readily accessible to the public for three years would benefit broker-
dealers, market centers, and third-party vendors in that it would allow 
them to access and analyze historical order execution information more 
easily. This would allow broker-dealers to compare different market 
centers more easily, market centers to compare themselves to other 
market centers more easily, and third-party vendors to provide their 
services based on the data more easily.
b. Costs
    The Commission preliminarily believes that the costs to market 
centers for making the order execution reports readily accessible to 
the public for a period of three years from the date of initial 
publication are negligible as it amounts to posting the currently-
required reports for the three-year time period. In addition, some 
market centers may already make their reports available to the public 
for an extended period of time. The requirement to post and maintain 
reports on an Internet Web site that is free of charge and readily 
accessible to the public for a period of three years would begin at the 
adoption of the proposed amendments to Rule 605(a)(2) and apply going 
forward. Affected entities (the market centers) would not be required 
to post reports created and posted prior to the proposed Rule's 
effectiveness.
    The Commission notes that specifying a minimum length of time for 
making the Rule 605 reports available may make the data owned by third-
party vendors aggregating the time series of 605 reports less useful 
because, for three years, the data would be publicly available and more 
easily accessible.
c. Request for Comment
    The Commission requests comment on the Commission's analysis of the 
costs and benefits of the proposed amendments in Rule 605(a)(2). In 
particular, the Commission solicits comment on the following:
    164. Do commenters believe that there are benefits to making order 
execution reports readily available for three years? If so, please 
explain.
    165. Do commenters agree with the Commission's analysis that the 
costs are negligible? Why or why not?
4. Structured Format of Reports
    The Commission is proposing to require that the retail order 
routing and institutional order handling reports be made available 
using the Commission's XML schema and associated PDF renderer. As 
discussed earlier, the Commission preliminarily believes that requiring 
the reports to be made available in an XML format will facilitate 
enhanced search capabilities, and statistical and comparative analyses 
across broker-dealers and date ranges.\444\ In addition, the associated 
PDF renderer would provide users with an instantly human-readable 
format for those who prefer to review manually individual reports, 
while still providing a uniform presentation.
---------------------------------------------------------------------------

    \444\ See supra Section III.A.3.
---------------------------------------------------------------------------

    The Commission understands that there are varying costs associated 
with varying degrees of structuring. Most, if not all, broker-dealers 
already have experience applying the XML format to their data. For 
example, all FINRA members must use FINRA's Web EFT system, which 
requires that all data be submitted in XML.\445\ For the end users, 
with the data in the reports structured in XML, they could immediately 
download the information directly into databases and analyze it using 
various software. This would enhance their ability to conduct large-
scale analysis and immediate comparison of broker-dealers, and across 
date ranges. Moreover, as an open standard, XML is widely available to 
the public at no cost.
---------------------------------------------------------------------------

    \445\ See http://www.finra.org/industry/web-crd/web-eft-schema-documentation-and-schema-files.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that if the reports are 
provided in a structured format, users could avoid costs associated 
with third-party sources who might otherwise extract and structure the 
data, and then charge for access to that structured data. Users could 
also avoid the additional time it would take for them to manually 
review and individually structure the data if they wanted to conduct 
large-scale analysis, comparison, or aggregation.
    The XML schema would also incorporate certain validations to help 
ensure consistent formatting among all reports, in other words, to help 
ensure data quality. Validations are restrictions placed on the 
formatting for each data element so that comparable data is presented 
comparably. However, these validations would not be designed to ensure 
the underlying accuracy of the data. Any reports made available by 
broker-dealers pursuant to the proposal would have to comply with 
validations that are incorporated within the XML schema, otherwise the 
reports would not be considered to have been made available using the 
most recent version of the Commission's XML schema.
    XML is an open standard that is maintained by an organization other 
than the Commission and undergoes constant review. As updates to XML or 
industry practice develop, the Commission's XML schema may also have to 
be updated to reflect the updates in technology. In those cases, the 
supported version of the XML schema would be made available on the 
Commission's Web site and the outdated version of the schema would be 
removed in order to maintain data quality and consistency with the 
standard.
    The Commission considered alternative formats to XML, such as 
comma-separated values (``CSV'') and XBRL. The Commission does not 
believe the CSV format is suitable because it does not lend itself to 
validations. As a result, the data quality of the reports would likely 
be diminished as compared to XML, impairing comparability, aggregation, 
and large-scale analysis. While the XBRL format enables users to 
capture the rich complexity of financial information presented in 
accordance with U.S. Generally Accepted Accounting Principles, XBRL is 
not necessary to accurately capture the information for the proposed 
reports. The Commission preliminarily believes the simpler 
characteristics of the information in the required reports are better 
suited for XML.
a. Request for Comment
    The Commission requests comment on the Commission's analysis of the 
proposed structured format for the

[[Page 49500]]

proposed reports. In particular, the Commission solicits comment on the 
following:
    166. Should the Commission require a structured format other than 
XML? If so, please identify the other format; identify how the other 
format could be used for aggregation, comparison, and large-scale 
analysis; and identify how the Commission can similarly ensure data 
quality.
    167. As proposed, the public reports will be made available on each 
broker-dealers' Web site. Are there any benefits to the public or to 
broker-dealers if the reports were also submitted to the Commission's 
EDGAR system? If so, please identify those benefits and any associated 
costs.
    168. How and in what format do broker-dealers currently provide 
their reports for retail orders required by Rule 606(a)(2)?
    169. Broker-dealers currently provide reports about order routing 
and execution quality to institutional customers upon request on a 
voluntary basis. How and in what format do broker-dealers currently 
provide those ad-hoc reports?
    170. Market centers publish current Rule 605(a) reports in a pipe-
delimited ASCII format. Should the Commission require a different 
structured format for the reports required by Rule 605(a)? Why or why 
not? If yes, should the Commission require that the reports required by 
Rule 605(a) be made available using an XML schema and associated PDF 
renderer published on the Commission's Web site? Why or why not? Please 
be specific in your response. If commenters believe another format 
would be more appropriate, please identify the other format and 
identify how the other format can also be used for aggregation, 
comparison, and large-scale analysis; and identify how the Commission 
can similarly ensure data quality. Please identify any benefits and 
associated costs.
5. Other Definitions in Proposed Amendments to Rule 600
a. Definition of Non-Marketable Limit Order in Proposed Rule 600(b)(51)
    Proposed Rule 600(b)(51) defines a non-marketable limit order to 
mean any limit order other than a marketable limit order. The 
Commission preliminarily believes that proposed Rule 600(b)(51) would 
ensure consistent and correct interpretation and application of the 
proposed amendments to Rule 606(a)(1) for retail orders. The Commission 
also preliminarily believes that there are no costs associated with 
proposed Rule 600(b)(51) because it is a definition that is widely used 
by market participants.
b. Definitions of ``Orders Providing Liquidity'' and ``Orders Removing 
Liquidity'' in Proposed Rule 600(b)(55) and (56)
    Proposed Rule 600(b)(55) defines ``orders providing liquidity'' to 
mean orders that were executed against after resting at a trading 
center. Proposed Rule 600(b)(56) defines ``orders removing liquidity'' 
to mean orders that were executed against resting trading interest at a 
trading center. The Commission preliminarily believes that proposed 
Rules 600(b)(55) and (56) would ensure consistent and correct 
interpretation and application of proposed Rule 606(b)(3) for 
institutional orders. The Commission also preliminarily believes that 
there are no costs associated with proposed Rules 600(b)(55) and (56) 
because the Commission understands that the two definitions are widely 
used by market participants.
c. Request for Comment
    The Commission requests comment on the Commission's analysis of the 
proposed definitions. In particular, the Commission solicits comment on 
the following:
    171. Do commenters agree with the definitions? If not, please 
provide alternative definitions and describe the benefits and costs of 
those alternatives as compared to the proposed definitions. Please be 
specific.
    172. Do commenters agree with benefits and costs of the proposed 
definitions as described by the Commission? Please be specific.
    173. Do commenters believe that the proposed definitions are widely 
used and accepted by market participants? Please be specific.

D. Alternatives Considered

1. Definition of Institutional Order in Proposed Rule 606(b)(31)
    The Commission considered one alternative to the proposed 
definition of institutional order in Rule 600(b)(31) that would specify 
different thresholds for NMS stocks based on trading volume. This 
alternative would more finely tailor the definition for different types 
of NMS stocks, as described in Section V.C.1.a.ii. However, this 
alternative approach would add complexity to the proposed definition, 
and analysis of data on orders from institutions does not indicate any 
natural breakpoints.\446\ The absence of natural breakpoints makes it 
more difficult to draw definitive conclusions about what thresholds, if 
any, would be appropriate in a definition.
---------------------------------------------------------------------------

    \446\ See Section V.C.1.a.ii. for a discussion of Commission 
staff analysis of a set of orders from institutional customers.
---------------------------------------------------------------------------

    In addition to the concern that the threshold of a market value of 
at least $200,000 may not capture large (measured by shares) orders in 
illiquid NMS stocks, Section V.C.1.a.ii. also discusses the incentives 
that market participants may have to change their behavior as stock 
prices may change over time, which may affect the proportion of orders 
that fall under the proposed definition of institutional order.
    The Commission considered another alternative to the definition in 
proposed Rule 600(b)(31) that would address both concerns. The 
alternative would be to have customers identify their orders as 
institutional orders subject to Rule 606. This alternative approach 
would address the issue of having the same thresholds for all NMS 
stocks, independent of the trading volume of the stocks. Since this 
approach would require each customer to identify institutional orders, 
there would be a risk that customers may apply different criteria in 
identifying institutional orders. To the extent broker-dealers receive 
institutional orders that take different approaches, the usefulness of 
the reports for the purpose of comparing broker-dealers would be lower 
than with a consistently applied definition. However, the Commission 
notes that the alternative of allowing institutions to identify their 
orders as institutional orders would not reduce the usefulness of the 
information if the public reports contained specified thresholds as in 
the proposal. This alternative may not be significantly more costly for 
broker-dealers to implement than the proposal. After identifying the 
orders to be included in the calculations, all calculations would be 
the same for the alternative as for the proposal. On the other hand, if 
the alternative requires a specified threshold for disclosure on public 
reports, the public reports would require separate processing because 
they would involve calculations on different underlying orders. In this 
case, the alternative would be more costly than the proposal.
2. Limited or No Public Disclosure of Institutional Order Routing and 
Execution Quality (Proposed Rule 606(c))
    The Commission considered requiring broker-dealers to make publicly 
available only a subset of the information on institutional order 
handling required by proposed Rule 606(c). For instance, order routing 
and execution could be disclosed, but not

[[Page 49501]]

information on orders providing liquidity or orders removing liquidity. 
Although this alternative would enhance the quality of the disclosure 
provided by broker-dealers relative to the disclosure under current 
Rule 606, which does not apply to institutional orders, it would shed 
less light on how order routing affects execution quality and, thus, 
provide less information on the potential for conflicts of interest 
relative to proposed Rule 606(c). As such, the benefits that would be 
achieved by this alternative are smaller relative to the benefits 
proposed Rule 606(c) would offer. Additionally, the Commission 
preliminarily believes that the costs to broker-dealers of this 
alternative would only be marginally less expensive in than proposed 
Rule 606(c), because a process would still be required to create the 
report.
    The Commission also considered not requiring broker-dealers to make 
publicly available any of the information required by proposed Rule 
606(c) (but still proposing to require disclosure pursuant to the 
amendments to Rule 606(b)(3) regarding customer requests for 
institutional order handling information). As for limited public 
disclosure just discussed, this alternative would improve the quality 
of the disclosure provided by broker-dealers relative to the disclosure 
under current Rule 606, but it would shed even less light on how order 
routing affects execution quality and thus provide even less 
information on the potential for conflicts of interest relative to 
proposed Rule 606(c). As such, the benefits that would be achieved by 
this alternative would not only be smaller relative to the benefits 
proposed Rule 606(c) would offer, but also smaller relative to the 
benefits of the alternative of limited public disclosure. The 
alternative of no public disclosure would result in cost savings 
compared to proposed Rule 606(c) because the process to create the 
public report would not be required under this alternative.
3. More Frequent Public Disclosure of Institutional Order Routing and 
Execution Information (Proposed Rule 606(c))
    The Commission considered requiring broker-dealers to make the 
aggregated public disclosure of their institutional order routing and 
execution information available on a more frequent basis than in 
proposed Rule 606(c) (i.e., monthly rather than quarterly). This 
alternative would increase the frequency of order routing and execution 
disclosure, but at an additional cost to broker-dealers relative to 
proposed Rule 606(c). Specifically, additional costs would accrue from 
creating and disseminating the reports more frequently than quarterly. 
Monthly public reports as compared to quarterly public reports would 
result in having to run the production process to create and 
disseminate the reports twelve rather than four times per year.
    The Commission preliminarily estimates that each broker-dealer that 
routes institutional orders will incur an average burden of 10 hours 
resulting in a cost of $1,600 \447\ to prepare and disseminate a 
quarterly report required by proposed Rule 606(c).\448\ The Commission 
preliminarily believes that the costs for a monthly report would be 
similar to the costs of a quarterly report. Hence, the Commission 
preliminarily estimates that each broker-dealer that routes 
institutional orders would incur an average burden of 120 hours 
resulting in a cost of $19,200 per year to prepare and disseminate 
monthly reports. This compares to a burden of 40 hours resulting in a 
cost of $6,400 per year for quarterly reports as required by proposed 
Rule 606(c), that is, the costs for each broker-dealer that routes 
institutional orders would be three times higher. The Commission 
preliminarily estimates the costs to produce a report would remain the 
same each month, as the cost of the report is more related to the act 
of producing the report, as opposed to how much data the report 
contains (one month vs. three months). The difference in costs for each 
broker-dealer to provide monthly reports as compared to quarterly 
reports as required by proposed Rule 606(c) is preliminarily estimated 
to be $12,800 per year.\449\ With an estimated 200 broker-dealers that 
route institutional orders, the total additional burden per year to 
comply with a monthly reporting requirement as compared to a quarterly 
reporting requirement as in proposed Rule 606(c) is preliminarily 
estimated to be 16,000 hours resulting in a cost of $2,560,000.\450\
---------------------------------------------------------------------------

    \447\ See supra note 266.
    \448\ See supra Section IV.D.2.d.
    \449\ $19,200 annually per broker-dealer for monthly reports--
$6,400 annually per broker-dealer for quarterly reports = $12,800 
annually per broker-dealer.
    \450\ 80 hours more annually per broker-dealer that routes 
institutional orders x 200 broker-dealers that route institutional 
orders = 16,000 hours. The Commission preliminarily estimates the 
total monetized burden for this requirement to be $2,560,000 
($12,800 more annually per broker-dealer that routes institutional 
orders x 200 broker-dealers that route institutional orders = 
$2,560,000).
---------------------------------------------------------------------------

    More frequent reports compared to the proposed quarterly frequency, 
although broken down by month, would have the benefit of providing the 
public with information that is more timely. However, the Commission 
preliminarily believes that the value of having monthly rather than 
quarterly reports is small because the Commission understands that 
analysis of order handling data generally is based on data comprising 
more than one month. While this may be, at least partially, due to the 
fact that current Rule 606 requires quarterly reports, staff experience 
suggests that the analysis of order handling data would be based on 
more than one month of data even if data were available at a higher 
frequency. This is because order handling data are inherently noisy and 
a large sample size is necessary to ensure a robust analysis. To that 
extent, from staff experience, the Commission understands that data 
spanning several months or even years are used in the analysis of order 
handling data. The Commission notes that using data spanning several 
months or even years does not preclude analyzing the data for trends, 
especially recent trends.\451\
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    \451\ One way to analyze the data for trends would be to look at 
subsamples within the full sample. For example, one could consider 
quarters within a full calendar year of data. Another way would be 
to employ a rolling window. For example, one could use a twelve-
month rolling window, that is, the analysis would use data 
comprising twelve months of data and then replace the oldest data 
with more recent data one month at a time.
---------------------------------------------------------------------------

    In addition, more frequent disclosure could allow sensitive trading 
information to be disclosed. For example, as discussed earlier, if a 
customer placing large institutional orders primarily engages one 
broker-dealer and that broker-dealer has few, if any, other customers 
placing significantly sized institutional orders, then other market 
participants may be able to decipher the customer's trading interest, 
particularly if the customer is building up or selling off a large 
position over a longer period of time. The risk of such disclosure of 
sensitive trading information is greater for monthly reporting 
frequency compared to the proposed quarterly frequency because, by 
construction, quarterly reporting provides the data for the first two 
months in the quarter with a delay compared to if the data for those 
two months were to be released monthly. As a result, it is less likely 
that data for those two months contain information about a customer's 
current and ongoing trading interests.
4. Automatic Provision of Customer-Specific Institutional Order 
Handling Report (Proposed Rule 606(b)(3))
    The Commission considered an alternative to proposed Rule 606(b)(3)

[[Page 49502]]

that would not require that customers request customer-specific 
standardized reports on institutional order handling, but would instead 
require broker-dealers to provide them to customers automatically, 
either by sending the reports out or by providing a portal where 
customers can view or download the reports. The alternative could 
reduce the cost to customers, compared to both the baseline and the 
proposal, of acquiring the institutional order handling reports, 
because customers would not need to request the reports. At the same 
time, it is difficult to determine whether there is any additional 
benefit to customers compared to the proposal. It is possible that not 
all customers would use the reports provided to them, and under the 
proposal, those customers that see enough value in the reports would 
incur the cost of requesting them.
    With respect to the costs to broker-dealers, the alternative would 
impose additional initial costs compared to the baseline, as the 
broker-dealers would be required to automatically provide reports to 
all customers, not just those that request reports, and would have to 
build infrastructure to generate these reports. The Commission 
preliminarily believes, however, that the alternative would involve 
slight modifications to the systems that produce the institutional 
order handling reports and thus preliminarily believes that these 
initial costs likely would be minimal.
    The effect of this alternative on the costs to broker-dealers, 
compared to the proposal, is unclear. On the one hand, the Commission 
preliminarily believes the alternative could impose additional, albeit 
minimal, initial costs associated with developing systems to 
automatically generate the reports compared to the proposal as well as 
to the baseline, as described above. On the other hand, the Commission 
preliminarily believes the alternative could avoid the initial costs 
associated with the proposed rule for those broker-dealers who do not 
currently have systems in place to receive and respond to requests 
because they would not have to develop and deploy such systems under 
this alternative, as they would under the proposal. Any related initial 
or ongoing cost savings compared to the proposal may be minimal, as, in 
either case, such broker-dealers would need to develop systems to 
generate customer-specific reports and broker-dealers could add the 
customer requests to a list for individual report generation under the 
proposal just as they add customers to a list for automated reports 
under the alternative. The alternative may reduce ongoing personnel 
costs compared to the proposal because under the proposal, broker-
dealers would have to answer emails, phone calls, or other forms of 
requests for ad-hoc reports. However, the brokerage industry is a 
relationship business and the Commission understands that broker-
dealers communicate frequently with their customers, especially their 
larger customers. Further, the alternative may also result in 
additional ongoing personnel costs compared to the proposal if 
customers who would not have requested reports contact the broker-
dealers to discuss reports they would receive automatically under the 
alternative. In addition, the Commission notes that, even under the 
proposal, broker-dealers could choose to provide reports automatically 
to their customers if this is more cost effective for them.
5. Submission of Institutional Order Handling Reports (Proposed Rules 
606(b)(3) and 606(c))
    The Commission considered an alternative to proposed Rules 
606(b)(3) and 606(c) that would require the customer-specific 
institutional order handling reports and the public aggregated 
institutional order handling reports to be submitted to the Commission. 
While Commission staff may be able to replicate much of the information 
in the reports were the proposed Consolidated Audit Trail to be 
approved,\452\ the reports would contain some information not included 
as data in the Consolidated Audit Trail (``CAT Data''), such as 
information on the use of aggressive and passive order routing 
strategies. In addition, the institutional order handling reports would 
be already assembled, making access to the reports more efficient than 
assembling the analogous information from CAT Data. With direct access 
to the reports under this alternative, Commission staff could 
potentially use the reports, for example, to investigate best execution 
concerns, assist in risk-based examination decisions, and/or conduct 
market analyses on order handling to promote data-driven rulemaking. 
These activities could, in turn, benefit investors and the market in 
the form of enhanced investor protection and better informed 
rulemaking. The alternative would also establish a central location for 
all reports and could reduce the burden for Commission staff to seek 
out and obtain the reports. Notably, under the proposal, the Commission 
could acquire the public aggregated institutional order handling 
reports as described in Rule 606(c), though not the customer-specific 
institutional order handling reports as described in Rule 606(b)(3), 
from broker-dealer Web sites. The proposal thus does not preclude the 
Commission from obtaining the public aggregated institutional order 
handling reports to achieve some of the benefits of this alternative.
---------------------------------------------------------------------------

    \452\ See Securities Exchange Act Release No. 77724 (April 27, 
2016), 81 FR 30614 (May 17, 2016) (File No. 4-698) (Joint Industry 
Plan; Notice of Filing of the National Market System Plan Governing 
the Consolidated Audit Trail), available at https://www.sec.gov/rules/sro/nms/2016/34-77724.pdf.
---------------------------------------------------------------------------

    While providing some benefits, this alternative would also impose 
additional costs to broker-dealers to submit their reports to the 
Commission. For example, under this alternative, broker-dealers would 
incur additional costs to transmit the reports directly to the 
Commission including any initial costs of setting up the connection to 
the Commission's repository, though the Commission preliminarily 
believes that these costs will not be significant. Further, the 
Commission preliminarily believes that acquiring the reports from each 
broker-dealer may impose burdens on Commission resources,\453\ though 
the magnitude of those burdens is unknown. Receiving customer-specific 
institutional order handling reports, which include sensitive 
information, e.g., PII or sensitive proprietary information, could 
impose further costs to the Commission as the Commission would need to 
take steps to safeguard this information, though the Commission may be 
able to leverage its experience dealing with the receipt of sensitive 
information in other contexts to minimize those costs.
---------------------------------------------------------------------------

    \453\ The Commission recognizes that third party vendors could 
collect and sell the broker-dealer reports at a price that could 
reduce the burdens on Commission resources compared to the burdens 
of Commission staff directly collecting the reports from broker-
dealers.
---------------------------------------------------------------------------

6. Disaggregate Categories of NMS Stocks for Rule 606(a)
    The Commission considered an alternative to current Rule 606(a) 
that would not require reports for retail orders be aggregated across 
all NMS stocks, but rather would require that those reports be divided 
into categories, e.g., into Exchange-Traded Products (``ETPs'') and all 
other NMS stocks, or into groups of stocks with different trading 
volume. The Commission considered this alternative in addition to or 
instead of the requirement of current Rule 606(a) to divide the reports 
by listing markets. This would increase the costs of producing the 
reports relative to the proposal, but it also would provide more 
information.
    For example, one such alternative could require that broker-dealers

[[Page 49503]]

separately report the routing of ETPs and the routing of non-ETP NMS 
stocks. The costs of producing the reports under this alternative would 
be higher than the costs of the proposal because such an alternative 
would require broker-dealers to classify NMS stocks into categories, 
e.g., into ETPs and non-ETP stocks. There would be an initial cost for 
the classification of all stocks and an ongoing cost to maintain the 
classification.
    Because some ETPs trade differently than non-ETP NMS stocks, 
broker-dealers may route them differently. To the extent that broker-
dealers vary their order routing decisions for ETP and non-ETP stocks, 
broker-dealer customers may benefit from the more targeted information 
that would be provided for each type of stock under this alternative 
compared to the proposed amendments to Rule 606(a). Specifically, the 
additional information concerning each type of stock contained in the 
divided reports would allow customers, broker-dealers, trading centers, 
and the public more generally to better evaluate and compare the order 
routing of retail orders for each type stock, whereas under the 
proposed rule information on order routing is provided for both ETPs 
and non-ETPs in the aggregate. While the consumers of such reports 
would benefit from the reports being more informative with respect to 
the order routing for each type of stock, broker-dealers would incur 
higher costs in processing the additional information provided by the 
reports. To use the additional information, customers, broker-dealers, 
trading centers, and the public more generally would have to process 
the additional information and incorporate it in their analyses and 
models when evaluating and comparing the order routing of retail 
orders, which could result in higher costs compared to the proposed 
amended Rule 606(a).
7. Disclosure of Additional Information About Institutional Order 
Routing and Execution
    The Commission considered requiring additional information to be 
disclosed to customers and the public relating to institutional order 
routing and execution quality. The Commission considered requiring 
additional measures to be included in proposed Rule 606(b)(3) and 
proposed Rule 606(c) reports for institutional orders. For example, the 
Commission considered requiring that proposed Rule 606(b)(3) and 
proposed Rule 606(c) reports contain time to execution, or 
implementation shortfall, which are dimensions of execution quality. In 
addition, the Commission considered making the reports more detailed by 
requiring segmentation of the data along additional dimensions, not 
only on order routing strategy.
    In general, transaction costs of institutional orders depend on, 
among other factors, stock characteristics, order characteristics, and 
market conditions at the time of order arrival and during order 
execution. The reports could be segmented by any of these factors. 
Examples of stock characteristics are liquidity or volatility of a 
stock.\454\ Examples of order characteristics are order size, usually 
measured as relative order size in relation to average daily 
volume,\455\ or whether an order is generated by a momentum strategy, 
where an customer buys a stock while the stock is increasing in price 
and sells a stock while the stock is falling in price. Examples of 
market conditions are the current liquidity in a stock, e.g., measured 
by the most recent volume or bid-ask spread compared to historical 
values and the current volatility in a stock, e.g., compared to 
historical values. Requiring any of this additional information in 
proposed Rule 606(b)(3) and proposed Rule 606(c) reports would increase 
the costs of producing the reports as well as the costs of using the 
reports relative to proposed Rules 606(b)(3) and 606(c), but it would 
also increase the information content and the usefulness of the reports 
relative to proposed Rules 606(b)(3) and 606(c).\456\
---------------------------------------------------------------------------

    \454\ See, e.g., Zhuo Zhong, The Risk Sharing Benefit versus the 
Collateral Cost: The Formation of the Inter-Dealer Network in Over-
the-Counter Trading, Working Paper (2014). Zhong argues that broker-
dealers at the center of a dealer network are better able to work 
off the inventory risk earned from executing orders containing 
volatile stocks, which in turn will determine which broker-dealers 
receive orders in volatile stocks. Id.
    \455\ Zhong suggests that broker-dealers at the center of the 
dealer network are better able to work off the inventory earned from 
executing large orders, which in turn will determine which broker-
dealers receive large orders. See id.
    \456\ The costs of this alternative would be higher than the 
proposed amendments because it would require that broker-dealers 
compute additional data items. For purposes of the PRA, the 
Commission estimated the costs associated with the rule as proposed. 
See supra Sections IV.D.1. and 2. The Commission does not currently 
have information on how extensive the programming would be for 
broker-dealers to adapt their systems to combine data that they may 
not yet combine to calculate these statistics.
---------------------------------------------------------------------------

    For some data items, the computation costs would be larger than for 
others. For example, computing the implementation shortfall for an 
order is more involved than computing the time to execution and thus 
would result in larger computational costs. Further, unlike the 
proposed amendments, implementation shortfall and time to execution 
could involve running calculations on data received on other systems 
and from others who handle orders later in their lifecycle. This may 
make these fields more computationally costly than those proposed. 
However, with the addition of other relevant information, the reports 
under this alternative might be more useful than the proposed reports.
    In addition, determining categories by metrics such as trading 
volume or volatility would add complex definitions to the reports and 
the Commission is not aware of any natural breakpoints that would 
simplify the identification of appropriate thresholds to classify 
stocks into groups of varying trading volume or volatility. Setting 
thresholds at levels that do not meaningfully distinguish routing 
activity or execution quality would be more costly than the proposed 
amendments without providing greater benefits.
    The Commission could later evaluate data that would be disclosed 
pursuant to proposed Rules 606(b)(3) and 606(c), if adopted, to inform 
any decision as to whether additional data items or other changes might 
be appropriate.
8. Institutional Order Handling Reports at the Stock Level (Proposed 
Rule 606(b)(3))
    The Commission also considered requiring the institutional order 
handling information required by proposed Rule 606(b)(3) to be reported 
at the individual stock level rather than aggregated across stocks. 
This alternative would enhance transparency to customers relative to 
proposed Rule 606(b)(3) because the reports would be more detailed. 
Specifically, order handling information calculated at the stock level 
may be more informative than aggregated data because trading centers 
may not charge the same maker-taker fee for all stocks. It is possible 
for a given trading center to use inverted and non-inverted fees for 
different stocks at the same time. If this is the case, the reports as 
proposed by Rule 606(b)(3) could potentially mask conflicts of interest 
because routing decisions may be different for different stocks on the 
same trading center due to differing maker-taker fees across the 
stocks, particularly if some stocks have inverted and other stocks have 
non-inverted fees on the same trading center.
    Because the reports would be more detailed, however, this 
alternative would increase the costs of producing the reports as well 
as the costs of using the reports relative to proposed Rule 606(b)(3). 
The Commission preliminarily believes that any potential

[[Page 49504]]

increase in costs of producing the reports would be negligible because 
broker-dealers already process the data order-by-order and to aggregate 
orders by stock and venue, rather than only by venue, should not 
increase significantly programming costs and processing time. While the 
Commission preliminarily believes that the production of these 
voluminous reports itself may not result in significantly higher costs 
than for the proposed reports, the size of the reports may result in 
higher costs to deliver the reports to customers. For example, the 
report could be hundreds of pages in hard copy, which would result in 
costs to print and deliver the report; likewise, a broker-dealer could 
incur higher costs to send a report electronically, depending on the 
size of the file that has to be sent to customers.\457\ Moreover, given 
the thousands of securities in existence, requiring reporting metrics 
be broken down at the stock level would produce voluminous reports that 
would be difficult and costly to process for all but the most 
sophisticated customers. For these reasons, the Commission is proposing 
to have the reports broken down by venue and aggregated across stocks.
---------------------------------------------------------------------------

    \457\ For example, there typically are limitation to the size of 
files that can be sent through email.
---------------------------------------------------------------------------

9. Alternative to Three-Year Posting Period (Proposed Amendments to 
Rules 605(a)(2) and 606(a)(1), and Proposed Rule 606(c))
    The Commission considered requiring broker-dealers and market 
centers to make both institutional and retail reports available for a 
minimum length of time less than three years or more than three years. 
If public reports are available for less than three years, then 
historical data may not be as readily available to customers and the 
public who are seeking to analyze past routing behavior of broker-
dealers or past execution quality of market centers as it would be 
under the proposal of a three-year posting period. Customers and the 
public would either have to download the data more often or have to 
rely on third-party vendors who download and aggregate the data. For 
example, if a broker-dealer or market center posted the reports for 
only one quarter, customers and the public would have to download the 
data every quarter if they wanted access to data that is older than 
three months. Third-party vendors also would have to download the data 
with sufficient frequency to capture historical data without gaps. This 
would have the effect of reducing the transparency of broker-dealer 
routing decisions for customers placing both retail and institutional 
orders and of the execution quality of market centers compared to the 
proposal of a three-year posting period. The benefit of a shorter 
minimum length of time would be that any costs broker-dealers incurred 
associated with posting reports would be less than under the proposal 
of a three-year posting period. However, as discussed above, the 
Commission preliminarily believes these incremental costs to be small 
and that the cost savings associated with a shorter minimum length of 
time would not justify the costs of historical data potentially being 
less readily available to customers and the public.
    If public reports are available for more than three years, the 
historical data would be even more readily available to customers and 
the public who are seeking to analyze past routing behavior of broker-
dealers or past execution quality of market centers as it would be 
under the proposal of a three-year posting period. Customers and the 
public would have to download the data less frequently to have access 
to historical data that is older than the minimum length of time 
required. However, the Commission preliminarily believes that the 
additional benefit of a minimum length of time of more than three years 
would be small because three years is a meaningful time period 
considering the rapid changes in financial markets and customers and 
the public would only need to download data every three years to be 
able to access historical data older than three years. The Commission 
understands that maintaining public reports for more than three years 
may represent a burden and result in an additional cost to broker-
dealers. However, as discussed above, the Commission preliminarily 
believes the additional cost to be small. Nevertheless, the Commission 
preliminarily believes that a minimum length of time of three years is 
appropriate.
10. Request for Comment
    The Commission requests comment on the Commission's analysis of 
potential alternatives as described above and the costs and benefits 
associated with such alternatives. In particular, the Commission 
solicits comment on the following:
    174. Do commenters believe that the alternatives that the 
Commission considered are appropriate? Do commenters believe that the 
analysis of the associated costs and benefits of the alternatives is 
accurate? If not, please provide alternative costs and benefits, 
including any data or statistics that supports those costs and 
benefits.
    175. Are there other alternatives that the Commission should 
consider? If so, please provide additional alternatives and how their 
costs and benefits would compare to the proposal.
    176. Do commenters believe the reports for retail orders should 
contain information required by proposed Rule 606(b)(3) for 
institutional orders that is not currently required by Rules 606(a)(1) 
and 606(b)(1) for retail orders? Why or why not? If yes, what 
additional information should be required? Please be specific in your 
response.
    177. Do commenters believe the Commission should require that the 
reports for institutional orders required by proposed Rule 606(b)(3) 
include information about payment for order flow and payment from 
profit-sharing relationships as would be required by proposed Rule 
606(a)(1)(iii) for retail orders? Why or why not? Similarly, do 
commenters believe the Commission should require that the reports for 
institutional orders required by proposed Rule 606(b)(3) include a 
discussion of the material aspects of the broker-dealer's relationship 
with each venue as would be required by amended Rule 606(a)(1)(iv) for 
retail orders? Why or why not? Please be specific in your response.
    178. Do commenters have information on the costs and benefits of 
any of these alternatives? If so, please provide any data or statistics 
to support the estimates.

E. Economic Effects and Effects on Efficiency, Competition, and Capital 
Formation

    Section 23(a)(2) of the Exchange Act requires the Commission, when 
making rules under the Exchange Act, to consider the anti-competitive 
effects of any rules it adopts.\458\ Specifically, Exchange Act Section 
23(a)(2) prohibits the Commission from adopting any rule that would 
impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.\459\ Furthermore, 
Section 3(f) of the Exchange Act requires the Commission, whenever it 
engages in rulemaking where it 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.\460\ We consider these effects below.
---------------------------------------------------------------------------

    \458\ 15 U.S.C. 78c(f).
    \459\ Id.
    \460\ 15 U.S.C. 78w(a)(2).

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[[Page 49505]]

1. Effects of Proposed Amendments on Efficiency and Competition
a. Proposed Amendments to Disclosures for Retail Orders
    As a result of the proposed amendments to Rule 606(a)(1), broker-
dealers that route retail orders would be required to make public 
enhanced aggregated reports detailing retail order routing practices 
and information regarding marketable and non-marketable limit orders in 
addition to information on payment for order flow arrangements, payment 
from any profit-sharing relationship received, and transaction fees 
paid and rebates received per share and in aggregate for such orders. 
In addition, the proposed amendments would require those reports to be 
made available using an XML schema and associated PDF renderer on the 
Commission's Web site and to be maintained on an Internet Web site that 
is free and readily accessible to the public for a period of three 
years.\461\ As explained in detail below, the Commission preliminarily 
believes that these enhanced disclosures, which require broker-dealers 
to describe any terms of payment for order flow arrangements and 
profit-sharing relationships with Specified Venues that may influence 
their order routing decisions for retail orders, should promote 
competition and enhance efficiency.
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    \461\ Consistent with the proposed amendments to Rule 606, the 
Commission is proposing to amend Rule 605(a)(2) to require market 
centers to keep public execution reports required by the rule posted 
on an Internet Web site that is free of charge and readily 
accessible to the public for a period of three years from the 
initial date of posting. The Commission preliminarily believes that 
making past order execution information available to customers and 
the public generally will be useful to those seeking to analyze 
historical order execution information from different market 
centers. The proposed requirement to keep public execution reports 
required by Rule 605 for a period of three years is expected to make 
it easier, and thus more efficient, for the public to collect 
historical data for analysis. The Commission preliminarily believes 
the proposed requirement could enhance efficiency in the data 
collection process of those seeking to retrieve and analyze 
historical order execution information from different market 
centers.
---------------------------------------------------------------------------

    First, per the discussion above, the additional information 
required by the amendments relative to the information required by 
current Rule 606(a)(1) would allow customers to better assess the order 
routing and execution quality provided by their broker-dealers,\462\ 
which, in turn, would enable the customers to more efficiently evaluate 
and select broker-dealers.\463\ The proposed amendments to Rule 606(a) 
would require broker-dealers, for retail orders, to differentiate 
between marketable and non-marketable limit orders and to publicly 
report the net aggregate amount of any payment for order flow, payment 
from any profit-sharing relationship received, the transaction fees 
paid, and transaction rebates received, both as a total dollar amount 
and on a per share basis, for each of the following order types: market 
orders, marketable limit order, non-marketable limit orders, and other 
orders. As discussed in Sections V.C.2.a. and V.C.2.b., the Commission 
preliminarily believes that this would allow customers and the public 
to better understand the potential conflicts of interest broker-dealers 
may face when routing retail orders and to assess if and how well 
broker-dealers manage these potential conflicts of interest. This would 
enable customers to make a more informed decision as to which broker-
dealers to use for retail orders. The Commission preliminarily believes 
that this would enhance the competition for retail order flow between 
broker-dealers, which might result in better execution quality for 
customers. In addition, if broker-dealers change their routing behavior 
in response to the public reports required by proposed Rule 606(a)(1), 
the Commission preliminarily believes that competition between trading 
centers might be enhanced as trading centers could better compete for 
retail order flow, which might result in better execution quality for 
retail orders and innovation by existing or new trading centers. As 
discussed in Section V.C.1.c.i, one way a trading center can attract 
order flow is through innovation thereby differentiating itself from 
other trading centers.
---------------------------------------------------------------------------

    \462\ See supra Section V.C.2.
    \463\ The proposed amendments to Rule 606(a)(1) which would no 
longer require reports be divided into separate sections for stocks 
listed on different exchanges may be an exception to this. As 
discussed below, to the extent that order routing decisions may 
differ for stocks that are listed on different exchanges, the 
reports that aggregate the data as required by the proposed 
amendments to Rule 606(a)(1) may provide less information to retail 
customers and the public and therefore may reduce the efficiency 
with which customers and the public are able to evaluate and select 
broker-dealers based on the order routing and execution quality they 
provide.
---------------------------------------------------------------------------

    Further, to the extent that the proposed amendments to Rule 606(a) 
lead to better execution quality provided by broker-dealers and trading 
centers, the Commission preliminarily believes that the proposed 
amendments would lead to lower transaction costs for customers. Because 
transaction costs can be viewed as a measure for efficiency in the 
trading process, lower transaction costs would indicate enhanced 
efficiency in the trading process. In addition, to the extent that the 
proposed amendments to Rule 606(a) make the trading process more 
efficient by lowering trading costs, the Commission preliminarily 
believes the proposed amendments would reduce market friction and 
therefore have a positive effect on the efficiency of prices.
    As discussed above, however, the proposed amendments to Rule 
606(a)(1) could result in costs that may have an effect on efficiency 
and competition. For example, the proposed amendments would impose 
certain costs on broker-dealers who currently route retail orders, as 
well as on broker-dealers who would like to start routing retail orders 
and will also have to comply with the proposed amendments to Rule 
606(a)(1). To the extent that the costs for a broker-dealer entering 
the market for retail orders are higher under the proposed amended Rule 
606(a)(1) than under the current Rule 606(a)(1), these higher costs 
could lead to a higher barrier to entry and thereby reduce competition. 
However, the Commission preliminarily believes that any difference in 
costs under the proposed amended Rule 606(a)(1) and the current Rule 
606(a)(1) to be relatively small as to not alone deter broker-dealers 
from entering the market for retail brokerage.
    Under the proposed amendments to Rule 606, the broker-dealer may be 
concerned about the perception of acting on a conflict of interest. As 
a result, a broker-dealer may be incentivized to route fewer non-
marketable limit orders to the trading center offering the highest 
rebate, even if this affects execution quality, in an effort to ensure 
that a customer does not misconstrue the intent behind the broker-
dealer's routing decisions. Such a potential outcome could reduce to 
some degree the intensity of competition between broker-dealers on the 
dimension of execution quality. However, the Commission preliminarily 
believes that such a scenario is not likely as customers are likely to 
review the 606 reports in conjunction with execution quality statistics 
currently required pursuant to Rule 605 and can discuss with their 
broker-dealers the order routing and execution quality the broker-
dealer provides.
b. Proposed Rules for Disclosures for Institutional Orders
    For institutional orders, proposed Rules 606(b)(3) and (c) would 
require broker-dealers that route institutional orders to provide 
detailed reports to customers who submit such orders upon the request 
of the customer, and to make public on a quarterly basis broken down by 
calendar month, a report that

[[Page 49506]]

aggregates the information. In addition, these proposed rules would 
require reports on institutional orders to be made available using an 
XML schema and associated PDF renderer to be published on the 
Commission's Web site and to be maintained for a period of three years. 
As discussed below, the Commission preliminarily believes that these 
disclosures of order routing decisions by broker-dealers for 
institutional orders could promote competition and enhance efficiency.
    First, the disclosures required by the proposal, both on an 
individualized and aggregated basis, would inform customers as to the 
institutional order routing practices of and the execution quality 
provided by a particular broker-dealer, as described in further detail 
above. As a result, customers would be able to use that information to 
compare the institutional order routing and execution quality of their 
broker-dealers based on the institutional orders submitted to those 
broker-dealers as reported in the customer-specific reports required by 
proposed Rule 606(b)(3). In addition, a customer placing institutional 
orders would be able to compare the order routing practices and 
execution quality of each broker-dealer based on the public aggregated 
institutional order handling reports required under proposed Rule 
606(c), independent of whether the customer submits orders to a 
specific broker-dealer. Further, a customer would be able to compare 
the order routing and execution quality of its institutional orders 
submitted to a specific broker-dealer as reflected in the customer-
specific reports required by proposed Rule 606(b)(3) to the order 
routing and execution quality of all orders that the broker-dealer 
handled contained in the public aggregated institutional order handling 
reports required by proposed Rule 606(c).
    These enhanced disclosures would better enable customers to analyze 
institutional order routing and execution quality provided by broker-
dealers, which would allow customers to more efficiently monitor, 
evaluate, and select broker-dealers. In addition, customers and broker-
dealers would be able to evaluate execution quality of institutional 
orders on different trading centers more efficiently.\464\ Customers 
also would be better informed as to the institutional order routing and 
execution quality they received from a particular broker-dealer. If a 
customer feels it received poor order routing and execution quality 
from a particular broker-dealer, the customer could initiate a dialogue 
with the broker-dealer for an explanation, which may lead to better 
order routing decisions and execution quality by the broker-dealer. The 
customer may also decide to use different broker-dealers in order to 
seek better order routing and execution quality. This could enhance 
competition between broker-dealers.
---------------------------------------------------------------------------

    \464\ See supra Section V.C.1.
---------------------------------------------------------------------------

    Further, the Commission preliminarily believes that proposed Rules 
606(b)(3) and (c) might enhance competition between trading centers. 
First, if broker-dealers change their routing decisions in response to 
the reports required by proposed Rules 606(b)(3) and (c), trading 
centers would have an additional incentive to compete for institutional 
order flow. Second, the reports required by proposed Rules 606(b)(3) 
and (c) are structured by trading center, so that the execution quality 
at each trading center would be clearly visible. This may lead broker-
dealers to change their routing behavior, but also, more directly, 
trading centers could compare the execution quality of all trading 
centers, which may again lead to enhanced competition among trading 
centers. The Commission preliminarily believes that the enhanced 
competition between trading centers could lead to innovation by 
existing and new trading centers, resulting in better execution quality 
for customers placing institutional orders. As discussed in Section 
V.D.1.a if a trading center were to lose order flow to other trading 
centers due to lower execution quality it would have the incentive to 
innovate to improve its execution quality.
    To the extent that proposed Rules 606(b)(3) and (c) lead to better 
execution quality being provided by broker-dealers and trading centers, 
the Commission preliminarily believes that the proposed amendments 
might lead to lower transaction costs for institutional orders. As 
discussed above, lower transaction costs indicate enhanced efficiency 
in the trading process and the Commission preliminarily believes as a 
result, the proposed rules would reduce market friction and therefore 
have a positive effect on the efficiency of prices.
    In addition, the Commission preliminarily believes that the 
requirement of standardized customer-specific and standardized public 
aggregated institutional order handling reports in proposed Rules 
606(b)(3) and (c) would enhance efficiency for customers and the public 
in processing the information contained in the reports, as compared to 
the ad-hoc reports customers may currently receive from their broker-
dealers.\465\ Because the data will be presented in a standardized 
format, customers and the public would be able to more efficiently 
aggregate, compare, and analyze the data, as opposed to reconciling 
dissimilar formats, which may not always be possible, before trying to 
aggregate, compare, and analyze the data.
---------------------------------------------------------------------------

    \465\ See supra Section V.B.1. for a discussion of the ad-hoc 
reports and supra Section V.C.4. for a discussion of the 
standardization and format for the reports required by proposed 
Rules 606(b)(3) and (c).
---------------------------------------------------------------------------

    In addition, as discussed above, the Commission understands that 
many broker-dealers that handle institutional orders currently 
voluntarily provide reports to institutional customers upon request. 
However, the Commission understands that how willing a broker-dealer is 
to provide such reports and how detailed the reports are might depend 
on the size of an institutional customer. To that extent, larger 
institutional customers have an advantage over smaller institutional 
customers. Proposed Rules 606(b)(3) and (c) would provide access to 
reports on institutional order handling to all institutional customers, 
regardless of their size.
    The Commission notes that, even without the proposed rule 
amendments, institutional customers can still request customized 
reports from their broker-dealers and broker-dealers would have an 
incentive to provide such reports in order to attract institutional 
order flow. As is currently the case, broker-dealers might be more 
willing to provide such customized reports to larger institutional 
customers and the customized reports might provide more detailed 
information for larger institutional customers. While the Commission 
preliminarily believes that proposed Rules 606(b)(3) and (c) mitigate 
the advantage of larger institutional customers in that respect, the 
Commission preliminarily believes that larger institutional customers 
are likely to continue to have an advantage over smaller institutional 
customers to the extent that they are able to obtain customized reports 
more easily and that those customized reports contain information not 
contained in the reports required by proposed Rules 606(b)(3) and (c). 
The Commission preliminarily believes that by reducing the 
informational advantage of larger institutional customers over smaller 
institutional customers, proposed Rules 606(b)(3) and (c) would improve 
fairness between institutional customers. Smaller institutional 
customers would be able to evaluate and

[[Page 49507]]

select their broker-dealers with efficiency more similar to larger 
institutional customers, thereby increasing the efficiency of their 
investment process. The Commission preliminarily believes that this 
would provide smaller institutional customers with information to 
select the broker-dealers that promote better execution quality, to the 
benefit of their investors.
    As discussed above, however, proposed Rules 606(b)(3) and (c) could 
result in certain costs to broker-dealers who currently route 
institutional orders, as well as those who would like to start routing 
institutional orders and thus would have to comply with proposed Rules 
606(b)(3) and (c). These costs could lead to a higher barrier to entry 
and thereby reduce competition. However, the Commission preliminarily 
believes that the costs associated with proposed Rules 606(b)(3) and 
(c) are not large enough to meaningfully affect the barriers to entry 
and the level of competition due to potential new entrants into the 
market for institutional orders. In addition, the Commission 
preliminarily believes that any negative effect on competition due to 
heightened barriers to entry are justified by the expected positive 
effect on competition of the disclosures required by proposed Rules 
606(b)(3) and (c).
    In addition, the proposed amendments may cause broker-dealers to 
change how they handle institutional orders. Given that broker-dealers 
would be aware of the metrics to be used a priori, they may handle 
institutional orders in a manner that promotes a positive reflection on 
their respective services but customers could erroneously view a 
broker-dealer's handling as suboptimal.\466\ Any changes to broker-
dealers' order routing decisions due to proposed Rule 606(b)(3) may 
well be to the benefit of customers placing institutional orders, but 
if broker-dealers and customers focus exclusively on the metrics in the 
reports required by proposed Rule 606(b)(3), the order routing 
decisions could also be viewed as suboptimal for the customers. 
Customers' preferences could, therefore, be skewed toward the metrics 
as opposed to their true objectives, which could skew broker-dealer 
incentives, potentially limiting the efficiency and competition 
benefits of the proposed amendments.
---------------------------------------------------------------------------

    \466\ The Commission preliminarily believes that the set of 
metrics provide customers with the most cost effective view of 
broker-dealer order handling practices, but recognizes a risk that 
the information from the disclosures may not perfectly align routing 
practices and execution quality.
---------------------------------------------------------------------------

    For example, suppose a broker-dealer routes institutional orders so 
that the orders execute at lower cost with a higher fill rate, shorter 
duration, and more price improvement than the broker-dealer's 
competitors. However, it could be the case that, in order to achieve 
these objectives, the broker-dealer routes the majority of non-
marketable limit order shares to the trading center offering the 
highest rebate. An institutional customer that reviews the proposed 
order handling reports might suspect that the broker-dealer acted in 
its self-interest by selecting the highest rebate venue in order to 
maximize rebates when in fact, the broker-dealer made the decision 
based on factors that might not be completely reflected in the proposed 
reports.\467\
---------------------------------------------------------------------------

    \467\ Id.
---------------------------------------------------------------------------

2. Effects of Proposed Amendments on Capital Formation
    The Commission preliminarily believes that the proposed amendments 
to Rules 600, 605, and 606 might have positive effects on capital 
formation, but the Commission notes that predicting the magnitude of 
such effects is difficult as the effects likely would be indirect 
rather than directly resulting from the proposed amendments.
    As discussed, the Commission preliminarily believes the proposed 
amendments to Rules 600, 605, and 606 would enhance competition among 
broker-dealers and trading centers resulting in better execution 
quality for customers that place retail and institutional orders and to 
the extent that better execution quality would lead to lower friction 
in the trading process, the proposed amendments would increase market 
efficiency in both the trading process and asset pricing. This could 
lead to more efficient asset allocation because better execution 
quality and greater market efficiency leads to more efficient 
investment decisions by customers that place retail and institutional 
orders.\468\ For example, lower transaction costs could allow customers 
to rebalance their portfolios more frequently and more efficiently and 
at more efficient prices that better reflect the true underlying value. 
More efficient asset allocation could have a positive impact on capital 
formation as capital is allocated to firms with the most profitable 
projects, which ultimately would allow these firms to raise capital 
more easily.\469\
---------------------------------------------------------------------------

    \468\ More efficient investment decisions means investing in the 
securities with the expected risk and return that better fit the 
customer's investment objectives.
    \469\ See supra Section V.B.8. for a discussion of how asset 
allocation can relate to capital formation.
---------------------------------------------------------------------------

    In addition, there is a relation between liquidity of an asset and 
the required rate of return for that asset.\470\ The less liquid an 
asset is, e.g., the higher transaction costs are to buy or sell it, the 
higher rate of return customers could demand as compensation. For 
example, lower transaction costs for stocks could result in lower 
required rates of return for stocks. This in turn could lead to lower 
cost of capital for the firms, which could have a positive impact on 
capital formation because it would allow firms to raise capital at more 
favorable conditions.
---------------------------------------------------------------------------

    \470\ See Yakov Amihud and Haim Mendelson, Asset Pricing and the 
Bid-Ask Spread, 17 Journal of Financial Economics 223 (December 
1986).
---------------------------------------------------------------------------

3. Request for Comment
    In sum, the Commission preliminarily believes that as a result of 
the disclosures required by the proposal bringing competitive forces to 
bear on the market, the proposed amendments should enhance competition 
among broker-dealers as well as trading centers to provide customers 
placing both retail and institutional orders with enhanced quality of 
execution. The Commission preliminarily believes that this enhanced 
quality of execution should promote efficiency in the trading process 
as well as pricing, which should also have a positive impact on capital 
formation.
    The Commission requests comment on its analysis of the proposal's 
economic effects and effects on efficiency, competition, and capital 
formation. In particular, the Commission solicits comment on the 
following:
    179. Do commenters believe that the Commission's analysis of the 
potential economic effects of the proposal, including potential effects 
on efficiency, competition, and capital formation is accurate? Why or 
why not? Please provide analysis and empirical data to support your 
views.
    180. Are there other effects of the proposal that the Commission 
should consider? If so, please explain and provide support for your 
views.
    181. Do commenters believe there are alternative mechanisms for 
achieving the Commission's goal of enhancing transparency for order 
routing practices while promoting efficiency, competition and capital 
formation? If so, what would be the potential impacts on promotion of 
efficiency, competition, and capital formation? For example, what would 
be the effect of requiring broker-dealers to provide the public reports 
for retail orders, on a monthly basis, rather than

[[Page 49508]]

quarterly? What would be the effect of requiring broker-dealers to 
provide the public quarterly reports for retail orders, proposed in 
Rule 606(a), broken down into exchange-traded products (ETP) and non-
ETP NMS stocks? Would the effects be the same for institutional orders 
under proposed Rules 606(b) and 606(c)? Please explain and provide 
support for your arguments.
    182. Do commenters believe that market participants would change 
their behavior in response to the proposal? If so, which market 
participants and how? What would be the costs and benefits of these 
changes? How would such changes affect efficiency, competition, and 
capital formation? Would these changes affect market quality and market 
efficiency? Please explain.

VI. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\471\ the Commission requests comment on the 
potential effect of the proposed amendments on the United States 
economy on an annual basis. The Commission also requests comment on any 
potential increases in costs or prices for consumers or individual 
industries, and any potential effect on competition, investment, or 
innovation. Commenters are requested to provide empirical data and 
other factual support for their views to the extent possible.
---------------------------------------------------------------------------

    \471\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified 
in various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 
601).
---------------------------------------------------------------------------

VII. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (``RFA'') \472\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. Section 603(a) \473\ of the Administrative Procedure 
Act,\474\ 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.'' \475\ 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 significant economic impact 
on a substantial number of small entities.
---------------------------------------------------------------------------

    \472\ 5 U.S.C. 601 et seq.
    \473\ 5 U.S.C. 603(a).
    \474\ 5 U.S.C. 551 et seq.
    \475\ Although Section 601(b) of the RFA defines the term 
``small entity,'' the statute permits agencies to formulate their 
own definitions. The Commission has 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 Rule 0-10, 17 CFR 240.0-10. See 
Securities Exchange Act Release No. 18451 (January 28, 1982), 47 FR 
5215 (February 4, 1982) (File No. AS-305).
---------------------------------------------------------------------------

    For purposes of the Commission rulemaking in connection with the 
RFA \476\ as it relates to broker-dealers, a small entity includes a 
broker-dealer that: (1) Had total capital (net worth plus subordinated 
liabilities) of less than $500,000 on the date in the prior fiscal year 
as of which its audited financial statements were prepared pursuant to 
Rule 17a-5(d) under the Exchange Act,\477\ or, if not required to file 
such statements, a broker-dealer with total capital (net worth plus 
subordinated liabilities) of less than $500,000 on the last day of the 
preceding fiscal year (or in the time that it has been in business, if 
shorter); and (2) is not affiliated with any person (other than a 
natural person) that is not a small business or small 
organization.\478\
---------------------------------------------------------------------------

    \476\ See id.
    \477\ 17 CFR 240.17a-5(d).
    \478\ See 17 CFR 240.0-10(c).
---------------------------------------------------------------------------

    Based on the Commission's analysis of existing information relating 
to broker-dealers that would be subject to the proposed amendments to 
Rule 606, the Commission preliminarily believes that such broker-
dealers do not fall within the definition of ``small entity,'' as 
defined above.\479\ Further, the proposed amendments to Rule 605 to 
require reports to remain posted on an Internet Web site for a 
specified period of time will not have a significant impact on small 
entities affected by the proposed Rule.\480\ For the foregoing reasons, 
the Commission certifies that the proposed amendments to Rules 600, 
605, and 606 would not have a significant economic impact on a 
substantial number of small entities for the purposes of the RFA.
---------------------------------------------------------------------------

    \479\ The Commission considered FOCUS Report data in making this 
determination.
    \480\ See supra Section IV.D.5.
---------------------------------------------------------------------------

    The Commission requests comment regarding this certification. In 
particular, the Commission solicits comment on the following:
    183. Do commenters agree with the Commission's certification? If 
not, please describe the nature of any impact on small entities and 
provide empirical data to illustrate the extent of the impact.

VIII. Statutory Authority and Text of the Proposed Rule Amendments

    Pursuant to the Exchange Act, and particularly Sections 3(b), 5, 6, 
11A, 15, 17, and 23(a) thereof, 15 U.S.C. 78c, 78e, 78f, 78k-1, 78o, 
78q, and 78w(a), the Commission proposes to amend Sections 240.3a51-1, 
240.13h-1, 242.105, 242.201, 242.204, 242.600, 242.602, 242.605, 
242.606, 242.607, 242.611, and 242.1000 of Chapter II of Title 17 of 
the Code of Federal Regulations in the manner set forth below.

List of Subjects

17 CFR Part 240

    Brokers, Dealers, Registration, Securities.

17 CFR Part 242

    Brokers, Reporting and recordkeeping requirements, Securities.

    For the reasons stated in the preamble, the Commission is proposing 
to amend Title 17, Chapter II of the Code of Federal Regulations as 
follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The authority citation for part 240 continues to read in part 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, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78-q1, 78s, 78u-5, 78w, 78x, 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; 
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. Section 240.3a51-1, paragraph (a) introductory text, is amended by 
removing the text ``Sec.  242.600(b)(47)'' and adding in its place 
``Sec.  242.600(b)(49)''.


Sec.  240.13h-1  [Amended]

0
3. Section 240.13h-1, paragraph (a)(5), is amended by removing the text 
``Section 242.600(b)(46)'' and adding in its place ``Sec.  
242.600(b)(48)''.

PART 242--REGULATIONS M, SHO, ATS, AC, NMS AND SBSR AND CUSTOMER 
MARGIN REQUIREMENTS FOR SECURITY FUTURES

0
4. The authority citation for part 242 continues to read as follows:

    Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a23, 80a-29, and 
80a-37.


Sec.  240.105  [Amended]

0
5. Section 242.105 is amended by:

[[Page 49509]]

0
a. In paragraph (b)(1)(i)(C), removing the text ``Sec.  
242.600(b)(22)'' and adding in its place ``Sec.  242.600(b)(23)''.
0
b. In paragraph (b)(1)(ii), removing the text ``Sec.  242.600(b)(64)'' 
and adding in its place ``Sec.  242.600(b)(69)''.


Sec.  240.201  [Amended]

0
6. Section 242.201 is amended by:
0
a. In paragraph (a)(1), removing the text ``Sec.  242.600(b)(47)'' and 
adding in its place ``Sec.  242.600(b)(49)''.
0
b. In paragraph (a)(2), removing the text ``Sec.  242.600(b)(22)'' and 
adding in its place ``Sec.  242.600(b)(23)''.
0
c. In paragraph (a)(4), removing the text ``Sec.  242.600(b)(42)'' and 
adding in its place ``Sec.  242.600(b)(44)''.
0
d. In paragraph (a)(5), removing the text ``Sec.  242.600(b)(49)'' and 
adding in its place ``Sec.  242.600(b)(52)''.
0
e. In paragraph (a)(6), removing the text ``Sec.  242.600(b)(55)'' and 
adding in its place ``Sec.  242.600(b)(60)''.
0
f. In paragraph (a)(7), removing the text ``Sec.  242.600(b)(64)'' and 
adding in its place ``Sec.  242.600(b)(69)''.
0
g. In paragraph (a)(9), removing the text ``Sec.  242.600(b)(78)'' and 
adding in its place ``Sec.  242.600(b)(83)''.


Sec.  240.204  [Amended]

0
7. Section 242.204, paragraph (g)(2), is amended by removing the text 
``Rule 600(b)(64) of Regulation NMS (17 CFR 242.600(b)(64)'' and adding 
in its place ``Sec.  600(b)(69) of Regulation NMS (17 CFR 
242.600(b)(69)''.
0
8. Section 242.600 is amended by:
0
a. Redesignating paragraphs (b)(52) through (83) as (b)(57) through 
(88);
0
b. Adding new paragraphs (b)(55) and (56);
0
c. Redesignating paragraphs (b)(49) through (51) as (b)(52) through 
(54);
0
d. Adding new paragraph (b)(51);
0
e. Redesignating paragraphs (b)(30) through (48) as (b)(32) through 
(50);
0
f. Amending newly redesignated paragraph (b)(50) by removing the word 
``customer'' and adding in its place ``retail'';
0
g. Adding new paragraph (b)(31);
0
h. Redesignating paragraphs (b)(1) through (b)(29) as (b)(2) through 
(b)(30);
0
i. Adding new paragraph (b)(1).
0
j. Amending newly redesignated paragraph (b)(19) by removing the word 
``Customer'' and adding in its place ``Retail'';
0
k. Amending newly redesignated paragraph (b)(20) by removing the word 
``customer'' and adding in its place ``retail'';
0
l. Amending newly redesignated paragraph (b)(24)(ii) by removing the 
word ``customer'' and adding in its place ``retail'';
    The additions 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.
* * * * *
    (31) Institutional order means an order to buy or sell an NMS stock 
that is not for the account of a broker or dealer and is an order for a 
quantity of an NMS stock having a market value of at least $200,000.
* * * * *
    (51) Non-marketable limit order means any limit order other than a 
marketable limit order.
* * * * *
    (55) Orders providing liquidity means orders that were executed 
against after resting at a trading center.
    (56) Orders removing liquidity means orders that executed against 
resting trading interest at a trading center.
* * * * *


Sec.  242.602  [Amended]

0
9. Section 242.602 is amended by:
0
a. In paragraph (a)(5)(i) removing the text ``Sec.  242.600(b)(73)'' 
and adding in its place ``Sec.  242.600(b)(78)''.
0
b. In paragraph (a)(5)(ii) removing the text ``Sec.  242.600(b)(73)'' 
and adding in its place ``Sec.  242.600(b)(78)''.
0
10. Section 242.605 is amended by:
0
a. Revising the introductory text designated as a Preliminary Note; and
0
b. Adding a sentence at the end of paragraph (a)(2).
    The addition reads as follows:


Sec.  242.605  Disclosure of order execution information.

    This section requires market centers 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'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 retail orders.
    (a) * * *
    (2) * * * Every market center shall keep such reports posted on an 
Internet Web site that is free and readily accessible to the public for 
a period of three years from the initial date of posting on the 
Internet Web site.
* * * * *
0
11. Section 242.606 is revised to read as follows:


Sec.  242.606  Disclosure of order routing information.

    (a) Quarterly report on retail order routing. (1) Every broker or 
dealer shall make publicly available for each calendar quarter a report 
on its routing of non-directed orders in NMS securities during that 
quarter broken down by calendar month and keep such report posted on an 
Internet Web site that is free and readily accessible to the public for 
a period of three years from the initial date of posting on the 
Internet Web site. Such report shall include a section for NMS stocks 
and a separate section for NMS securities that are option contracts. 
Such report shall be made available using the most recent versions of 
the XML schema and the associated PDF renderer as published on the 
Commission's Web site for all reports required by this section. Each 
section in a report shall include the following information:
    (i) The percentage of total retail orders for the section that were 
non-directed orders, and the percentages of total non-directed orders 
for the section that were market orders, marketable limit orders, non-
marketable limit orders, and other orders;
    (ii) The identity of the ten venues to which the largest number of 
total non-directed orders for the section were routed for execution and 
of any venue to which five percent or more of non-directed orders were 
routed for execution, the percentage of total non-directed orders for 
the section routed to the venue, and the percentages of total non-
directed market orders, total non-

[[Page 49510]]

directed marketable limit orders, total non-directed non-marketable 
limit orders, and total non-directed other orders for the section that 
were routed to the venue;
    (iii) For each venue identified pursuant to paragraph (a)(1)(ii) of 
this section, 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 orders.
    (iv) A discussion of the material aspects of the broker's or 
dealer's relationship with each venue identified pursuant to paragraph 
(a)(1)(ii) of this section, including a description of any arrangement 
for payment for order flow and any profit-sharing relationship and a 
description of any terms of such arrangements, written or oral, that 
may influence a broker's or dealer's order routing decision including, 
among other things:
    (A) Incentives for equaling or exceeding an agreed upon order flow 
volume threshold, such as additional payments or a higher rate of 
payment;
    (B) Disincentives for failing to meet an agreed upon minimum order 
flow threshold, such as lower payments or the requirement to pay a fee;
    (C) Volume-based tiered payment schedules; and
    (D) Agreements regarding the minimum amount of order flow that the 
broker-dealer would send to a venue.
    (2) A broker or dealer shall make the report required by paragraph 
(a)(1) of this section publicly available within one month after the 
end of the quarter addressed in the report.
    (b) Customer requests for information on order routing. (1) Every 
broker or dealer shall, on request of a customer, disclose to its 
customer the identity of the venue to which the customer's retail 
orders were routed for execution in the six months prior to the 
request, whether the orders were directed orders or non-directed 
orders, and the time of the transactions, if any, that resulted from 
such orders. Such disclosure shall be made available using the most 
recent versions of the XML schema and the associated PDF renderer as 
published on the Commission's Web site for all reports required by this 
section.
    (2) A broker or dealer shall notify customers in writing at least 
annually of the availability on request of the information specified in 
paragraph (b)(1) of this section.
    (3) Every broker or dealer shall, on request of a customer that 
places, directly or indirectly, an institutional order with the broker 
or dealer, disclose to such customer within seven business days of 
receiving the request, a report on its handling of institutional orders 
for that customer for the prior six months by calendar month. Such 
report shall be made available using the most recent versions of the 
XML schema and the associated PDF renderer as published on the 
Commission's Web site for all reports required by this section. For 
purposes of such report, the handling of an institutional order 
includes the handling of all smaller orders derived from the 
institutional order. Such report shall include, with respect to the 
order flow sent by the customer to the broker or dealer, the total 
number of shares of institutional orders sent to the broker or dealer 
by the customer during the relevant period; the total number of shares 
executed by the broker or dealer as principal for its own account; the 
total number of institutional orders exposed by the broker or dealer 
through an actionable indication of interest; and the venue or venues 
to which institutional orders were exposed by the broker or dealer 
through an actionable indication of interest. Such report also shall 
include the following columns of information for each venue to which 
the broker or dealer routed institutional orders for the customer, in 
the aggregate and broken down by passive, neutral, and aggressive order 
routing strategies as defined in paragraph (b)(3)(v) of this section:
    (i) Information on Order Routing. (A) Total shares routed;
    (B) Total shares routed marked immediate or cancel;
    (C) Total shares routed that were further routable; and
    (D) Average order size routed.
    (ii) Information on Order Execution. (A) Total shares executed;
    (B) Fill rate (shares executed divided by the shares routed);
    (C) Average fill size;
    (D) Average net execution fee or rebate (cents per 100 shares, 
specified to four decimal places);
    (E) Total number of shares executed at the midpoint;
    (F) Percentage of shares executed at the midpoint;
    (G) Total number of shares executed that were priced on the side of 
the spread more favorable to the institutional order;
    (H) Percentage of total shares executed that were priced at the 
side of the spread more favorable to the institutional order;
    (I) Total number of shares executed that were priced on the side of 
the spread less favorable to the institutional order; and
    (J) Percentage of total shares executed that were priced on the 
side of the spread less favorable to the institutional order.
    (iii) Information on Orders that Provided Liquidity. (A) Total 
number of shares executed of orders providing liquidity;
    (B) Percentage of shares executed of orders providing liquidity;
    (C) Average time between order entry and execution or cancellation, 
for orders providing liquidity (in milliseconds); and
    (D) Average net execution rebate or fee for shares of orders 
providing liquidity (cents per 100 shares, specified to four decimal 
places).
    (iv) Information on Orders that Removed Liquidity.(A) Total number 
of shares executed of orders removing liquidity;
    (B) Percentage of shares executed of orders removing liquidity; and
    (C) Average net execution fee or rebate for shares of orders 
removing liquidity (cents per 100 shares, specified to four decimal 
places).
    (v) For the purposes of paragraph (b)(3) of this section:
    (A) A passive order routing strategy is one that emphasizes the 
minimization of price impact over the speed of execution of the entire 
institutional order;
    (B) A neutral order routing strategy is one that is relatively 
neutral between minimization of price impact and the speed of execution 
of the entire institutional order; and
    (C) An aggressive order routing strategy is one that emphasizes the 
speed of execution of the entire institutional order over minimization 
of price impact.
    The broker or dealer shall assign each order routing strategy that 
it uses for institutional orders to one of these three categories in a 
consistent manner for each report it prepares pursuant to paragraph 
(b)(3) of this section, promptly update the assignments any time an 
existing strategy is amended or a new strategy is created that would 
change such assignment, and document the specific methodologies it 
relies upon for making such assignments. Every broker or dealer shall 
preserve a copy of the methodologies used to assign its order routing 
strategies and maintain such copy as part of its books and records in a 
manner consistent with Sec.  240.17a-4(b) of this chapter.

[[Page 49511]]

    (c) Quarterly report on institutional order handling. A broker or 
dealer that receives institutional orders shall make publicly available 
a report that aggregates the information required by paragraph (b)(3) 
of this section, whether or not requested by a customer, on its 
handling of all institutional orders for all customers for each 
calendar quarter by calendar month within one month after the end of 
the quarter. Such report shall be made available using the most recent 
versions of the XML schema and the associated PDF renderer as published 
on the Commission's Web site for all reports required by this section. 
Every broker or dealer shall keep such report posted on an Internet Web 
site that is free and readily accessible to the public for a period of 
three years from the initial date of posting on the Internet Web site.
    (d) Exemptions. The Commission may, by order upon application, 
conditionally or unconditionally exempt any person, security, or 
transaction, or any class or classes of persons, securities, or 
transactions, from any provision or provisions of this section, if the 
Commission determines that such exemption is necessary or appropriate 
in the public interest, and is consistent with the protection of 
investors.


Sec.  240.607  [Amended]

0
12. Section 242.607 is amended by:
0
a. In paragraph (a)(1) removing the words ``customers' orders'' and add 
in its place ``customers' retail orders'' and removing the word 
``customer'' and add in its place ``retail''.
0
b. In paragraph (a)(2) removing the word ``customer'' and add in its 
place ``retail''.


Sec.  240.611  [Amended]

0
13. Section 242.611, paragraph (c) is amended by removing the text 
``Sec.  242.600(b)(30)'' and adding in its place ``Sec.  
242.600(b)(32)''.


Sec.  240.1000  [Amended]

0
14. In Section 242.1000 amend the definition of Plan processor by 
removing the text ``Sec.  242.600(b)(55)'' and adding in its place 
``Sec.  242.600(b)(60)''.

    By the Commission.

    Dated: July 13, 2016.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-16967 Filed 7-26-16; 8:45 am]
BILLING CODE 8011-01-P